DALLAS - Texas lawmakers passed a two-year, $70 billion budget this week in last-minute voting that also saw approval of a proposed constitutional amendment to sell $1 billion in prison debt and one to give voters the final say on an income tax.
Wall Street rating analysts said yesterday that while the budget is balanced, the two amendments passed at the end of the legislative session could cause trouble down the road. Selling more debt to build prisons would increase the long-range cost of the criminal justice system, they said, and the income tax amendment could hamper the state in balancing future budgets.
The amendments do not require the governor's approval and will go before the voters this November. Gov. Ann Richards is expected to sign the budget.
The budget for fiscal 1994 and 1995 would increase spending about 11% above the current biennium. But whether the budget remains balanced could depend on the fate of Senate Bill 7, the wealth-sharing school finance law that faces a constitutional challenge.
Claire Cohen, executive vice president at Fitch Investors Service, said defeat for the law could increase demands that the state put more money into the system to equalize the funding disparity between rich and poor districts.
Three Texas school funding bills have been overturned by the courts since 1989. "There is always a certain amount of pressure to increase spending," Cohen said.
All told, though, analysts and state officials say the $70 billion budget is balanced without general tax increases and should not affect the state's general obligation bond ratings. Texas is currently rated AA-plus by Fitch and double-A by Moody's Investors Service and Standard & Poor's Corp.
"My general impression of the budget is that it's tight, but it's solid and covers all that it needs to," said Jim Thomassen, executive director of the Texas Bond Review Board. the state's debt oversight agency.
The budget does employ at least $1.8 billion of one-shot maneuvers such as delaying payments of state aid to schools and universities. "Texas is always telling us about what a great cash balance they have, but they are not recognizing their obligations in a timely manner," said Hyman Grossman, managing director at Standard & Poor's. "It is troublesome for them down the road."
Analysts also cited the plan to ask voters to authorize another $1 billion in general obligation bonds to build prisons, jails, and mental health projects by the mid-1990s. Voters have already authorized $2 billion in previous elections to nearly triple the number of prison beds to 96,000 this decade.
Grossman said that in some states officials have found they do not have the money to run their new prisons. Capital outlay "doesn't solve the problem," he said.
George Leung, vice president and managing director of state ratings at Moody's, said the cost of operating a new prison can reach $70,000 per year per inmate.
"We look not only at the debt service burden, but at the long-term, more significant increase in the budget for operations," Leung said.
Then there is the proposed constitutional amendment to give voters the final say in imposing a personal income tax. Texas is one of only nine states without a personal income tax.
Analysts agree that Texas will face pressure for increased funding in coming years. "We're not advocating an income tax, but we do advocate flexibility for government." said Grossman. "This would limit the state's flexibility in the future."
But Dale Craymer, the governor's budget director, said that even without the amendment, Texas lawmakers are not likely to impose an income tax without widespread public support.
"I'm not sure the amendment changes the dynamics of passing an income tax," Craymer said. "Realistically, I don't think one would ever pass in Texas without a [popular] vote or some ground swell of support for it."
Many observers said that even though a near record number of bills were passed in the he day session, remarkably few will directly affect government finances or debt-issuing practices. Those that were passed are expected to have a minor impact on debt practices.
"They basically left us alone," said one Austin bond industry source.
Lawmakers approved a bill that would allow the Texas Treasury to provide liquidity for state agency programs, such as commercial paper. A spokesman said the office will not work to set up guidelines for the treasury program, which is aimed at cutting the state's borrowing costs.
Another bill would create a state intercept program, in which cities and counties guarantee that if they miss a debt payment the money will come from sales tax payments distributed by the state comptroller. The program would be run by the Bond Review Board, which proposed the legislation.
Thomassen, the board's director, said he will meet with rating analysts to discuss how the program could be organized. Few cities and counties are likely to use the program unless it helps them secure higher credit ratings, he said.
Another measure would give cities and counties broader authority to sell cash management notes. Because most rely on property tax collections that are not due until three months or more into the fiscal year, counties and cities have traditionally used surpluses, costly interfund borrowings, and spending constraints to meet their cash-flow needs.
The governor is expected to sign the measures, including a little-known change in when governments may enter credit agreements that could broaden the use of interest rate swaps and other derivative products, sources said. Under existing law, an issuer could enter a credit arrangement only if it was anticipated at the time securities were sold. That restriction would be removed.
The measure could give governments more financing options. "It's another tool in the tool kit," said Jeff Leuschel, a partner at McCall, Parkhurst & Horton in Dallas.
