Texas's current constitutional spending limit, contained in Article VIII, Section 22 of the Texas Constitution, reads as follows:
In no biennium shall the rate of growth of appropriations from state tax revenues not dedicated by this constitution exceed the estimated rate of growth of the state's economy.
The Texas Constitution grants the Legislature authority to provide statutory guidance to facilitate implementation of the spending limitation. Under this guidance, the “rate of growth of the state’s economy” is calculated by the Legislative Budget Board (LBB) by dividing the estimated Texas total personal income (as defined by the U.S. Bureau of Economic Analysis) for the next biennium by the estimated Texas total personal income for the current biennium.
The most important factors to consider in relation to Texas’ constitutional spending limit are that (1) the limit applies only to non-dedicated General Revenue (GR) spending, rather than all state spending, (2) the limit applies only to state spending, not local government spending, (3) the limit may be overridden by a simple majority vote of the Legislature if it finds that an emergency exists, and (4) perhaps most importantly, the limit is based on an estimate of future personal income growth.
1. General Revenue versus All Funds
The first major weakness of the state’s current constitutional spending limit is that it applies only to state tax revenues not dedicated by the Texas Constitution. There are numerous constitutional dedications of state tax revenue that are exempted from the current spending limit, including those to the State Highway Fund and to the Foundation School Program. For the 2020-21 Biennium, an estimated 13.4 percent of all state GR appropriations- or more than $15.8 billion- is dedicated by the constitution. Leaving aside the considerable magnitude of this dedicated revenue, the spending limit is phrased in a manner that is not transparent. As the Senate Finance Committee has pointed out that the spending limit could be simplified by phrasing the amount subject to the spending limit to mirror the ways in which funds are discussed in the budget (GR, GR-Dedicate, Federal Funds, All Funds).
For a constitutional spending limit to be effective, it is critical that it apply to at least both GR and GR-Dedicated state spending. Doing so would be a significant change that would enhance the state’s spending limit. A spending limit that does not apply to all state funds can be circumvented and will always be a less than optimal restraint on the growth of state spending.
2. No limit on local government spending
Texas' current constitutional spending limit applies only to certain aspects of state spending; it does not impose any limit on local spending. The arguments for capping state spending by reference to population growth and inflation which are discussed below apply with equal force to local government spending.
An indication that spending at the local level in Texas has become problematic and that local governments are living beyond their means is the growing aggregate debt burden of local governments in Texas. In June 2015, the Comptroller released a 50 State Scorecard showing Texas’s rankings in various categories; the State ranked 3rd worst in terms of local debt per capita. As of the end of the 2019 fiscal year, the combined local debt in Texas was $240 billion - a per capita burden of approximately $8,276 per resident. Furthermore, these numbers do not take into account the interest that will be paid on that $240 billion in principal.
At the end of fiscal year 2007, the total debt held by Texas local governments was $141.4 billion. Over the ensuing twelve-year period, local governments borrowed more than $98 billion. That figure is vastly greater than the State’s total outstanding debt of $59.9 billion as of August 31, 2019. This substantial increase in local government debt is striking because Texas’s economy experienced solid growth of 3.8 percent annually during that period. Despite this growth, local governments still felt compelled to borrow to finance their spending. Relying on the most recent data from the U.S. Census Bureau (census year 2016), the Bond Review Board stated in its most recent annual report that, among the ten most populous states, Texas ranks second in local debt per capita.
The excessive borrowing of local governments in Texas is especially concerning the growth of property taxes in Texas in recent years. While borrowing may allow local governments to temporarily prevent property taxes from rising at an even greater rate, paying down principal of $240 billion in addition to the interest on that amount inexorably puts upward pressure on property taxes, which are easily the most significant revenue source for local bond repayment. As noted elsewhere in this Task Force Report, the Legislature passed significant property tax relief in the 86th Session, which should slow the rate of growth of maintenance and operations (M&O) property taxes imposed by local governments. However, growing local debt is still a concern because much of it is repaid through interest and sinking (I&S) property taxes, not M&O property taxes.
Implementing a limit on spending by local governments could be accomplished by a simple statutory change. Recognizing the threat of excessive spending by local governments, Senate 18 (85S1, 2017) proposed to limit local government spending by reference to population growth and inflation. Under the bill, a local government could have exceeded its spending limit only if the voters approved the excess spending or if the governor declared the area governed by the local government as a disaster area. Importantly, the spending limit would not have applied to funds raised by voter-approved bonds, or to a gift, donation, or grant to the local government. Although it was not enacted into law, the bill struck the correct balance between fiscal prudence and flexibility.
While critics of spending limits are sure to complain that they place local governments in desperate fiscal positions, there is ample evidence that voters are willing to provide authorization to spend. For example, in November 2019, 97 local governments in Texas held 132 bond elections, 105 of which approved debt totaling $11.3 billion (a 79.5 percent passage rate). If voters are willing to approve new local debt at such a high rate, local governments wishing to spend in excess of a spending limitation need only ask them.
