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America’s transition to the new century has been difficult and tumultuous. The collapse of the tech-fueled stock market bubble left many Americans uncertain of their financial security, and subsequent revelations of corporate fraud only deepened investors’ gloom. The 9/11 terrorist attacks brought more uncertainty.

Although we here in Texas have not and will not fall into a recession, the state certainly hasn’t escaped the turmoil. The white-hot nineties boom is a fading memory. But Texans are nothing if not resilient, and we have faced the new century with our traditional determination, learning to survive and to thrive in a cooler economy.

State government must learn to do so as well.

State spending skyrocketed over the last decade. From 1990 through 2001, the Legislature increased state spending by more than 131 percent—an enormous increase considering that the state’s population rose by just 23 percent over the same period.

Today, the bill is coming due. The 2003 Legislature faces a severe gap between available revenues and funding requests. Two years ago, Comptroller Strayhorn warned that our state would face a $5.1 billion shortfall when the next session of the Legislature rolled around. Although our last budget was balanced, it was done so in a way that left the current Legislature holding the bag. After witnessing the struggle our economy has been through since that time, the comptroller now believes that number will be significantly higher.

Texas is hardly the only state facing fiscal problems. According to the National Conference of State Legislators (NCSL), 43 states have reported fiscal 2002 budget gaps totaling $27.3 billion; this amount will rise to $57.9 billion in fiscal 2003. Many states are implementing cost-cutting measures—some unacceptable to Texas. Of the 43 states cited by NCSL, 26 are using across-the-board cuts to address their shortfalls; 22 are raiding their “rainy-day” fund revenues; 11 are laying off employees; 10 are reorganizing programs; and 33 states are using a variety of other methods, including targeted cuts, reduced entitlement benefits and the redirection of tobacco settlement funds.

Now it’s hardball time for Texas. This is a spending crisis, not a budget crisis. And it’s time to make some hard, but necessary choices. It’s time to set priorities, cut costs and balance the state’s books—without raiding the Rainy Day Fund or raising taxes.

This report is intended to help the Legislature make the tough choices needed to ensure the continued health of Texas government and, more importantly, the state economy.

Where does the money go?

To begin grappling with the Texas spending crisis, we should begin by asking some basic questions: just what are we buying with the taxpayer’s money? What factors are driving the upward surge in state spending?

Typically, analyses of state spending focus on broad categories of spending. Texas state government’s four largest areas of expenditure are public education, health and human services, higher education and transportation. These account for four out of every five dollars spent by state government. Until recently, public education was the largest category of expenditure; it accounted for 27.4 percent of all 1990 spending. In 2001, however, health and human services represented the largest spending category, accounting for 34.2 percent of the total.

Analyses of specific programs within these broad categories are less common. In fiscal 2001, Texas spent more than $1 billion from all funds on each of seven programs:

  • Foundation School Program, which supplies the state’s share of public education funding, plus other grants for elementary and secondary education: $13.8 billion,
  • Highway construction: $2.8 billion;
  • Incarcerating adult prisoners: $2 billion;
  • Payments to nursing homes for elderly Medicaid recipients: $1.6 billion;
  • Payments for prescription drugs for Medicaid recipients: $1.3 billion;
  • State’s contribution to pensions for retired teachers: $1.1 billion; and
  • Medical services for blind and disabled Medicaid recipients: $1.1 billion.

Two other major programs would appear at or near the top of this list if considered in their entirety. The Medicaid program consists of numerous specialized recipient programs all run in partnership with the federal government. In total, FY2001 Medicaid spending was more than $11.1 billion, excluding Disproportionate Share funding. The state budget appropriates these funds to a variety of programs at a number of different agencies. Even when budgeted separately, however, the amounts in some of the Medicaid programs rival those spent in any other state program. In fact, three of the top seven programs shown above are Medicaid programs.

Likewise, higher education funding is appropriated to each institution. When combined, higher education expenditures in FY2001 totaled $5.3 billion. This amounts to a 52 percent increase from FY1990 to FY2001 and a 13 percent increase in real expenditures.

Growth in these expenditures, however, has varied greatly (Exhibit 1).

