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On November 27, the Legislative Budget Board held a hearing on the constitutional spending limit, but postponed actually setting the cap until the first week in January 2007.  On November 26, we sent the letter bdollarmanelow to all members of the Legislative Budget Board, including the co-chairs Speaker Tom Craddick and Lt. Governor David Dewhurst.  I then entered it into the record at the hearing on November 27.  

The letter urges the LBB to change the current method for calculating the cap, under which spending in the next biennium may not exceed the projected growth in the state's economy.  The problem is that the LBB has been using growth in personal incomes rather than gross state product, the most widely accepted index of economic prosperity.  Further, in calculating projected growth in personal incomes, they fail to account for inflation which dilutes real purchasing power and deduct income attributable to government benefits, thereby allowing more government to beget more government. lbb

 There is an enormous difference in the effect of using personal incomes instead of gross state product.  The five estimates that the LBB has received for growth in personal incomes in the 2008-09 biennium range from 13.11 percent to 17.02 percent while the Comptroller's office estimates that growth in gross state product ofr the 2008-09 biennium will be only 6.6 percent.  Give the baseline 2006-07 budget of $55 billion in general revenues (federal and dedicated funds are excluded from the cap), using growth in personal incomes (depending on which estimate is adopted) will allow between $3.58 and $5.73 billion in additional spending (that is with a "b").

With that in mind, check out our letter:

 

November 26, 2006

Dear Legislative Budget Board Members,

 

            We are writing to request that you modify the methodology by which you set the constitutional spending cap.  As you know, 84 percent of voters approved this amendment and we believe it is crucial that it be strictly applied to carry out the voters’ intent of limiting the growth in government.

 

First, we ask you to exercise your authority under the Texas Government Code to adopt projected growth in the gross state product as the index for measuring the state’s economy rather than projected growth in personal incomes.  The amendment itself does not specify the method by which growth in the state’s economy should be measured, although we believe that it should be interpreted to require the use of the most widely accepted method in the field of economics.  Gross national product is relied upon throughout the world as the primary and most accurate means of measuring economic activity.  The Comptroller of Public Accounts already makes these projections for the Texas economy so this data is available to you. 

 

While the implementing legislation adopted by the Legislature in 1979 indicated that projected growth in personal incomes was to be used, it also provided the following provision which is now contained in Section 316.022(c) of the Government Code, stating: “(c) If a more comprehensive definition of the rate of growth of the state's economy is developed and is approved by the committee established by Section 316.005, the board may use that definition in calculating the limit on appropriations.”  Therefore, there is a procedure in place whereby, without further action by the Legislature, the LBB can begin using gross state product in lieu of personal incomes.

 

Consider that, by using growth in personal incomes as the sole measurement, Texas government would be allowed to grow by nearly another half of one percent in a biennium if Bill Gates were to move to Texas, assuming that he earned the historical 12 percent rate of return in the stock market over the course of a year on his $60 billion fortune, sold the stocks, reported the $7.2 billion in income, and reinvested.  That means, if Gates moved to Texas, the state budget could grow by about $500 million more than would otherwise be permissible.  Clearly, a metric that permits that kind of aberration cannot be what the drafters and voters of the amendment intended and contravenes generally accepted economic and public finance principles.  In fact, the Legislature in 1978 expressly considered a proposal under which the amendment would have stated growth in personal incomes as opposed to growth in the state’s economy, but the conference committee ultimately settled on the current growth in the state’s economy language.  This would indicate that the legislative intent was that growth in the state’s economy would mean something different than growth in total personal incomes. 

Although we believe gross state product should be the sole barometer, we note that the LBB is also fully empowered to use a blended metric that would split the difference between the projected growth in personal incomes and projected growth in gross state product.  Certainly, this would be an improvement in accuracy over the current approach, which entirely excludes gross state product. 

 

If the LBB decides to continue using growth in personal incomes, we ask that you consider making several methodological adjustments to this measurement.  First, we believe that inflation must be deducted.  By definition, inflation cannot be counted as economic growth because it dilutes real purchasing power.  A person whose income only keeps pace with inflation has no additional wherewithal to make purchases and does not enjoy a higher standard of living. 

 

There is a certainly a strong case to be made for an entirely different type of spending limitation that is tied to population plus inflation, since these factors can be expected to track the need for government services and the cost of providing them.  However, the current spending limitation has an entirely different purpose.  It was not created on the basis that the need for government programs would vary with economic growth, but rather that, as a sound fiscal principle, the public sector should not grow faster than the private sector.  When calculating the projected rate of growth in the private sector economy, it is double dipping to use real economic growth plus inflation.  Whether measured by gross state product or personal incomes, economic growth simply does not include inflation, which by definition merely dilutes the purchasing power of the same dollar over time.  Accordingly, we believe the Constitution requires that inflation be excluded from growth in personal incomes and we ask you to do so.  The Comptroller’s estimate released last week indicates that inflation will be 4.0 percent for the 2008-09 biennium, a figure based on the projected change in the consumer price index during these years.

Additionally, we ask that you exclude federal, state, and local government benefits when calculating total personal incomes.  Certainly, to allow growth in government to beget more growth in government is contrary to the intent of an amendment designed to limit pubic sector growth to private sector growth.  We have seen enormous increases in federal spending in recent years on top of a double-digit increase in state spending in the last biennium.  Income from government programs, whether it is from welfare or farm subsidies, should be excluded in this context since the legislative history and public debate at the time make clear that the purpose of the limitation was to tie government growth to private sector growth.

 

We would be pleased to provide further information on any of the issues discussed above.  In closing, we have recently seen that the American public has grown increasingly frustrated with elected officials in Washington that promise fiscal discipline but deliver runaway spending.  That is why it is so important that you, as the highly respected leaders responsible for our state budget, act to vindicate the intent of the voters who overwhelmingly ratified the constitutional spending limitation.  Thank you for your consideration and public service.

 

Sincerely,

Marc Levin, Esq.

General Counsel, Texans for Fiscal Responsibility

 

cc:  Mike Morrissey, Office of Governor Rick Perry

Comptroller Carole Keeton Strayhorn

Comptroller-elect Susan Combs

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