What Forces Drive State Spending?

But a majority of state spending goes to just three purposes: education, health care and transportation. In this report, we examine what’s driving the steady increase in their costs…

Every regular session of the Texas Legislature considers thousands of pieces of legislation. But regardless of what happens to this mountain of bills, there’s one that always gets attention — the General Appropriations Act (GAA), which outlines the state budget. The GAA, as thick as a Victorian novel, addresses every aspect of state government funding, from roads and prisons to immunizations and scientific research.

Most of the budget is driven by mandates in state law and the Texas Constitution and matching requirements for federal aid. Less than a fifth is available for “discretionary” spending, and lawmakers prioritize this spending as Texas’ needs change. Deciding how to spend that crucial fifth requires hundreds of hours of debate and negotiation in every session.

But a majority of state spending goes to just three purposes: education, health care and transportation. In this report, we examine what’s driving the steady increase in their costs.

Classifying State Revenue

Texas state government derives its revenue from taxes, licenses, fees, interest and investment income, net lottery proceeds, federal aid and other, minor sources.

These revenues can be classified into four categories:

• General Revenue funds are revenues that are not restricted by state law and include the nondedicated portion of the General Revenue Fund, the state’s primary operating fund.
• General Revenue dedicated funds (GR-D) include revenue in more than 200 accounts within the General Revenue Fund that state law dedicates for specific purposes.

Together, General Revenue and General Revenue-dedicated fund balances are called General Revenue-related funds (GRR). GRR represents a little more than half of all state spending.

• Federal funds include grants, allocations and payments or reimbursements received from the federal government by state agencies and institutions.
• Other funds consist of any funds not included in general revenue, whether dedicated or not, such as the state revenue included in the State Highway Fund, the Texas Mobility Fund, the Property Tax Relief Fund and the Economic Stabilization Fund (or “Rainy Day Fund”).

The sum of all these revenue sources is called All Funds.

Spending by Article

The GAA is organized into 10 major “articles” based on type of government function (Exhibit 1). Article VI, for example, includes agencies that deal with natural resources such as the Texas Parks and Wildlife Department, the Department of Agriculture and the Railroad Commission.

Limits on State Spending

State laws and the Texas Constitution place certain limits on legislative appropriations to maintain the state’s fiscal health.

Article VIII, Section 22 of the Texas Constitution states that:

…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.

Government Code Chapter 316 defines the “rate of growth of the state economy” as the rate of growth of Texas personal income. Since the 1996-97 biennium, Texas personal income has risen by an average 5.4 percent annually, compared to 4.3 percent for GRR appropriations and 4.6 percent for All-Funds appropriations (Exhibit 2).

Note: Article IX consists of general provisions such as state employee salary schedules and does not involve costs.
* Compound annual growth rates (CAGRs) based on annual averages within the 1996-97 and 2018-19 biennia.

Sources: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, IHS Markit, Legislative Budget Board, Texas Comptroller of Public Accounts and Texas Education Agency

State spending in Texas also cannot exceed available revenue. Article III, Section 49a of the Texas Constitution restricts state spending to the amount of revenue the Texas Comptroller estimates will be available in a given biennium.

In other words, the Texas Legislature cannot pass a budget in deficit, except in “the case of emergency and imperative public necessity” and with a four-fifths vote from each house of the Texas Legislature — a very high hurdle.

Source: Texas State Comptroller