Exhibit 1
Growth in Texas’ Seven Largest Individual Program Expenditures
Fiscal 1990-2001

Index 2001 Expenditures* Total Expenditures Percent Change FY 1990-2001 Inflation-Adjusted Expenditures** Percent Change FY1990-2001 Workload Percent Change FY 1990-2001 Unit Cost (Inflation-Adjusted Dollars)** Percent Change FY 1990-2001
Public School Payments—Foundation School Program and Grants to Elementary and Secondary Schools $13,759,024,409 128.5% 71.8% 22.4% 40.4%
Highway Construction $2,752,114,660 68.9% 11.0% 46.5% (24.2%)
Incarceration of Felons $1,986,949,313 236.3% 152. 8% 200.0% (15.8%)
Nursing Facility and Hospice Expenditures $1,571,738,082 130.2% 73.0% 15.7% 49.6%
Vendor Drug Program Expenditures $1,324,418,643 566.3% 400.9% 182.9% 77.1%
TRS Retirement Expenditures (State Cost) $1,143,109,908 45.4% 9.3% 63.1% (33.0%)
Disabled and Blind Persons-Medicaid Services $1,123,744,527 288.3% 191.9% 80.1% 62.1%

* Expenditures from all funds, including general revenue, dedicated funds and federal aid.
* Expressed in constant 1990 dollars to allow for the effects of inflation.
Source: Texas Comptroller of Public Accounts.

As Exhibit 1 indicates, Medicaid drug spending rose most quickly, jumping by more than 566.3 percent between fiscal 1990 and 2001. Medicaid payments for disabled and blind persons rose by 288.3 percent over the same period, while the costs of incarcerating felons increased by 236.3 percent. Teacher retirement spending, by contrast, rose by just 45.4 percent from fiscal 1990 to 2001.

Another concept captured in Exhibit 1 is the change in program workloads over time. For the purpose of state budgeting, “workloads” for the seven largest programs are defined as follows:

  • the Foundation School Program—public school enrollment.
  • highway construction—daily vehicle miles traveled on Texas highways.
  • the incarceration of adult prisoners—the number of inmates incarcerated on August 31 of each year.
  • payments to nursing homes for elderly Medicaid recipients—average number of nursing home clients per month.
  • payments for prescription drugs for Medicaid recipients—Medicaid prescriptions issued annually.
  • the state’s contribution to pensions for retired teachers—total Teacher Retirement System (TRS) Pension Trust Fund membership, including current members and retirees.
  • medical services for blind and disabled Medicaid recipients—average number of disabled and blind Medicaid recipients per month.

The greatest percentage increase in workload measures was experienced by the state’s prison system, which saw a 200 percent increase in its prisoner population over the decade. The number of Medicaid prescriptions increased 183 percent. The number of blind and disabled Texans receiving Medicaid rose by 80 percent, while the number of teachers receiving TRS retirement benefits increased by 63.1 percent.

A third concept in Exhibit 1 concerns costs per workload unit. From fiscal 1990 to 2001, the program with the greatest increase in cost per unit was the Medicaid Vendor Drug program, which saw its real cost per prescription (after adjustment for inflation) rise by 77.1 percent. Real medical costs per blind and disabled recipient increased by 62.1 percent over the decade, while costs per nursing home resident rose by 50 percent. TRS, by contrast, saw its real costs per pension fund member fall by 33 percent over the same period, due largely to a reduction in the state contribution rate (7.7 percent of salary in fiscal 1990 versus 6 percent of salary in fiscal 2001).

Why are costs rising?

While all Texas expenditures have been affected by a substantial amount of inflation over the last decade, spending growth in major programs also is driven by a number of factors unique to each.


One important factor in the growth of education spending is the simple fact that Texas is educating many more students today than it did a decade ago. While this growth was under way, educational reforms reduced class sizes, requiring schools to hire more teachers. And the increased demand for teachers, in turn, required many districts to increase teacher pay (Exhibit 2).

Exhibit 2
Texas Teachers, Enrollment, Average Class Size and Average Teacher Salary
Fiscal 1990-2001

  1990 2001 % Change
Number of Teachers 200,179 274,817 37%
Student Enrollment 3,316,785 4,059,619 22%
Students per Teacher 16.57 14.77 (11%)
Average Teacher Salary $25,923 $38,361 48.0%

Source: Texas Education Agency.

At the same time, the number of other Texas school staff members rose as well. While Texas’ number of teachers rose by 37 percent between 1990 and 2001, the number of professional support staff rose by more than 108 percent; the growth in campus and central administration also exceeded the growth in teaching staff. Average professional staff salaries were higher than teacher salaries in 1990 and the gap had widened by 2001 (Exhibit 3).

