The biennial regular session of the 87th Texas Legislature occurred after a year unlike any in recent memory. As if the pandemic weren’t enough, weather interrupted the session and played an outsized role as well.
“When the legislative session opened in January,” recalls Comptroller Glenn Hegar, “I was confident Texas lawmakers would be able to reach an agreement on a budget and on key fiscal issues, but it was hard for me to see exactly how that would happen. The ground was shifting under our feet, and it felt like it never stopped moving.”
Texas experienced a decade’s worth of paradigm shifts in less than 18 months, says Hegar.
Substantial changes not only occurred before but also during the session. Rising case counts and mounting hospitalizations due to the COVID-19 pandemic gave way to emerging vaccines and fewer restrictions. As vaccination numbers rose and restrictions eased, the Texas economy showed resilience. Commerce reopened, and economic activity accelerated, warranting a revised revenue forecast from the negative balance projected in the January biennial revenue estimate (BRE).
The updated BRE issued in May projected $113.88 billion in revenue available for general-purpose spending in fiscal 2020-21, which ended Aug. 31. The May update anticipated a $725 million ending balance in general revenue-related (GR-R) funds, reflecting an increase of $1.67 billion from January’s original projection.
The higher ending balance, combined with greater revenue collections expected in the biennium that began Sept. 1, produced an estimate of $115.65 billion available for general-purpose spending in fiscal 2022-23 — an increase of $3.12 billion from January’s BRE projection.
Those figures increased again in July when the Comptroller issued a new revenue estimate for the 87th Legislature’s first special session. After accounting for appropriations made by the Legislature, the projected GR-R ending balance for the 2022-23 biennium was $7.85 billion that included:
$116.13 billion available for general-purpose spending in fiscal 2020-21.
A $5.01 billion GR-R ending balance for fiscal 2021 (due mostly to state agency budget reductions, improved revenue collections and the replacement of eligible GR-R appropriations with federal relief funds).
$123.02 billion available for general-purpose spending in fiscal 2022-23.
Increased consumer spending fueled increased sales tax collections, including sales taxes from online commerce. In 2019, remote sellers located outside Texas were required to collect and remit Texas sales taxes, and marketplace providers were required to collect and remit taxes for Texas sales made using their platforms. Along with increased consumer spending, the energy sector rebounded, boosting crude oil and natural gas production tax revenues. The latter not only buoys the budget but also benefits the state’s savings account (aka the “Rainy Day Fund”) and state highway funding.
Despite anticipated growth through the 2022-23 biennium, Hegar counsels caution; the pandemic’s long-term economic effects remain unknown, dictating continued monitoring and analysis.
The New Budget
Lawmakers authorized spending a little over $248.5 billion during the current two-year budget cycle, compared with $262.1 billion two years ago (Exhibit 1). (Note that the tables and content in this article only reflect actions taken during the 87th Legislature’s regular session unless otherwise stated.)
EXHIBIT 1: STATE ALL-FUNDS* BUDGET COMPARISON, CURRENT AND PREVIOUS FOUR BIENNIA
Fiscal Years
Total
Change from Prior Biennium
Federal Funds
Change from Prior Biennium
2022-23
$248,550.50
($13,554.00)
-5.20%
$84,767.10
-15.50%
2020-21
$262,104.5**
$45,496.20
2.10%
$100,281.40
39.60%
2018-19
$216,608.30
$7,505.30
3.50%
$71,854.70
5.60%
2016-17
$209,103.00
$8,681.90
4.30%
$68,001.50
-1%
*Includes federal funds and supplemental appropriations, if any.
**Comparatively higher balance due largely to additional federal funds for pandemic-related relief used to offset personnel costs (salary swaps).
Note: As of this publication date, the state’s 2022-23 budget does not yet allocate the federal pandemic relief monies received from the Coronavirus State Fiscal Recovery Funds.
Source: Legislative Budget Board (LBB)
The current biennial budget is about 5 percent less than the previous one. General revenue (GR) spending is up 5.5 percent, but spending from general revenue-dedicated (GR-D) and other funds is down, for a slight overall increase of 1.2 percent combined.
