DALLAS — Two years after massive spending cuts to deal with a slumping economy, Texas lawmakers are considering measures to ease the impact as they prepare to convene for their 2013 session next week.

The Texas Legislature, which meets only in odd-numbered years, will open formally on Tuesday.

After cutting $1 billion for higher education in the current biennial budget, lawmakers are discussing fixed-rate tuition for state university students who graduate in four years or less.

Although the measure would provide a higher level of certainty for students, some university officials, facing volatility in state funding, could see less flexibility in responding to budget pressures. That could have an impact on credit considerations, they say.

Texas Gov. Rick Perry has been advocated fixed-rate tuition since 2009 when only two of the 38 state universities offered the option. Only 29% of public university students in Texas graduate in four years, while after six years, 57% have graduated.

The higher education issues are considered less ominous than those facing public schools in grades kindergarten through 12th grade. After the Republican-controlled legislature cut school funding for the first time in Texas history in 2011, schools have struggled to meet the demands of rapidly growing enrollment. A lawsuit in state district court in Austin also challenges the school funding formula.

Analysts for the credit-rating agencies cite the school funding dilemma as one of the major flaws in the state's fiscal strategy.

The adopted budget for the current fiscal years 2012 -2013 biennium relied primarily on spending cuts to address forecast slow revenue growth and expiring federal stimulus aid, but also included one-time underfunding of Medicaid and a school payment deferral.

"Fitch expects the legislature, which convenes for its biennial session in

January 2013, to direct a portion of higher revenues to the fiscal 2013 Medicaid

Underfunding," analysts at Fitch Ratings observed. "Broader budgetary risks include several lawsuits challenging school funding changes enacted in the last legislature."

Despite the funding pressures, Fitch conferred triple-A ratings on the state's general obligation bonds in a Dec. 21 report.

Standard & Poor's rated the $53 million of GO bonds AA-plus, while Moody's Investors Service also issued triple-A ratings. Outlooks were stable for all three agencies.

While noting Texas strong growth in revenues over the past year and relatively mild recession, analysts also point out the state's high levels of poverty and conservative approach to dealing with growth.

"In our opinion, Texas' approved biennial budget failed to achieve structural solutions to the state's long-term budgetary pressures," S&P analysts wrote. "Chief among these potential sources of persistent imbalances is education funding. As we have noted for the past five years, we believe that the school finance reforms that the legislature approved in 2006 created a long-term source of budgetary imbalance and liquidity pressure for the state."

Bolstering the state's economic stature is its economic stabilization fund, or "rainy day fund." State comptroller Susan Combs forecasts that the ESF balance will rise to $8.1 billion as of the end of fiscal year 2013. As of Nov. 30, the balance was $8 billion.

State revenue collections for the first three months of fiscal year 2013 through November 2012 continue the trend of out-performing projections. General revenue fund receipts are 4.9% over forecast and 13.1% over prior year figures. Sales taxes are up 11% year-over-year.

Combs is expected to release the next revenue forecast through the fiscal 2014 — 2015 biennium next week.

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