Exhibit 3
Professional Staffing in Texas Public Schools, 1990-2001

  1990 2001 % Change
Campus Administrators 10,306 13,916 35%
Central Administrators 7,145 4,491 (37%)
Professional Support 20,276 42,092 108%
Total Professionals 237,906 335,317 41%
Average Professional Salary $28,862 $45,655 58%

Source: Texas Education Agency.


Texas transportation spending over the last decade was driven almost entirely by an increase in the federal funding that supplies about half of Texas’ total transportation spending. Both the 1991 and 1998 federal transportation bills—the Intermodal Surface Transportation Efficiency Act of 1991 and the Transportation Equity Act for the 21st Century (TEA 21)—increased Texas’ federal transportation funding. Federal funding for highway construction and maintenance rose from $1 billion in 1990 to nearly $2.4 billion in 2002. The increase, however, outpaced inflation only slightly; after adjusting for inflation, Texas’ highway expenditures rose by just 11 percent for the decade.

TEA 21 expired this year and Congress has not yet passed a new federal highway bill. Congress passed a continuing resolution to extend current funding for the time being. Due to projected decreases in federal gasoline tax revenues, however, the federal government may cut Texas highway funding by $250 million or more in 2003.


Payments to nursing homes caring for elderly Medicaid recipients rose 130.2 percent from 1990 through 2001, an average annual increase of 7.9 percent. This substantially exceeded the growth rate in the actual number of recipients served, which was 15.7 percent for the decade—1.3 percent annually. The rapid expansion in payments was prompted by broader program eligibility requirements at both state and federal levels; settlements in provider lawsuits that required the state to raise reimbursement rates, state funding for nursing home liability insurance; and higher labor costs.

Increases in payments for prescription drugs have affected many areas of state spending. Medicaid expenditures for prescription medicines rose by 566.3 percent over the decade. Even after adjusting for inflation, growth in the program still topped 400 percent. The number of people eligible for Medicaid prescription drugs rose by 57 percent over the same time period, but the number of prescriptions actually written increased by 182.9 percent. The greater demand for prescriptions was driven in part by consumer advertising of prescription drugs, which has greatly increased demand, as well as the arrival of many new drugs for various illnesses. And new drugs tend to come with higher price tags; an average prescription cost the state $20 in 1990, but in 2002 cost an average of $48.

The cost of medical services for disabled and blind people on Medicaid also rose dramatically, by 288 percent over the decade. After adjusting for inflation, this increase was still almost 192 percent. Over the same time, the average number of disabled and blind persons receiving monthly Medicaid care rose by 80.1 percent. Inflation-adjusted expenditures per person per month rose from $2,809 in 1990 to $4,551 per month in 2001. This increase was due to a variety of factors, including increased usage of services; an aging population needing more and more expensive care; and the introduction of better and more expensive medicines and medical technology. The rate of “medical” inflation—the yearly increase in the cost of health-related goods and services—exceeded the general inflation rate throughout the decade.


During the last decade, Texas criminal justice was shaped by an enormous buildup of the state’s adult prison capacity, as well as an overhaul and expansion of the juvenile justice system. While recent prison populations have declined slightly, they are expected to increase in coming years.

The Texas Department of Criminal Justice (TDCJ) operates or contracts with private operators for 109 separate prison facilities, 71 of them built in the 1990s. The ending of early release programs, the “War on Drugs” and federal court orders all spurred the growth of the prison population, which rose from 48,000 inmates in 1990 to about 145,000 in 2001. Expenditures have ballooned as well, rising from $590.9 million to almost $2 billion annually.

The Criminal Justice Policy Institute estimates that TDCJ’s population will remain below capacity for 2004 and most of 2005. In the following two-year budget period, however, the prison population is likely to exceed capacity once again.

Teacher Retirement System

In 2001, the state contributed $1.1 billion for public schoolteachers’ retirements, an increase of just 45.4 percent over 1990’s total, making this the slowest-growing of the state’s seven largest programs. Membership in the Trust Fund increased by 63 percent over the decade. In 2001, the state contributed $1,136 in retirement expenditures per member, 10.9 percent less than in 1990.

Meeting the Crisis

Rising costs, coupled with a slower economy, represent a daunting, but not impossible, fiscal challenge for the 2003 Legislature.

Balancing the state’s books won’t be easy. But the state’s constitution—and the state’s people—demand that it be done. Conservative economic policies have served this state well in the past and will continue to do so in the new century.

