July 9, 2010

Will Taxpayers Have to Bailout the States' Public Pension Plans?

Hawaii Employees Retirement System $6.2 Billion in the Hole – Will Taxpayers Have to Make Up the Difference?

July 9, 2010

Hawaii Reporter - David Shimabukuro, head of the Hawaii public Employees Retirement System (ERS) for 28 years, spent his last hours on the job June 30, 2010 reminiscing on the ups and downs he’s faced for nearly three decades as the administrator for what has become a $10 billion trust.

The trust has made all of the pension payments since opening in 1920, overcoming challenges through several major world events, including wars, economic downturns as devastating as black Monday in 1987, the September 11 terrorist attack, and the current recent recession.

While Shimabukuro emphasizes that the fund is stable for now, he and his replacement, administrator, Wesley K. Machida, note there are great challenges ahead, particularly because the Hawaii Employees’ Retirement System (ERS) is facing $6.2 billion in unfunded liabilities.

According to the Pew Center of the States, The Trillion Dollar Gap: Underfunded State Retirement Systems and the Road to Reform, the Hawaii ERS has one of the greatest burdens in the nation relative to the size of its payroll and population, with an unfunded liability of one and one-third times the amount of its payroll in fiscal year 2008.

This incredible unfunded liability burden has landed Hawaii on public retirement watch lists, including CNN Money, which noted in a May 2010 article,
“Pension funds in at least seven states — Illinois, Louisiana, New Jersey, Connecticut, Indiana, Oklahoma, and Hawaii — could dry up by 2020.”
Both the former and current administrators maintain they have a plan to catch up to ensure they can continue to cover the retirement benefits for some 38,000 retirees and the more than 110,000 eligible people in the public retirement system.

So What’s The Problem?

The fund’s unfunded liabilities burden exploded in recent years, but in reality, this has been an ongoing battle since the ‘60’s, says Shimabukuro, in large part because of the unique way Hawaii’s government has affected the fund.

For example, the state legislature has raided and transferred money while the city and county of Honolulu did not make required payments to the fund.

In 1967, a unique funding formula set up by Hawaii lawmakers and approved by the governor, began to drain the State and County’s contributions for the general fund, leaving just the 8 percent of investment returns in the fund as mandated by law.

The “excess” interest earnings went to cover a ballooning city and state operating budget instead of remaining in the fund so investments and interest could be optimized.

So while every other retirement fund across the country was using the economic good times to boost revenue for their retirees through returns on their investments, the ERS managers and board watched as their fund was depleted each year for 38 years, with $1.687 billion skimmed, according to ERS administrators.

The money was used for everything from building parks, paying salaries, to funding lawmakers’ favorite social programs and charities.

Then a combination of factors – including a poor investment market, a Hawaii State law that mandates the actuarial assumption at 8 percent return on investments, the generosity of benefits provided, and accounting practices that don’t record pensions when earned – worked against the best intentions of the trustees in charge of the fund.

Now they have to play catch-up to cover the $6.2 billion in unfunded liabilities.

The good news, administrators say, is the legislature and Gov. Linda Lingle addressed in 2005 the financial pension crisis by passing another law that says the fund can no longer be raided to balance the state budget.

Balancing the Budget on the Backs of Future Generations

For decades, the Legislature claimed to have a “balanced budget” according to State law, but legislators actually were using “excess” interest earnings from the public sector pension fund to supplement the general fund.

This is the way it worked: the State would expense, on the books, 100 percent of the total amount due to the fund as the employer contribution, while employees would pay their proportional share. But then, the general fund would be “credited” all ERS investment income over the legislatively mandated interest rate – currently at 8 percent. For example, if the State owed $200 million in pension contributions to the fund and excess interest earnings that year were $100 million, the cost to the State for contributions would only be $100 million.

Put simply, the State and Counties – the “employers” – were paying their legally mandated share of benefits. But the government then, in essence, got a “kickback,” which lessened its overall costs and allowed those funds to be used for other purposes.

