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Will Texas Squander Its Prosperity?

September 26, 2012

By Steven Malanga

Texas has been on a roll recently. Fueled by a booming energy sector, the state has easily outpaced others in job growth. Business executives consistently rate it among the most desirable places to invest in, and Texas has made a habit recently of poaching jobs from places like California. Although Texas legislators did confront a budget squeeze a few years ago, the booming economy has provided Austin with plenty of fiscal room to maneuver, even as other states confront perhaps another decade of fiscal adjustments.

Now Texas faces the challenge of managing its success over the long term. Although Texas has a reputation as a conservative state, legislators have been spending its prosperity. Its government is bigger than you might imagine, and Texas has its share of inefficient and at times even frivolous government expenditures that are unsustainable over time. Other states in the past have squandered their prosperity. Will Texas, too?

Texas revenues have increased robustly over the past decade thanks to economic growth, but so have state and local spending. State expenditures from all sources grew from the 1998-1999 two year budget cycle by 120 percent to $187 billion through the 2010-2011 biennial budget. Even though Texas is still among the more frugal of state governments based on a spending per capita basis, over those years expenditures grew 50 percent faster than the rate of inflation plus population growth. Local government spending in the state has similarly risen, doubling over a decade, according to the federal government’s census of state and local government finance. That high level of spending forced legislators to scramble, when tax revenues skidded in the fiscal downturn, and cut the state budget by billions of dollars, though Texas largely did so with one-time gimmicks that didn’t really balance the budget.

You see the increased spending reflected in the growth of the Texas government workforce. Although state government’s personnel rolls are modest in size, local governments employ more workers per 10,000 residents than all but five other states. Some of that is a result of big investments that Texas school districts have made in hiring. Schools increased per-pupil spending by 65 percent in the last decade to about $9,300. A chunk of that money has gone into expanding teacher ranks. Texas schools now boast one public school teacher per 14.6 students. Teachers, however, now make up only about half of all of those employed by districts. Like the rest of the country, Texas schools have also been bulking up on non-instructional personnel.

Texas justifiably has a reputation as a low tax state. Its business tax burden, for instance, is 9th lowest in the country, according to the Tax Foundation. Too much of the tax burden, however, has been shifted to homeowners. Texas’ property tax burden is now the fourth highest in the country when measured as a percentage of median home value, according to the Tax Foundation. That puts Texas in the company of states like New Jersey, Illinois, if you can believe it. The state’s newspapers are suddenly reporting on fears that homeowners have of being unable to hang onto their homes in retirement thanks to high property taxes.

The same dynamic is playing out with state debt. Texas’s constitution restricts lending by state government, so per-capita state debt is among the lowest in the nation. Local governments, on the other hand, have borrowed seven times as much as the state, giving Texas the third-highest total debt in the nation, at $233 billion. That borrowing includes a $119 million bond offering approved in 2009 by the wealthy Allen school district outside of Dallas, which was used in part to finance an extravagant $60 million high school football stadium.

Supporters argue that localities can afford those kinds of expenditures because of Texas’ growing wealth. Legislators in California made the same assumption in the midst of the technology boom in 1999, when they voted to vastly increase pension benefits for government workers. When the boom turned out to be a bubble, Californians quickly found they couldn’t afford the extra spending, and pensions are now squeezing out other government spending through the Golden State.

When we speak of pension reform today we rarely speak of Texas, but that’s about to change. Although Texas’ government retirement system is better funded than many states, using an approach that is based on more conservative estimates of future market returns than many public pensions employ, Texas only has about 78 percent of the funds it needs to pay its future liabilities.

Even more troubling, though, is that the state has been shirking its responsibility to the system even in the good years. Between 2005 and 2010, for instance, Texas state government failed four times to make its full annual contribution to the pension system, according to the Pew Center’s recent study of state pension systems. Recently, the Texas retirement system examined its own liabilities and concluded that, "Without action, the unfunded liability will continue to increase and make today’s situation unmanageable."

In addition, the state has only set aside one-percent of the cost of funding workers’ health-care premiums in retirement. That’s even less than other states and gives Texas a whopping $55 billion unfunded liability just for those benefits. Apparently, it’s tempting for politicians even in a prosperous state like Texas to make unrealistic promises to employees and then fail to pay for them.

Texas’ dilemma right now reminds me of an observation by 18th century cleric John Wesley, founder of Methodism. Wesley observed that many of his middle-class congregants became wealthy by practicing the virtues he preached, notably thrift, industriousness and adherence to a modest lifestyle. But, Wesley noticed, as they became wealthier, some of these members drifted from his teachings and from the very virtues that had made them rich in the first place.

Governments can similarly abandon their virtues and squander their prosperity. We are watching some states do so right now. Will Texas be next?

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