This report is intended to help lawmakers grapple with the task before them. It provides 179 recommendations that could produce $1.7 billion in additional general revenue for the state, without raising taxes. The recommendations fall in three major areas: education, general government and health and human services. The following sections highlight some of these proposals:


Spending per student in Texas public schools rose by an inflation-adjusted 20 percent between 1990 and 2000; in 2000-2001, Texas spent more than $6,600 per public school student. The state and local school districts together spent nearly $27 billion educating about 4 million public school students in the 2000-01 school year. Yet only 51 cents of every dollar is spent where it belongs in the classroom.

Texas has made a great deal of progress in education over the last decade. Students of all backgrounds improved their scores on the Texas Assessment of Academic Skills (TAAS). A more equitable school finance system, better teacher pay and an accountability system based on statewide essential curriculum elements all have contributed to improved student performance. In 2003, the more rigorous Texas Assessment of Knowledge and Skills, which will raise the state’s expectations for student performance still further, will replace the TAAS.

Despite this progress, test scores for minority and economically disadvantaged students still lag behind state averages, and minority students remain more likely to drop out of school and less likely to enroll in and graduate from college. Texas students continue to graduate from high school and college at lower rates than their peers across the country, despite significant increases in public education spending over the last decade. Respected researchers estimate that as many as 40 percent of all Texas students do not graduate from high school within four years of entering the ninth grade.

Much remains to be done to provide all Texans with equal access to higher educational opportunity. This is illustrated by recent estimates of the number of students who would be enrolled in Texas colleges and universities if participation rates for the state’s ethnic and racial minorities were equalized over the next 15 years. The Texas Higher Education Coordinating Board’s “parity” forecast for 2015 shows that nearly 50,000 more students would be enrolled in the state’s public universities, over and above a forecasted growth of 42,000 new students, if minority participation rates matched the state average. Community colleges alone would have 208,000 more students than indicated by current forecasts.

Texas should strive to ensure that all its students can continue their education beyond high school. To achieve this, Texas must improve K-12 education to prepare more students to continue learning beyond high school, and ensure that college education is affordable and attainable for every high school graduate.

Achieving these goals will require the state to use its resources wisely—to make sure that our education dollars are spent effectively, to gain the maximum benefit from every dollar.

Improve student performance

Many Texans have expressed concern over the plight of students trapped in low-performing public schools. Changes in school staffing can produce rapid improvements in student performance. “Reconstitution” requires a school’s teachers to resign and reapply for their jobs with their district. The state’s commissioner of Education should reconstitute schools that the Texas Education Agency rates as “Low Performing” for two consecutive years.

Texas should encourage preparation for college by awarding automatic admission to state universities only to students who complete the recommended or advanced high school curriculum. Texas also should help its colleges and universities prepare more students for college by allowing them to grant charters under the state’s charter school law.

Texas faces a substantial teacher shortage that must be eliminated if every child is to have a chance to succeed. The state should allow candidates with bachelor’s degrees who pass the state teacher certification examination to become fully certified to teach.

Counselors in Texas public schools spend as much as 40 percent of their time on activities other than guidance and counseling. The state should require school districts to set policies determining how counselors’ time should be used and limiting duties other than counseling and guidance, to ensure that counselors are able to devote the bulk of their time to helping students succeed.

Texas should improve its early graduation scholarship program to encourage more students to take advantage of the opportunity. School districts, moreover, should be given incentives to promote the program. Increased early graduation from this recommendation would reduce the state’s payments to public schools and save the state $3.5 million in general revenue over the next biennium.

Improve educational efficiency

The Texas Constitution does not allow any portion of the principal of the Permanent School Fund (PSF) to be used to support public education. This has led to an income-based spending policy for PSF contributions to the Available School Fund. Today, virtually all American college and university endowment funds use a “total return” management policy. A constitutional amendment allowing the PSF to use a total return policy would provide an additional $88.8 million in general revenue over the 2004-05 biennium.

To compete effectively for talented students and research and development funding, universities must have some budgetary flexibility to adapt to changing circumstances. However, Texas public colleges and universities have only limited flexibility in setting tuition rates. State colleges and universities could gain additional resources if they were able to vary tuition charges to reflect factors such as program quality and demand, along with pricing strategies that encourage the most effective use of facilities. Moreover, universities are allowed to keep only 50 percent of funds collected for indirect costs incurred on sponsored research projects, while institutions in other states generally keep all of these funds and use them for new investments in research and development. Giving universities greater flexibility in setting tuition rates and allowing them to retain their indirect cost recovery funds would assist them in meeting the challenges of the 21st century.