ERS administrators say that if total earnings on investments had been retained by the pension fund, the $1.687 billion taken over the years would have been the equivalent of over $4 billion today and the pension fund would be much closer to being fully funded.

Now, taxpayers, who fund the State’s portion, must pay higher costs to cover unfunded liabilities. And active public sector employees must pay a higher percentage of their wages to help pay for their predecessors’ retirement as well as their own.

Public Sector Employees Fight Back, Forcing Changes in Pension Funding

In 2005, the State and Legislature voluntarily stopped diverting ERS’ excess investment earnings and adopted a new funding methodology.

Public employees sued the State over Act 100, passed in 1999, that authorized the State to take the excess of 10 percent investment earnings from 1997-98 and diverted $347 million in contributions.

The Hawaii Supreme Court ruled in the plaintiffs’ favor in 2007. However, the court did not issue an injunction against the State’s practice. And the State vowed to fight the court’s ruling.

Former administrator Shimabukuro notes in the 2009 report,
“The new percentage of payroll funding methodology that was implemented in July 2005 and the moratorium on retirement benefit enhancements will strengthen the ERS financially over the long term. “
The ERS management has its critics including some lawmakers and outside actuary experts.

Some of the criticism includes that the annual required contribution (ARC) from the 1930s to 2005 was based on an Accepted Actuarial Funding Method (AAFM). After 2005, the legislature eliminated that requirement.

The Government Finance Officers Association (GFOA) recommends that the cost of benefits should be reported in accordance with generally accepted accounting principles (GAAP) and public employers should pay100 percent of the annual required contribution.

As of FY2009, taxpayers owed government employees $17.6 billion for benefits earned to date.

In 2007, the Legislature increased employers’ contributions and enacted a moratorium on retirement benefit enhancement proposals through January 2011.

Hawaii Delegation Pushed for Amendment to the Federal Pension Protection Act of 2006

A new hybrid contributory plan was implemented by the ERS in July 2006 to provide members with enhanced benefits as compared to the noncontributory plan.

Administrators say they worked with several national public pension plan organizations and the Hawaii Congressional delegation to secure federal legislation to allow for the upgrade of members’ past Noncontributory Plan service credits from the 1.25 percent benefit multiplier to the 2 percent benefit multiplier under the Hybrid Plan.

An IRS ruling against the practice gave impetus to these changes.
“Our efforts were successful as a special amendment was included in the federal Pension Protection Act of 2006, which enables Hybrid Plan members to use their deferred compensation and tax-sheltered annuity monies to pay for the upgrade,” say ERS administrators.
By collecting enhanced payments now from Hybrid Plan members electing to upgrade their membership service, fund assets will increase. However, benefit payments will be higher once those members retire.

Despite Improvements, Pension Fund is Decreasing

The newly released 2009 ERS Actuarial Valuation Report reveals that the fund’s net assets decreased from 10.8 billion to $8.8 billion in fiscal year 2009.

The trust fund provided $839 million in pension payments to retirees last year and is projected to pay out $1 billion by 2012 to keep up with Hawaii’s aging work force.

On March 31, 2008, the ERS’ total membership of 108,696 was comprised of 66,589 active members, 36,260 retirees and beneficiaries, and 5,847 inactive vested members.

Despite an increase in the both State and employee contribution rates, payouts exceeded contributions by over $75 million last year.

Other factors beyond the diversion of assets by the Legislature have put the fund on shaky ground, according to the report.

* Hawaii’s retirees live longer than average and so receive benefits over a longer period of time.
* Funding future payments are based on estimated annual pay increases, but the Legislature has funded much larger worker pay increases than anticipated.
* The number of retirees is growing, along with increased payments.

The report also states that the fund carries $534 million deferred investment losses, which will decrease the funded ratio and increase the funding period over the next three years without an offsetting actuarial gain.

