Texas budget cycle nears its critical stage

An improved forecast and federal funds will help the Legislature write a balanced budget

By Zelma Smith, TAC Financial Analyst

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Adopting a balanced biennial budget is one of two acts the Texas Constitution requires of the Legislature. The other is apportioning state senatorial, state representative and congressional districts, commonly referred to as redistricting, after the publication of each U.S. decennial census.

The outlook for the state budget had been grim. In July, Comptroller Glenn Hegar predicted a $4.6 billion shortfall in the current state budget, which ends on Aug. 31, 2021, because of the pandemic and a related contraction in economic activity combined with declining energy prices and a corresponding drop in drilling and investment.

Well, that was then. The estimated shortfall is now down to $946 million. And it appears the Legislature will be able to rely on federal fiscal relief for the pandemic, on the 5% reductions that state leaders required of most state agencies last summer and on previously uncollected tax receipts from online sales to balance the budget.

The baseline budget recommendations released by the Texas House and Texas Senate in January don't account for the 5% reductions and the use of federal relief dollars to reimburse the state for eligible pandemic-related expenditures incurred by state agencies and to directly pay for eligible agency expenses. The House and Senate budget-writing committees will rely heavily on these funding sources to eliminate the deficit in the current two-year budget and balance the 2022-23 budget.

It is important to note that the Legislature previously has used federal stimulus funds to help balance the budget. American Recovery and Reinvestment Act (ARRA) funds assisted in balancing the 2010-11 biennial budget after the Great Recession. Just as it is with the Coronavirus Aid, Relief and Economic Security Act’s $150 billion Coronavirus Relief Fund and the $350 billion State and Local Coronavirus Fiscal Recovery Funds, a key component of ARRA was one-time stimulus funding for state and local governments. The amount of federal relief funds appropriated by the 87th Legislature has not been determined, but federal funds will likely play a significant role in balancing the state budget.

Other measures available to budget writers are dipping into the Economic Stabilization Fund, better known as the Rainy Day Fund, or an assist from Hegar through an increase in available revenue above what he forecast in January's Biennial Revenue Estimate.