Aug. 18 (Bloomberg) -- Governor Rick Perry made his pitch to Republican voters this week touting the Texas economic miracle and his ability to create jobs even during the longest recession since the Great Depression.
Yet Perry, 61, may be choosing an opportune time to trade Austin for Washington. Projected Medicaid deficits as well as shortchanged schools threaten to hollow out the miracle, even as population gains pressure the government to spend more.
“He would be leaving behind a fiscal house in worse shape than he found when he first became governor,” state Representative Mike Villarreal, a Democrat from San Antonio, said in an interview. “Our revenue system looks like Swiss cheese and our tax code is littered with tax loopholes that leak billions of dollars from our state coffers.”
A boom in energy output and health-care services helped Perry mask a structural deficit that left schools and Medicaid each short about $4 billion in the next budget. While unemployment never topped 8.3 percent through the recession, even as the U.S. rate rose to 10.1 percent, 23 percent of Texans lived in poverty in 2009, including about a third of 9.9 million Hispanics, according to the Henry J. Kaiser Family Foundation. A 32 percent child-poverty rate was fourth highest in the U.S.
“Perry has benefited from dumb luck, including our energy sector, which is booming,” said Mike Davis, who teaches finance and economics at Southern Methodist University in Dallas. The state added about 1 million jobs from December 2000 to May 2011 as the population rose about 21 percent, federal data show.
While almost 3.3 million Texans rely on Medicaid for health care, Perry’s spending plan for the two years starting next month pushed $4.3 billion in projected program costs into the next fiscal biennium starting in 2014. The insurance system for the poor, jointly funded with the federal government, covers about 2.46 million Texans 18 and under, state data show.
“The state has been underestimating Medicaid spending for a decade or more, but this is just an extension of that on steroids,” Billy Hamilton, a business consultant in Austin and a former deputy state comptroller, said in an interview.
The Medicaid budget, which makes up a quarter of Texas’s spending, also took a 10 percent cut for the next two fiscal years, said Jeff Miller, a policy analyst at Disability Rights Texas, an advocacy group in Austin.
With public schools projected to serve 80,000 more students this year than last and a tax system that wasn’t expected to support that demand, Perry cut $15 billion from spending and shortchanged them by about $4 billion from previously mandated levels rather than raise taxes. The governor spurned attempts to use the state’s reserve fund, projected to top $6 billion by August 2013, even as education advocates said his budget would lead to the loss of several thousand school jobs.
“Texas didn’t fully fund its public-education formula for the first time since 1949 because they were facing a major budget crisis,” Hamilton said.
The budget also cut higher-education support by $1.2 billion, a move faulted by critics including former AT&T Inc. Chairman Ed Whitacre for threatening the quality of the state’s workforce.
The effects of Medicaid and school cuts will fall disproportionately on the Latino population, whose children make up 49 percent of kindergarten through 12th-grade students in Texas, according to U.S. Census Bureau data. Heading into the new fiscal year, Texas ranked 42nd in per-pupil spending among U.S. states and 43d in high-school graduation rates. For every one white dropout, there were three Latinos.
Hispanics accounted for most of the past decade’s Texas population growth, Census figures show. In Harris County alone, which includes Houston, the fourth-largest U.S. city, those under 18 rose by 185,330 -- about 10 percent of the entire gain among all Americans in that age category.
Texas will face budget gaps until it revises an overhaul Perry led in 2006 that sought to substitute expanded business taxes for property levies used to pay for schools, Villareal said. Moody’s Investors Services cited the state’s plans to maintain property-tax relief while serving a rapidly growing population for creating a “structural budget imbalance.”
Policy makers in Austin relied on federal stimulus dollars to balance their current budget and “delayed making difficult fiscal decisions,” Moody’s said in an Aug. 17 report. The New York-based credit-rating company said the state subsidized tax relief with reserve funds because of its underperforming business levy. Moody’s rates Texas general-obligation debt Aaa, its top grade, with a stable outlook.
Texas received about $17 billion from President Barack Obama’s 2009 economic-stimulus measure, David Axelrod, Obama’s Chicago-based political adviser, said Aug. 12 on ABC’s “Good Morning America” television show. “It has helped him balance his budgets.”
Perry frequently points out that Texas has led the nation in job creation in recent years. Yet many of those jobs are lower-paid positions, with the biggest gains in health care and temporary employment, Richard Froeschle, deputy director of Labor Market and Career Information at the Texas Workforce Commission, said in June.
“The Republicans should be proud that their definition of job growth and low unemployment means working at the chicken-flip or burger-flip joints,” said state Representative Garnet Coleman, a Houston Democrat and a lawmaker since 1991.