Administrators also note that despite severe investment losses of as much as -17.5 percent in FY2009, the period between July and December 2009 posted gains of 15.3 percent, helping to offset the earlier decline in stocks.

So What’s the Plan?

Part of the strategy ERS administrators say is to hire qualified investment companies to act on their behalf (they have 34) and to continue to diversity their portfolio.

The diversification aspect is important especially in light of the sometimes-volatile stock market.

For example, in recent weeks, a number of pensions across the country including Hawaii have come under criticism because of their holding of BP Oil and other petroleum stock, which are taking a significant hit since the April 2010 gulf oil spill.

In Hawaii, the BP investment was at $19,912,533, but now as of June 14, 2010, amounts to $11,845,090. However, since that is less than 20 percent of 1 percent of the ERS’ $10 billion portfolio and they expect the value will rebound before stocks are sold, they maintain the loss is on paper, and not actual.

What does this have to do with the Taxpayers and Why Should They Care?

The ERS plan and strategy relies heavily on a hands-off policy by the Legislature and counties, or the unfunded liability and their ability to pay retirees without raising taxes or raiding special funds will be in jeopardy.

Ultimately, whether or not investments return a positive yield, taxpayers are obligated to pay all government workers’ pension benefits as promised through collective bargaining agreements.

Taxpayers will pay benefits when they become due, regardless of whether the fund is solvent or not.

Legislators are able to promise benefits to public sector unions. But to pay for those promises, they mandated a high return on investments, which allowed for a lower state annual contribution.

Also, the Legislature increased the percentage of payroll on today’s workers to help pay for retirees. However, deferring costs to future taxpayers means that the bill will ultimately become due.

Hawaii isn’t the only state with underfunded liabilities. A new joint study released by the Foundation for Educational Choice and the Manhattan Institute for Policy Research, “Underfunded Teacher Pension Plans: It’s Worse Than You Think,” by Josh Barro and Stuart Buck, reveals nearly $1 trillion in unfunded teacher pension liabilities in 59 funds nationally.

The study shows Hawaii at 67 percent funded, but after adjusting for the discount rate and figuring market value, the fund is only 47 percent funded.

The solution for states, the authors say, could be to put employees into a hybrid or defined contribution model like a 401(k).

Hawaii Gov. Linda Lingle said during the April 2010 Milken Institute Global Conference in Los Angeles said,
“Until the public rises up and says, ‘Enough is enough, you have to stop this spending,’ it won’t stop, and our quality of life will degrade.”

State of Washington's $2-Billion-Budget Hole will Require Deep Cuts

Gov. Chris Gregoire must find ways to make budget cuts to meet a tax revenue shortfall expected to top $2 billion.

November 19, 2009

Daily Herald — Washington's budget hole is getting deeper, and today state leaders will find out how much.

A new economic forecast due out this morning will show the recession's squeeze on consumers continues to starve the state of tax revenues and a shortfall that's been growing for months now likely tops $2 billion.

For Gov. Chris Gregoire, the precise figure will represent the amount of red ink she must erase in her 2010 supplemental budget expected out the week of Dec. 7.

By law, her spending plan must plug that gap without counting on new revenue from tax increases. That means making cuts in the current budget, a position she found herself in a year ago at this time.

Except now there's even less fiscal fat to trim from.

“It's not nickel-and-diming around the edges,” she said, referring to hundreds of small cuts made earlier this year. “If we have discretion to eliminate (a program) it is on the table.”
She dramatized the magnitude with a PowerPoint presentation showing that even if she does the unthinkable, it won't save enough.

For example, closing down Washington's penal system would save about $800 million a year, according to her budget office.

Or if she proposed ending state aid to the University of Washington and Washington State University, it would free up $493 million in the fiscal year that runs from July 1, 2010 to June 30, 2011. If she also shuttered the state's 34 community and technical colleges, that would produce another $643 million in savings.
“You can't close down every prison. You can't close down all mental health services. You can't close down all state-funded services. It's just not practical,” she said.
To find the $2 billion, she's regularly huddling for hours with her senior staff, budget analysts and agency directors trying to figure out what to keep and what to discard.

