Texas has begun emerging, slowly, from a 14-month economic slump that has contributed to what is expected to be a shortfall of up to $18 billion in the next two-year state budget, the state's top accountant said.
Republican Comptroller Susan Combs said the state's economy is improving but still "bumping along the bottom," while Republican Gov. Rick Perry, is running for re-election largely on boasts that Texas has weathered the recession better than most states. Meanwhile, legislative leaders are talking about hiring and salary freezes and furloughs for some state employees.
"We're definitely on the path to recovery," Combs said in an interview with The Associated Press. "Rocket ship? No, but a slow upward movement."
Combs was expected to release the state's sales tax figures for July this week. Small but steady growth in the state's largest revenue stream was expected for the fourth month in a row.
The gains since April, however, haven't yet been enough to erase the $1.4 billion year-to-date deficit in sales tax revenue compared to the first 10 months of the previous fiscal year.
"It's a little bit lower, obviously, but we do not at this point see a double dip," Combs said, using an economic term for a second downturn after signs of recovery. "We're sort of bumping along the bottom coming up, and there are signs of life, definitely."
Even with the apparent turnaround, the state has far to go to meet the gains projected for the current two-year budget cycle. And, although the books won't yet be closed on that budget, lawmakers will have to begin grappling with the shortfall in the next one when they return to Austin in January.
The Texas economy has become a top focus for both of the candidates in this year's governor's race. Republican Gov. Rick Perry has touted his economic development initiatives as the engine that has helped Texas weather the recession better than other states. But Democrat Bill White says irresponsible policies and spending under Perry have led to the massive shortfall.
Sales tax receipts, which make up almost two-thirds of the state's tax revenue, had been making double-digit gains for years. But paralleling the national recession, the gains shrunk in 2008, and they started a steady monthly decline in February 2009. That stopped in April, when sales tax returns had jumped from a 7.8 percent decline in March to a 1.4 percent gain.
"The days of the wonderful 12 percent increases, I think, are behind us for the foreseeable future," Combs said. Smaller gains of between 2 percent and 3 percent are "OK, but it's not robust. It's just that people still are not unlocking their wallets."
But Combs said continued growth and better-than-expected tax revenue from the oil and natural gas industry will help her avoid having to revise the revenue estimate that lawmakers used to write the current $87 billion budget -- a move that could have painful consequences given the already dire outlook for the 2012-2013 budget.
In anticipation of a shortfall, state leaders asked agencies to cut their budgets by 5 percent for the current fiscal year, which began last September. Savings from those cuts are expected to reach about $1.2 billion. Leaders also have asked agencies to submit budget requests for the next two-year budget with 10 percent spending reductions.
"The 5 percent we requested was just the beginning," Republican House Speaker Joe Straus told lawmakers recently, raising the possibility of freezes on hiring, salary freezes and unpaid employee furloughs. The 5 percent cuts, he said were "not nearly sufficient" to address the magnitude of the shortfall.
Because the Texas Constitution tightly restricts government borrowing, lawmakers will have to make up for the shortfall with cuts to government programs and services. They also could raise taxes and fees, though state leaders have said that's not an option.
They can use money in the state's Rainy Day Fund, estimated to have an $8.2 billion balance by next year. But using that money requires a two-thirds vote of the Legislature, a hurdle that at times has proven too high. And state accountants say part of that balance must be left untouched to maintain Texas' strong financial standing.
The state is expected to get some aid from Congress this year -- about $900 million from an extended increase in federal matching funds for Medicaid.
Officials also expect a payment from the Permanent School Fund, a $23 billion endowment used for public education. The payment wasn't available last year because of constitutional limits during times of poor financial performance.