Employment numbers on the Federal Reserve Bank of Dallas’s website show that energy extraction industries had the biggest gains of the decade under Perry, rising 62 percent as crude-oil prices almost tripled. Figures on the state comptroller’s website show that health-care jobs climbed 45 percent. Fed data indicate a 17 percent increase in state positions and a 21 percent rise among local governments.
“Employers fleeing the over-taxing, over-regulating and over-litigating atmosphere that has taken hold in so many other states come to Texas because we’ve cultivated a culture that rewards innovation without all the red tape,” Perry said in an Aug. 10 speech in San Antonio at a National Conference of State Legislatures meeting. Chief Executive Magazine has ranked Texas as the best in the U.S. for business for seven straight years.
Texas’s gross state product surged 56 percent from 2000 to 2009, according U.S. Commerce Department data compiled by Bloomberg. That compares with a 44 percent gain in California and 42 percent in New York.
Median Income Drop
Growth in health care, defense-related markets and energy industries helped to double the number of Texas households with annual incomes topping $150,000, to about 640,000 in 2009 from 2000, Census figures show. Yet the state’s inflation-adjusted median household income fell 5.4 percent, and more than 1.6 million households have incomes of less than $20,000.
On campaign stops in Iowa, New Hampshire and South Carolina, Perry has emphasized that keeping taxes low also helps families build wealth. In 2009, he signed an Americans for Tax Reform pledge to “oppose and veto any and all efforts to increase taxes.” In June, he rejected a bill that would have required Internet retailers to collect state sales levies.
In announcing his bid for the Republican presidential nomination on Aug. 13, Perry said he would “work every day to try to make Washington, D.C., as inconsequential in your life as I can.”
That reflects the governor’s practice in Austin as well, Coleman said. “It’s a philosophical approach that opposes public funding for education and health care,” he said.
The governor also pushed for changes in civil litigation rules, making lawsuits potentially more costly for losers, giving additional legal protection to businesses and professionals including doctors. That has helped fuel the boom in health-care services. Yet Texas ranked 34th among states in child well-being, the Annie E. Casey Foundation, a nonprofit organization in Baltimore, said in a 2010 study.
Cuts in spending have begun to cost jobs. Last month, the state closed a Youth Commission detention center that employed about 120 workers in Brownwood, about 140 miles (225 kilometers) southwest of Fort Worth. It was among four prisons shuttered since May.
“We knew for several months that they were considering it, but it was still a shock,” said Emily Crawford, executive director at the Brownwood Economic Development Corp. Those let go included teachers, who face a tough job market as area schools rein in spending, she said.
Credit analysts at Standard & Poor’s have focused on the state’s budget difficulties in withholding a top grade for its general-obligation debt, which it rates AA+, second highest.
After S&P removed its AAA rating from Texas in 1986, state officials spent much of the 1990s trying to convince its analysts to restore the top grade, said Hamilton, who was deputy comptroller from 1991 to 2006. “They usually said, ‘get an income tax and then come back and talk to us’ because they didn’t see a reliable revenue activity.’”
S&P has a “stable” outlook for the state, indicating no change in its credit grade is imminent. It raised its rating one step to AA+, the second-highest level, in August 2009.
With $4 billion less to work with in the coming two years, school districts are likely to increase class sizes and reduce support personnel such as teacher aides, said Miller, the Disability Rights Texas analyst. More than any other group, that will affect 430,000 children with learning disabilities and other special needs, Miller said.
“We weren’t overstaffed and overfunded before these cuts,” Miller said. “Paraprofessionals who aren’t certified teachers are the people most likely to be let go, which means teachers will have less help in the classroom and less time to help individual students.”
Disability Rights Texas is receiving more requests from parents seeking help because schools are proposing reduced services for their children, Miller said. “They can’t use the ‘We don’t have the money’ excuse,” he said, because federal law requires schools to provide appropriate services.
The early childhood intervention program, which provides needed resources to help pre-school pupils with disabilities, will serve 14 percent fewer students than previously, said Mary Faithfull, executive director of Miller’s group.
“Texas will lose jobs today and worst of all will have a less-educated, less-skilled workforce to compete for quality jobs in the future” because of the budget that begins next month, Villarreal said in May when the Legislature passed the spending plan. He called it “a betrayal of Texas families, especially women and children.”
To contact the reporter on this story: David Mildenberg in Austin, Texas, at firstname.lastname@example.org.
To contact the editor responsible for this story: Mark Tannenbaum at email@example.com.