This Saturday, they'll again gather in a large conference room to pore through spreadsheets detailing savings from potential cuts. They'll also debate the effect each move might have on a person, a business or a community.

While every year, a chunk of state tax dollars are untouchable, this year there are far less of them in play.

Some spending is mandated by the state constitution, such as providing basic education, or is required by law, such as paying debt on bonds.

Also, there is a batch of health care, human service and education programs that survive on a diet of state dollars matched by federal funds.

In 2010, those federal strings are tied around even more dollars because of the recovery act. Congressional rules bar states from reducing their spending on any program for which stimulus money is received.

Added up, about 70 percent of the state's general fund can't be touched in 2010, leaving the governor and lawmakers to find $2 billion in savings out of a $9.3 billion pot.

Gregoire may plug some of the hole with reserves. And she may suggest transferring a few dollars from the capital budget; last year nearly $800 million got shifted in this manner.

Congress is talking about pumping in more federal aid to states, though it won't happen before Gregoire puts out her budget.

As a result, she said she's focused on making it up through cuts.

That doesn't leave a lot of fiscal wiggle room for her and the Democratic-controlled Legislature in the 60-day session that begins Jan. 11.
“This is going to take the legislators to spend every waking moment they're here thinking about the short term consequences, the next biennium and the long term impacts,” Gregoire said.
Sen. Margarita Prentice, D-Renton, chairwoman of the Senate budget committee, said that this may be the most difficult and challenging year she's faced.

On Wednesday, she said Democrats are feeling in a slightly better starting point than a year ago because they've been in close contact with the governor.

“I'm not feeling as stressed because our communication is so much better,” she said. “It is going to be painful. But we'll get through it. We just have to act like grown-ups.”

Florida Expects $6 Billion Hole in Budget in 2011

May 2, 2010

Times/Herald — The oil rig explosion that threatens the Gulf of Mexico also rocked the carefully crafted agenda of the Florida Legislature's incoming leaders.

Rep. Dean Cannon and Sen. Mike Haridopolos had envisioned using oil drilling leases off Florida's gulf coast to fill a $6 billion budget hole expected next year. But as the oil slick washed closer to Pensacola, Cannon — on tap to be the next House speaker — conceded:
''I think it definitely is a game changer."
Legislators closed out their 60-day session Friday with a $70.4 billion budget and fears that next year's financial picture will be worse.

More than $15 billion in federal stimulus aid for Florida over three years will disappear in 2011, leaving gaps in programs that finance schools and health care for the state's poor and elderly. Meanwhile, the state's property insurance market and the state-backed Citizens Property Insurance Corp. remain vulnerable to a major storm, and Florida's budget-sapping Medicaid program continues to grow.
"It's going to be a tough year ahead," said Haridopolos, R-Indialantic, the incoming Senate president. "We're going to have less money with the loss of the stimulus money, and more than ever my conservative credentials are going to be put to the test."
Haridopolos took pride in helping steer the Senate to the right this session — during an election year — by pushing through a teacher tenure bill, stricter abortion laws, ballot measures aimed at rejecting federal health care reform and pushing for a balanced federal budget, and a redistricting amendment that would shift the impact of two citizen-backed redistricting plans.

But the Republican-led Legislature relied on $2.6 billion in federal stimulus money to fill its $3 billion budget hole. Lawmakers left for next year the job of finding more permanent solutions to Florida's budget woes.

Cannon, R-Winter Park, called this year's budget a "major victory" but warned:
"We have no assurance we're going to be able to do that again next year because the federal stimulus money probably will not be available and the economy doesn't look like it will recover quickly enough to close the gap."
Adding to their concern: The federal health care overhaul approved by Congress is expected to expand Florida's Medicaid rolls by at least 1 million people over the next couple of years.

