Comptroller warns of revenue shortfall for 2022-23 biennium

By Zelma Smith

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Concerned by the COVID-19 pandemic and a dramatic decline in oil prices, Texas Comptroller of Public Accounts Glenn Hegar is warning of a revenue shortfall in the billions of dollars for the 2022-23 state biennial budget. On May 20, state leaders directed state agencies, appellate courts and higher education institutions to submit plans to reduce their budgets for the current biennium by 5%. These plans were due to the Legislative Budget Board and the Office of the Governor by June 15.

The Texas Division of Emergency Management, the Texas Department of State Health Services, the Texas Department of Public Safety and the Texas Workforce Commission were not required to prepare 5% reduction plans, due to their role in the state’s response to the pandemic. Other programs exempted from reduction plans are the Foundation School Program, Medicaid, behavioral health programs, Child Protective Services, Texas Department of Criminal Justice appropriations for correctional security and the Correctional Managed Health Care program.

State leaders also warned of additional reductions in agency budget requests for the 2022-23 biennium, indicating further guidance would be provided in the Legislative Appropriations Request (LAR) instructions, set to be released in July. Senate Finance Committee Chair Jane Nelson said that as she meets with state agencies to review appropriation requests, she will “begin at zero.” While the impacts of these reductions cannot be determined yet, counties can expect cuts in the limited funding they receive through the state budget.

County grant programs funded by the General Revenue Fund and General Revenue-Dedicated accounts are the most vulnerable. The General Revenue Fund is the state’s primary operating fund, and the majority of its receipts (over 54%) come from sales tax revenue. General Revenue-Dedicated accounts are statutorily dedicated funds whose balances can be used to certify general revenue spending. Continued funding for the County Transportation Infrastructure grant program in the 2022- 23 state budget may also be at risk, given the downward trend in sales and oil and gas and motor fuel tax receipts deposited in the State Highway Fund.

The upcoming state budget covers a two-year period, running from Sept. 1, 2021, to Aug. 31, 2023.

In previous economic downturns, the Legislature has combined across-the-board budget cuts, cost-shifting measures and the use of the Economic Stabilization Fund (ESF) to address anticipated budget deficits. Prior cost shifts enacted by the Legislature included tuition deregulation, first enacted in fiscal year 2003, and reductions in grant funding to counties, such as indigent defense formula grants, local mental health authority grants, state contributions for juror pay, and community supervision programs for adult and juvenile offenders. Cuts in funding or the underfunding of state programs also contribute to cost shifting from the state to county government. For example, delays in increasing forensic bed capacity at state hospitals raise county jail operating costs and liability.

Typically, the first step in establishing across-the-board cuts is requiring agencies to submit their biennial budget requests, known as a LAR, at levels below their current funding. Restored funding for affected programs can be requested in a LAR through special requests, known as exceptional items. County officials and other stakeholders can also speak to the need for affected programs at public hearings on state budget requests held before and during the legislative session.

Past across-the-board reductions that the state’s leadership has required as a starting point for budget deliberations have been between 2.5% and 12.5%.

The next major step in the state budget process is releasing LAR instructions, which should include guidance regarding additional reductions for 2022-23 budget requests. TAC staff will share analysis and information regarding state budget cuts and their impact on counties in preparation for and during the 87th legislative session.

Editor’s note: At time of publication, Texas Comptroller of Public Accounts Glenn Hegar issued an updated revenue estimate, which projects a $4.6 billion deficit for the state’s two-year budget that ends on Aug. 31, 2021 — down from the $2.9 billion surplus Hegar projected before the pandemic began.