Legislative Budget Board Meets, Sets Spending Limits

Today, the Legislative Budget Board met to set the spending limits that will control the amount of appropriations capacity available during the 2023 session. The LBB is co-chaired by the Lieutenant Governor and the Speaker and consists of four additional House and Senate members chosen by those presiding officers (historically including the Chairs and Vice Chairs of the House Appropriations and Senate Finance Committees). The approved rate of 12.33% means that next session the Legislature can spend up to $114.11 billion (an increase of $12.53 billion). This is also the first session in which the consolidated general revenue appropriations limit is in effect. That limit will be $135.9 billion, or a $14.9 billion increase. Though there are some funds that are under one limit and not the other, the constitutional spending limit will generally be the one that restricts spending.

What This Means

The state has five limits that restrict how the Legislature appropriates money. The two most common are the pay-go limit (meaning the state can't spend more money than it has in the bank) and the constitutional spending limit (meaning the state's budget can't grow quicker than the state's economy). Since the Comptroller has estimated the state has plenty of money, the constitutional spending limit will be the one that controls (meaning the budget writers will hit it before they run out of money to spend). So, the state could have additional money in the bank that they can't spend if it would mean going over the spending limit. Since the base on which the rate is calculated is spending in this current biennium, any increase or decrease in spending this year (done in what's called the supplemental budget) will affect the target positively or negatively.

How It's Determined

In 1978, Texas voters approved an amendment to the Constitution which more or less said growth in appropriations between biennia cannot exceed the estimated rate of growth of the state's economy. Statute later clarified this to mean: state tax revenues not dedicated by the constitution cannot grow quicker than the rate of Texans' personal income growth. So spending from something like the State Highway Funded is exempted from this calculation. LBB staff get estimates from a number of leading economists and usually adopt one of the lower rates from them, or recently set the target at the increases in total population and inflation. LBB then keeps a running total throughout session to make sure the budget doesn't exceed this limit. If it does, the members must vote to exceed it which as you can imagine is not an easy vote.

Why This Matters

As stated above, depending on where this limit is set, it could preclude the Legislature from spending some money it has in the bank. As you might recall, the state has a historic revenue surplus which is good news. But state leaders have no shortage of ideas how to spend this funding such as property tax relief, border security, flooding and water infrastructure, pay raises for teachers and state employees, and a number of other priorities. And that is not including the day to day items of governing such as Medicaid cost increaes and more kids in public schools. There are ways to work within these limitations such as dedicating funding via a constitutional amendment or by using the $3-5 billion of federal funding remaining from ARPA for specific priorities. As a reminder, this only restricts spending from the state's most flexible money, not federal funds or constituionally dedicated ones.

A New Wrinkle

Last session, the Legislature added the first new sending limit in decades. SB 1336 created the Consolidated General Revenue Spending Limit. As you may have thought when reading the above paragraphs, the current constitutional spending limit is a little complicated to understand and apply. Thus, the Legislature added an additional requirement that the growth of spending from General Revenue (both unrestricted and those funds dedicated for a specific purpose) cannot increase more than the rate of population growth times the the average rate of monetary inflation. If the Legislature wants to exceed this cap, it would require a higher threshold of three-fifths of each chamber. At this point, it seems as though this will produce a higher number and thus will not affect spending this session.