AUSTIN — Texas faces a severe budget shortfall of $15-$27 billion over the next two years, but a deeper threat to its AA-plus credit rating is a structural imbalance in how it finances schools, according to Standard & Poor’s analyst Horacio Aldrete-Sanchez.

“Until now, economic growth was dynamic enough to mask these structural deficiencies,” Aldrete-Sanchez told The Bond Buyer’s Texas Public Finance Conference here. “In many ways, the state budget deficit has been four years in the making.”

The state’s school funding formula has been a source of chronic conflict in the Texas Legislature and has prompted lawsuits to make the system more equitable.

While the state is not at risk of a downgrade or lower outlook, the problem of the school funding is one that needs to be addressed, Aldrete-Sanchez said.

Schools may face cuts of $9.3 billion as lawmakers adjust the budget to the estimated $72.2 billion in available state revenue.

This year’s revenue is $8 billion below what was available in 2009 and does not account for growth. In addition to lower state revenues, the state will lose federal stimulus funds this year.

Gwen Santiago, executive director of the Texas Association of School Business Officials, said a cut of that size could force the layoffs of up to 100,000 school employees, including teachers and administrators, over the next two years. She said most school districts dedicate 80% of budgets to salaries.

Conference panelist Steven Bassett, chief financial officer of the San Antonio Independent School District, said the district is expecting a funding drop of $51.8 million for fiscal 2012. He attributed the decline to reduced state aid, the expiration of federal stimulus efforts, and loss of some Medicaid funding.

“Our revenues are currently about $500 million a year, so that is a drop over one year of 10% of our income,” Bassett said. “The district is cutting agency budgets by 5% and looking at other options suggested by our trustees, but even so we’re still $14.8 million short of that $51.8 million target.”

Nicole Conley-Abram, chief financial officer at the Austin Independent School District, said the looming cuts in state aid are exacerbated by a drop in assessed property valuations that is reducing revenue from the property tax.

The assessed valuation in the district fell 3.66% in fiscal 2010, and the district is expecting a 2.75% decline in fiscal 2011. The situation will ease somewhat in fiscal 2012, she said, as values are expected to drop only 1%.

The district is looking at almost $80 million in budget cuts, according to Conley-Abram.

A declaration of financial exigency by the Austin district is almost certain, she said. That declaration would allow the district to abrogate contracts and take other steps to reduce its expenditures.

Conley-Abrams said up to 80% of the 1,030 school districts in the state could be considering an exigency declaration.

Ron Caloss, a former district superintendent who is now a managing director at Morgan Keegan & Co., said it was a matter of pay now or pay later.

There are 4.6 million students in Texas public schools, Caloss noted.

“If we don’t educate these kids now, we’ll be paying down the line,” Caloss said. “We don’t have the money it takes to build the prisons we’ll need or the social programs that would be required if education is not a top priority for this state.”

Caloss predicted that state legislators will hear from disgruntled constituents over projected spending cuts.

“They are going to get some heat, and I mean red-hot heat,” he said. “I’m waiting for the first superintendent to tell their community that high school football will become an after-school club program due to budget cuts.”

Despite those problems, Republican state officials have continued to put a positive spin on the figures that they say are much less dire.

“I think there’s a lot of room to be optimistic,” said Mike Morrissey, senior adviser to Gov. Rick Perry. “The governor’s position is that when times are lean, you prioritize.”

Morrissey said that the actual shortfall for the next fiscal year should actually be estimated at $4.3 billion.

The $27 billion figure is based on budget requests from state agencies to keep up with growth.

Perry has estimated the budget gap at about $15 billion, but that includes an $11 billion deficit in the current budget that will be eliminated, according to Morrissey. Once that is covered, lawmakers will need to cut only $4.3 billion more in spending to balance the budget, he said.

Lieut. Gov. David Dewhurst agreed that “there’s no way we have a $27 billion shortfall.”

“Only government thinks you must increase your spending 10-15% per year,” he said while also noting that Texas’ population is growing rapidly.

Despite the financial troubles, Dewhurst said the state will seek to improve schools through use of technology, reducing non-teaching staff and improving charter schools.

“We’ll be making substantial changes and big improvements in public education,” he said.

For the current legislative session, the Texas Association of School Boards submitted its own budget proposal with a single-tier funding formula that would replace the current two-tiered system.

“What is different now is that all districts can agree that our current system for funding public education is broken — it’s too complex, too unfair, and not keeping pace with the educational needs of our students, said former TASB president Sarah Winkler.”

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