A 15.5 percent drop in federal funds, due mainly to Texas agencies being eligible to receive aid from the Coronavirus State Fiscal Recovery Funds (CSFRF) instead of direct pandemic-related aid in 2020-21, accounts for most of the biennial decrease in appropriations. Funds received under the CSFRF have not been directly and separately appropriated by the Legislature.
The bulk of expenditures in the General Appropriations Act (GAA) pays for education, health and human services and public safety and criminal justice, in that order (Exhibit 2).
EXHIBIT 2: GENERAL REVENUE APPROPRIATIONS* BY GOVERNMENTAL FUNCTION, 2022-23 BIENNIUM
Article
Function
Expended/ Budgeted, 2020-21
Appropriated, 2022-23
Numerical Change
Percentage Change
I
General Government
$3,977.40
$4,064.30
$86.90
2.2%
II
Health and Human Services
$33,629.60
$34,291.40
661.8
2%
III
Education Agencies
$60,402.80
$62,745.10
2,342.30
3.9%
Public Education
$44,561.50
$46,551.30
1,989.80
4.5%
Higher Education
$15,841.30
$16,193.80
352.5
2.2%
IV
Judiciary
553.8
551.6
-2.3
-0.4%
V
Public Safety and Criminal Justice
$11,869.50
$12,055.00
$185.5
1.6%
VI
Natural Resources
$933.1
$1,002.10
$69
7.4%
VII
Business and Economic Development
$520.9
$490.1
$-30.8
-5.9%
VIII
Regulatory
$367.8
$301.7
$66.1
18%
IX
General Provisions
–
$456.8
–
–
X
Legislature
$408.1
$410.2
$2.1
0.5%
House Bill (HB) 2 (supplemental)
-2,393.40
Total
All Functions
$110,269.60
$116,368.20
$6,098.60
5.50%
*Excludes general revenue-dedicated, federal and other funds.
Notes:
Totals include the net effect of the General Appropriations Act Senate Bill 1, HB 2 (supplemental appropriations) and SB 1605 (miscellaneous claims). These amounts have been adjusted to include supplemental spending in fiscal 2021. These preliminary estimates are subject to change based on any future actions by the 87th Legislature and final reconciliations by LBB staff.
Article IX contains job titles, salary schedules and other provisions related to appropriation authority, including contingency riders. Once all monies have been allocated and the GAA is fully reconciled, it becomes a zero sum, as in 2020-21.
For Article X, under “Appropriated 2022-23,” $315.883 million was vetoed. The Legislature provided funding for Article X in HB 5 during the second called special session, which at press time, was pending action from the governor.
Totals may not add due to rounding.
Source: LBB
THE SPENDING HIGHLIGHTS OF THE 87TH LEGISLATURE’S REGULAR SESSION
Full funding for the state’s commitment to the public education investments made last session, including projected enrollment growth during the biennium.
An increase in state contribution rates to the Teacher Retirement System (TRS) from 7.5 percent in 2020-21 to 7.75 percent in fiscal 2022 and 8 percent in fiscal 2023.
$897.6 million (up $39.5 million) to maintain current health insurance premiums and benefits for retired teachers.
An additional $1.02 billion for the biennium, over and above the state’s regular contributions, to begin making the existing Employees Retirement System pension fund actuarially sound.
$139.2 million for law enforcement salary increases at several state agencies.
Funding for 100 new state troopers along the border and 74 additional troopers and staff to enhance Capitol Complex security.
$4.2 million to enhance the Public Utility Commission and other regulatory responses related to oversight of activities by the Electric Reliability Council of Texas (ERCOT).
More than $3 billion in federal funds for continuing disaster recovery related to 2017’s Hurricane Harvey, including $1.4 billion for short-term and community housing projects, $1.6 billion for infrastructure and mitigation projects and $221.4 million for coastal projects.
$200 million to extend, improve and maintain coastal barriers, storm surge gates, seawalls and levees.
$316.9 million from sporting goods sales tax allocations for the Texas Parks and Wildlife Department, a $100.6 million increase.
The Texas Constitution sets spending limits on state government. For the fiscal 2022-23 biennium, the LBB reports that a combined total of $6.3 billion authorized for general-revenue spending remains untapped. The new, two-year budget also falls well within the constitutional spending limits for debt and welfare (PDF).