With 2.7 million Floridians already receiving Medicaid coverage, and the state at record unemployment levels, the state's share of the costs are expected to climb. Although federal dollars will cover the expansion's early stage, forecasts indicate Medicaid will absorb more than one-third of the state budget by the end of the decade.
"If we don't make some significant reform, it will literally eclipse the budget in a number of years," Cannon said.
He and Haridopolos vow to bring back the ambitious Medicaid overhaul that legislators tried but failed to pass this year.

The Senate wanted to find savings by expanding managed care to 19 counties in one year while the House sought to expand the program to all 67 counties within five years.

The Medicaid revamp, like the oil drilling plan, was never expected to provide an immediate fix to the state's budget woes but would have begun a series of gradual changes that could have lasting effects.
"We started the conversation, and we'll be back next year," said Rep. Denise Grimsley, R-Lake Placid, chairman of the House Health Care budget committee, and an architect of the House Medicaid plan.
Gov. Charlie Crist may give legislators another chance this year to tackle all the unfinished business.

He has threatened to veto the abortion bill, a property insurance bill, and large chunks of the budget, such as a $160 million raid on the road building fund. He also has suggested that he may bring lawmakers back into special session to take up anti-corruption bills and ethics reforms aimed at the Public Service Commission.

Crist, who declared last week that he will abandon the Republican Party and run for the U.S. Senate as an independent, antagonized legislators earlier this session by vetoing a teacher tenure bill and a bill giving legislative leaders new political campaign funds.

Senate President Jeff Atwater, who is running for a seat as the state's chief financial officer, said he is "open to" a summer special session to take up ethics, corruption and PSC reforms.

Rep. Ron Saunders, D-Key West, blames election-year politics for the lack of progress on many tough issues.
"Next year's not an election year and, after the elections, we'll see where the state is," he said. "Hopefully, we'll be able to start working together because next year we've got a deficit that is twice as bad as this year's and not as much money."
And with less money, oil drilling may not be completely dead. After a year of studying the prospects of safe oil drilling by a committee Cannon chaired, neither Cannon nor Haridopolos is willing to abandon the prospect for Florida.
"I'm not going to move forward until every single question has been answered," Haridopolos said, noting the spill is a once-in-40-years disaster.

Texas Budget Hole Will Prompt State Accounting Magic

May 3, 2010

Texas Tribune - It's 1983. Oil prices are in the toilet. The Texas economy is suddenly and unexpectedly reeling. Lawmakers, who happen to be in session, have a choice between big cuts or new taxes. Or they could decide on something creative. Comptroller Bob Bullock and his top propeller-heads find a creative out — a third way to balance the budget. They move up the due dates of the taxes already in place, borrowing from the future by speeding the arrival of money that wouldn't normally have been available until the next budget period.

In another budget crunch a few years later, they do the opposite, slowing payments due — into the next budget. Lawmakers decide to pay state employees on the first day of the month instead of the last day of the month. That moves the last payment of the budget period into the next budget period, allowing the state to make ends meet.

No taxes. No cuts. Just some accounting and collection tricks.

In 2011, facing a monstrously large budget shortfall, lawmakers will likely turn to the same shell game to cover the first $2 billion or more. But such trickery represents a risky bet: If the economy doesn’t rebound, bringing tax collections up with it, the next Legislature will be doubly broke.
"It's a gamble," says Dale Craymer, president of the Texas Taxpayers and Research Association. "It works great if revenues recover and you grow out of the problem."
To some, it’s a better gamble than the sure bet of raising taxes and fees now.
"I would rather see reductions made," says Talmadge Heflin, a former House Appropriations Committee chairman who now works for the Texas Public Policy Foundation. "But if they have no other choice than raising additional revenue ..."
The state's accounting tricks really came into their own in 1991, during yet another budget crunch — one so bad that lawmakers approved a new tax bill, some "efficiencies" in existing programs, the state lottery, and hundreds of millions of dollars in "smoke and mirrors" budgeting that moved costs out of the troubled period and into a future budget. They delayed state payments to local school districts by a day, "saving" an astonishing amount of money. They held money that was destined for state highways, along with other payments that would ordinarily come due in the last days of a biennial budget.

