DALLAS — Texas's legislature left some slack in its $106.6 billion budget for the next two fiscal years in case sales tax revenues decline more than state officials expect because of lower oil prices, analysts at Moody's Investors Service said.
In a July 15 report entitled "Five Key Texas Budget Takeaways," Moody's analysts led by vice president Nicholas Samuels assessed growth in revenue and spending, school funding, pension reform, and transportation finance. Outlooks on Texas' triple-A rating remain stable.
"Low oil prices have dragged Texas sales tax performance below long-term averages, although their impact on sales tax collections lagged, with the weakest performance only this spring," the analysts noted.
Texas Comptroller Glenn Hegar based revenue estimates on an average oil price of $68 per barrel in fiscal 2016 and $73 in 2017. Moody's projects those prices at $60 and $67.
"While Texas' outlook on oil prices is more positive than ours, we still view its 2016 sales tax forecast as reasonable, even given recent performance," the report said.
In June, state sales tax revenue declined month-over-month for the first time in 62 months. With no income tax, Texas relies on sales tax for 63% of forecasted tax revenue in the fiscal 2016-17 biennium.
Based on Hegar's revenue projections in January, the Legislature in May passed a two-year budget of $106.6 billion or $209.4 billion with federal funding included.
Signed last month by Gov. Greg Abbott, the budget increases general fund spending by 12% for the biennium, or 5.8% adjusted for inflation and population growth, according to the Legislative Budget Board.
One-third of the growth reflects the state's backfill of $3.8 billion of cuts to the state franchise tax and, subject to voter approval this fall, a higher school district homestead exemption, analysts noted.
"The budget reflects a significant increase in spending compared to the fiscal 2014-15 biennium, but is smaller than what the legislature could have enacted," analysts said. "At the start of the legislative session, the Texas comptroller determined $113 billion of revenue would be available to appropriate for the biennium."
That projection included a $7.5 billion surplus carried forward from fiscal 2014-15, $110 billion of taxes and other revenue, less $5 billion required to be deposited into a rainy day fund and the state highway fund.
"Reflecting those amounts, the final budget is 5.7% less than the full revenue forecast, which provides cushion against risk in the revenue forecast," the analysts said. "Additionally, the state's rainy day fund, the Economic Stabilization Fund, is projected to have a balance of $8.5 billion, or 16.1% of general fund revenues, at the end of fiscal 2015, rising to 18.2% and 19.5% of revenue in fiscal 2016 and 2017, respectively, a substantial budgetary cushion."
To close a chronic pension funding gap, the new budget increases state employee contributions to 9.5% from 7.2% of payroll, with the state expected to increase its employer contribution to 10%.
"The ability to increase employee contribution requirements is an example of Texas using its broad legal authority to address pension funding challenges through reforms, flexibility some other states do not have," the report said.
Following a pre-session mandate from Abbott, the 2015 Legislature sought to increase dedicated transportation funding significantly, without raising taxes, tolls or fees.
Voters in 2014 showed support for the state's transportation plan by approving a constitutional amendment that sends roughly half the surplus oil and gas tax revenue to the State Highway Fund. For fiscal 2014 the transfer was $1.74 billion and is expected to be $1.21 billion and $1.19 billion in fiscal years 2016 and 2017, respectively.
Next November, voters will choose vote on a constitutional amendment to divert $2.5 billion of general sales tax revenue to the State Highway Fund each year starting in 2017, and 35% of the growth of motor vehicle sales tax greater than $5 billion starting in 2020.