3. Overriding the spending limit
As noted above, the Texas Constitution also authorizes the Legislature to override the current spending limitation by a simple majority vote, provided that it is a record vote and that the Legislature finds that an emergency exists. Although this provision has never been exercised, it renders the existing spending limit a virtually meaningless “safeguard” against higher spending. Any budget passed by the Legislature already requires a majority vote in each house. Thus, a Legislature that collectively wishes to pass a budget which exceeds the spending limit simply faces a voting hurdle identical to the one it would face if the proposed budget were within the constitutional spending limit.
To address this shortcoming, the Texas Constitution should be amended to require a three-fifths vote requirement to override the spending limit. This change would require 90 affirmative votes in the House and 19 in the Senate to override the constitutional spending limit. A precedent for this is set by the constitutional requirements for appropriating funds from the Economic Stabilization Fund; the Constitution establishes a three-fifths requirement (Art. III, 49-g, (k)) to appropriate ESF monies to address a current biennium shortfall.
4. Shortcomings of basing the current constitutional limit on personal income growth
Perhaps the most critical flaw in the current constitutional limit on state spending is the manner in which it is calculated. Under current law, prior to a legislative session, the LBB adopts the constitutional spending limit that will be enforced for the upcoming biennium based on projections of personal income growth. It should be noted that the estimates of personal income growth frequently differ from actual income growth, and sometimes wildly so: most stark are the adopted rate of 14.1 percent for the 2002-03 biennium, when actual personal income growth reached only 6.8 percent, and the 2016-17 biennium adopted rate of 11.7 percent, when actual growth was only 4.5 percent.
More broadly, it should be obvious that personal income is not a sensible basis for a state spending limit: as personal income (wages, salaries, investment income, etc.) increases, the “need” for government services and assistance programs should decrease along with the spending on those programs. A spending limit that is functionally based on personal income growth assumes that state spending should continue to grow even as Texans become better-off. State spending and personal income should have an inverse relationship - not a direct one, as Texas’ current spending limit does.
A far more reasonable approach to defining a constitutional spending limit is to base the limit on a population growth and inflation formula. At the simplest level, this would allow the state to continue to provide current services even as the state’s population grows. Most importantly, in times of economic surplus, state spending could not exceed this “current services” standard. Conversely, whenever population growth slows (or even declines), state spending would have to be reigned-in accordingly.
Policymakers are increasingly taking note of the flaws with the current spending limit. For example, Senate Bill 9 (85R, 2017) would have based the spending limit in terms of population growth and inflation rather than personal income growth. Although the bill did not become law, it brought greater attention to a key flaw in the current calculation of the spending limit. More recently, the Senate Finance Committee endorsed using population times inflation as the proper measurement of the growth of state’s economy. Indeed, as the Committee noted in its August 2020 interim report, the 9.89 percent growth rate adopted for the 2020-21 biennium was based on population and inflation, although modifications were made to reflect additional state expenses due to Hurricane Harvey.
A comparison of Texas’ population growth plus inflation against actual and estimated personal income growth underscores the point that the population plus inflation measure is consistently the more conservative option and would therefore be the more effective type of spending limit.
From the 1996-1997 biennium through the 2018-19 biennium (inclusive), a population and inflation limit averaged 8.3 percent per biennium, while the average limit using estimated personal income growth averaged 11.4 percent per biennium- approximately 38 percent higher. The wide variation between the adopted spending limit and actual personal income growth (i.e., the difference between the blue and orange lines in the graph above) is also noteworthy. The data shows that actual biennial personal income growth over that same period is very volatile, vacillating wildly from high of 18.4 percent to a low of 4.5 percent. Forced to deal with this unpredictability, LBB frequently adopted spending limits both far below and far in excess of actual personal income growth. For example, the estimated personal income growth rates for the 2002-03, 2016-17, and 2018-19 biennia were 14.1 percent, 11.7 percent, and 8.0 percent, respectively. However, the corresponding actual growth rates were radically different: 6.8 percent, 4.4 percent, and 13.1 percent, respectively. In contrast, the population and inflation metric is considerably more stable, generally staying in a narrower band between 6 and 11 percent for each biennium.
Strengthen the State’s Constitutional Spending Limit
Texas’ constitutional spending limit must be strengthened and supplemented in order to address its fundamental shortcomings. This requires four key reforms: (1) apply the spending limit to all general revenue and dedicated general revenue, (2) make statutory changes to implement a spending limit on local governments, (3) require a three-fifths vote of the legislature to override the state spending limit, and (4) use changes in population and inflation (rather than personal income growth) as the basis for both local and state spending limitations.
Note: This post on LIFT Perspectives was taken from TCCRI's Final Report from the State Budget & Taxation Task Force. Citations have been omitted, but are included in the longer Report, which can be accessed here.