A few years later, lawmakers "repaid" the money they'd borrowed from themselves, adding an extra payment to, for instance, the Foundation School Program, to make up for the payment they “borrowed” from the previously cash-strapped budget.

This session: Time to borrow. State budgeteers expect the gap between revenue and current spending to be somewhere in the $11 billion to $20 billion range, a classic money trap that leads to conversations about taxes, spending cuts, expanded (and taxable) gambling, using the Rainy Day Fund, and new federal stimulus programs.

And cheating, too. The budget writers could erase $2 billion or more of tough political decisions over cuts or taxes with accounting tricks. Some say it’s a victimless crime.
"Obviously it's easier — it's invisible to the public," Heflin says.
Delaying the school payment by a day would chop $1.4 billion from the total, without the political pains of a new tax or spending cuts. Delaying payments to the employee and teacher retirement systems, Medicaid payments and transfers of gasoline taxes into the state highway fund — all will be on the table.

Some of the tricks of previous Legislatures will no longer work. The state never returned to paying its employees on the last day of the month, so it can’t move the date to the first of the month again. Neither will moving up the tax due dates work. When that was done, sales taxes were due at the end of the month. Taxpayers knew that as long as their checks were postmarked in time, the money didn't have to be in the state's hands on time. Moving the due date back 10 days meant that most checks landed in the state coffers before the end of the month, and that's why it helped duck a tax bill three decades ago. With electronic filing, the state already gets the money on time.

Billy Hamilton, now a consultant, worked for Bullock in 1983 when the comptroller cooked up those changes in tax deadlines and got these games started. And he was there when another comptroller, John Sharp, expanded the use of delayed payments in 1991.
"We used to say that 'on the last day of the state' — you know, when Texas goes out of business or whatever — someone will have to write a check before they turn out the lights."

Because of Shrinking Revenue, Texas May Need $15 Billion to Balance Budget

December 19, 2009

American Statesman - Legislative leaders might soon ask universities, regulators, state parks and other branches of state government to trim their spending as Texas starts to prepare for a years-in-the-making budget shortfall.

Surging sales tax receipts and booming oil prices in the middle of the decade, along with lawmakers' reluctance to spend, allowed billions of dollars in state reserve funds to stockpile.

The passage of a federal stimulus package this year gave the state an injection of federal dollars and kept the reserve funds piling up, even as the national economy took a nose dive.

But lawmakers have allocated those stimulus dollars, oil prices are back down, and sales tax collections are plummeting. So Capitol leaders are once again discussing ways to cut back state services.

Lt. Gov. David Dewhurst is floating a plan to ask state agencies to cut spending about 2.5 percent or more per year over the next four years. Health and human services programs and public schools — two giant staples of the state budget — would be exempted, he said.

Dewhurst said the cuts would help the state leave some of its reserve funds — optimistically, $4 billion to $6 billion — unspent at the end of the 2011 legislative session.
"We can't spend down to zero," he said.
Dewhurst expressed confidence that the cuts would not be severe. But leaving as much money unspent as he wants could prove difficult.

As compared with a year earlier, sales tax collections were down 14.4 percent in November, and those kinds of returns have hastened budget-cutting talk. But what's really driving the conversation is a decision that lawmakers made in wealthier times to put property tax cuts at the top of the state's permanent priority list.

In 2006, facing an order from the Texas Supreme Court, lawmakers passed a one-third reduction in school property taxes for operations, committing the state to spend $7.1 billion every year to hold those taxes down. But the tax increases that lawmakers passed at the same time to replace that money — most notably a revamped business tax — produce less than $3 billion per year.