Closing Chapter 313
The state’s largest economic incentive program for attracting corporate expansions and relocations since 2001 was not renewed. Consequently, barring legislative intervention, the Texas Economic Development Act (TEDA) expires at the end of 2022.
Dubbed “Chapter 313” due to its location in the tax code, the law allows school districts to offer property tax abatements to businesses that build facilities within their boundaries in exchange for direct payments and promises to create jobs and boost economic activity. Incentives in the form of property value limitations that last up to 10 years are applied to portions of taxable property values for new projects.
As of 2020, the program encompassed more than 500 active agreements representing $217 billion in investments (Exhibit 3). Many projects involve “big footprint” factories and plants (e.g., high-tech and energy industries). School property taxes typically are the largest portion of those enterprises’ overall tax liability.
In 2019, the Comptroller’s office received 133 applications, the largest amount since the program changed benefits from conveying a two-year tax credit coupled with an eight-year limitation to conveying a 10-year limitation.
In 2020, the Comptroller’s office received 97 amendments to executed agreements, more than double the number for all of 2019. Although unusual, it is not entirely surprising given that the COVID-19 pandemic has disrupted various markets. Many amendments extend project timelines or modified projects’ sizes or scopes.
Total Bills Filed, Other Fiscal Matters
Of 6,927 House and Senate bills filed before and during the regular session, 1,073 became law and 21 were vetoed (Exhibit 4). This represents a decrease from the 2019 legislative session, in which 7,324 bills were filed, 1,373 were passed and 56 were vetoed.
EXHIBIT 4: BILL ACTIVITY IN THE 2021 LEGISLATIVE SESSION
House and Senate Bills Filed
6,927
Passed
1,073
Vetoed by the Governor
21
Note: Does not include resolutions, memorial motions, etc.
Source: Legislative Reference Library
OTHER MAJOR FISCAL ISSUES
Electrical Grid Failure and Winter Storm Tragedy
HB 16 prohibits retail sales to residential electricity customers of pricing products indexed to wholesale markets. SB 3 requires power-generation companies to winterize their facilities and creates a statewide emergency system to alert residents about imminent power outages.
Franchise Tax Revenue Exclusions for Pandemic-Related Relief
HB 1195 exempts federal loan and grant proceeds received through COVID-19 relief programs, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, from the state franchise tax. Expenses paid with any of those funds may be used in calculating gross margins for franchise tax purposes.
Delinquent Taxpayer Data Match at Financial Institutions
HB 1258 authorizes the Comptroller’s office to request information from financial institutions for the purpose of matching accounts with delinquent taxpayer records.
Restricting Franchise Tax Credits for Historic Structure Rehabilitation
HB 3777 closes a loophole by precluding costs and expenses incurred to rehabilitate a historic structure from being eligible for a tax credit if the structure is leased to a tax-exempt entity in a disqualified lease.
Requiring Permits for E-Cigarette Sales
SB 248 regulates retail sales and/or delivery of e-cigarettes and related products, including requiring permits, imposing fees and providing administrative penalties. The law expands the applicable definition to include liquids and aerosols consumed while using e-cigarettes (vaping), even if they don’t contain nicotine.
Alcohol-to-Go Authorization
An outgrowth of pandemic practices that helped keep many eateries in business, HB 1024 allows establishments with state food and beverage permits to sell mixed drinks, wine and beer with food orders for pickup or delivery, effective Sept. 1.
Special Session
Gov. Abbott called the Legislature back into session in July and again in August to address several issues, including funding for the legislative branch and election reform. Legislative activity temporarily was put on hold during the first called special session when most House Democrats (and some senators) left the state, preventing a quorum from being established in the House to conduct legislative business. Among the items ultimately approved by lawmakers were election system changes and increased border security funding.
Every 10 years, the Legislature uses new population figures to redraw electoral boundaries for the House, Senate, U.S. House of Representatives (Texas is gaining two seats) and State Board of Education, plus the courts. Because decennial census data from the federal government were delayed due to the pandemic and other factors, redistricting will be addressed in the third called special session, which began on Sept. 20. FN
Visit the Comptroller's website to download a copy of the BRE and learn why it forms the basis of the state budget for each biennium.
A REVIEW OF THE TEXAS ECONOMY