So every two years, the state has to pull more than $8 billion away from other priorities, such as public schools, universities or prisons, to pay the rest of the cost of property tax cuts. Doing so wasn't too difficult when the state had surpluses, but now that they're gone, the property tax cuts threaten to eat up any revenue growth the state sees, even though many homeowners never saw much of a decrease in their tax bills.

To meet the state's commitment to hold down property taxes, to pay for an increasing number of people enrolling in public schools and colleges and joining Medicaid rolls, and to replace the stimulus dollars used to pay for the current budget, lawmakers in 2011 might have to come up with $15 billion or more to balance the budget, which now totals $182 billion over two years.

That's a daunting number, but Dewhurst said he is convinced the state can close that gap without severe cuts in state services. After all, the state could have as much as $11 billion in reserve funds available to balance the budget, although two-thirds of the Legislature has to agree to use that money, and that could be a tough sell.

An upturn in the stock market in recent months will probably make more money available from state investments, and an economic recovery in 2010 and beyond could bring in billions of dollars of new money as sales tax collections start to pick up.

It was Dewhurst who, in 2007, resisted calls from Gov. Rick Perry to use a state surplus on further tax cuts and calls from some Democrats to spend that money on state programs. Had Dewhurst listened to either side, the budget gap could be billions of dollars larger.

Because the cost of keeping down property taxes isn't going anywhere — in fact, thanks to an additional tax cut for small businesses that lawmakers passed this year, it's getting more expensive — Dewhurst wants to tell agencies to trim their spending so lawmakers will have some money left over for the budget that they'll have to balance in 2013. He'd like to get House Speaker Joe Straus to sign on to a letter instructing them to do just that.
"I don't have an agreement worked out yet with the speaker, other than he knows that I've gone through this several times and he's new to this," Dewhurst said. "I'm hoping that he will work with me."
State leaders ordered 7 percent cuts in 2003. Dewhurst has said he does not think balancing the budget in 2011 will require cuts in services as deep as those enacted in 2003, when lawmakers cut myriad services.

In a statement relayed through a spokeswoman, Straus said the Legislature and agencies should look for ways to be more efficient.
"We are early in the process, and we will continue to take a close look at economic forecasts before deciding on specific numbers," he said.
Under the parameters laid out by Dewhurst, a 2.5 percent annual reduction in spending would save about $400 million per year.
"They forget that all of these programs need more money to stay in the same place," said Eva DeLuna Castro of the Center for Public Policy Priorities, which advocates more spending on programs that aim to help low-income Texans. "Even if you just do what you're doing now, it's going to cost more, because of inflation. So it's like a double cut."
The state's worsening budget outlook will make it more difficult for state leaders to reach some of their stated goals, such as building up more flagship universities, DeLuna Castro said. Reducing waiting lists for state services is also likely to become more difficult.

And even though it is the state's effort to restrain property taxes that is causing much of the projected shortfall, that effort could result in higher property tax bills because the state will have fewer dollars to help school districts, community colleges and other forms of local government cope with cost increases, she said.

While some of the Capitol's best minds are already taking a hard look at the budget shortfall, it's not getting much attention so far on the gubernatorial campaign trail.

Perry has focused on highlighting the fact that Texas has not seen the budget crises experienced by many other states. And nobody running against him has suggested that the state needs to raise taxes or find other ways to take in more money.

In fact, U.S. Sen. Kay Bailey Hutchison, Perry's top challenger in the March Republican primary, has argued that the Texas budget has grown too quickly, but she has not identified ways to significantly reduce spending.

Perry, like Dewhurst, has sounded the call for restraint on the part of state agencies.
"It is time for state leaders and state agencies to sharpen their pencils and begin prioritizing their goals and their spending, because every penny we save during the current biennium is one penny closer to balancing the budget in 2011," he told a business group last month.
Asked whether the governor agreed with Dewhurst's call for cuts in the neighborhood of 2 percent, Perry spokeswoman Allison Castle said,
"It's a step in the right direction."

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