Public colleges and universities are required to estimate the local funds they expect to receive for each upcoming biennium. If they overestimate these receipts, they must live with the subsequent state funding shortfall; if they underestimate them, they can keep all additional receipts without any adjustment in subsequent state funding. In public education, by contrast, the state adjusts succeeding years’ receipts for underestimated local funds. Colleges and universities should have a similar “settle-up” mechanism; this would increase funding accountability and should result in savings to general revenue of $6.9 million in 2004 and 2005.

State appropriations for higher education institutions are largely determined through a formula funding system. Institutions can, however, compete with one another for “special item” funding—money earmarked for a specific purpose. Special items account for almost 10 percent of university appropriations. While many special items are worthy of earmarked funding, their overuse works against the basic purpose of the formula system, which is to distribute funding equitably and without regard to institutions’ political clout. Texas should limit the use of special item funding by eliminating institutional enhancement funding, setting a cap on special item funding and funding special items based on a ranking recommended to the Legislature by the Texas Higher Education Coordinating Board. This would provide greater accountability for the use of special items and would generate $137.3 million in additional general revenue over the next biennium.

Students at Texas public universities are eligible to receive a $1,000 award for graduating in a timely fashion. Statistics on the number of awards issued by Texas public institutions, however, indicate that the award program has proven ineffective due to overly restrictive requirements. The state should alter the requirements to encourage more students to complete their course requirements promptly and efficiently.

State law allows community colleges to waive tuition and fees for high school students concurrently enrolled in high school and community college courses. It does not, however, provide this option for four-year colleges and universities. Given the proven success of concurrent enrollment and the expanded individual choice it provides, the state should allow four-year institutions the same opportunity.

Texas’ conflict-of-interest laws do not prevent school board members from doing business with their districts. Although board members are required to declare their business interests and abstain from voting on issues that involve them, the Texas School Performance Review has seen clear evidence that some board members do benefit from business dealings with their districts. To ensure that all Texas school district business transactions are ethical and conducted in the best interest of the students and taxpayers of the community, board members should be prohibited from doing business, both directly and indirectly, with the school districts they serve.

School districts can post requests for proposals on the Texas Marketplace Web site, but still are required to advertise them in the newspaper as well. Removing this requirement would save scarce local resources.

Texas public schools now order, purchase and track textbooks directly from their publishers through the Texas Education Agency’s (TEA’s) electronic materials system. The use of this system should allow TEA to eliminate its State Textbook Depository, saving the state $762,000 in general revenue.

The state’s travel services provide state agencies with low-cost and highly flexible travel arrangements by negotiating favorable contracts for these services. Providing these services to public schools and community colleges should allow them to save money that then can be redirected into the classroom.

School districts that manage their finances poorly or report or file erroneous information with state and federal agencies face serious consequences. Some states and some Texas school districts have established school business service cooperatives to handle their finances in an efficient and professional manner. By providing incentives to fund startup costs for such cooperatives, the state could help school districts save money and improve their financial management and reporting.

General Government

“General government” covers a wide variety of activities involved in the day-to-day tasks of state government. It makes up about 27.5 percent of the state’s budget, or nearly $15.4 billion in fiscal 2002.

In evaluating programs in these areas, the Comptroller’s e-Texas team used a simple approach, examining the components and costs of general government and determining whether they can be eliminated or reduced. Items examined included costs for employee payrolls, transportation, information technology and state lands. The review team also sought out agencies and programs with overlapping missions and functions that can be consolidated or eliminated. And the Comptroller’s “Yellow Pages” test was applied to government as well—government should do no job if there is a company in the yellow pages that can do the same job better and at a lower cost.

Consolidate agencies and functions

Excluding institutions of higher education, Texas state government has 145 agencies. Inevitably, such a large number of agencies has engendered duplicated services—and offers significant opportunities for consolidation and increased efficiency.

Most of the Texas Railroad Commission’s (RRC’s) duties, for instance, are performed by other agencies as well. Such tasks include preventing and remediating oilfield pollution, overseeing pipeline safety, regulating gas utility rates, responding to oil spills, reclaiming surface mine lands and (in a remnant of its original purpose) ensuring rail safety. The Texas Commission on Environmental Quality, the Public Utility Commission (PUC), the General Land Office, the Texas Department of Transportation and several other small agencies have similar authority and programs. Consolidating the PUC and RRC into a Texas Energy and Communications Commission and redirecting other RRC programs to agencies better suited to handle them would improve the efficiency of these functions and could generate $12.5 million in general revenue savings over the next biennium.

Similarly, the Texas Youth Commission and Texas Juvenile Probation Commission, both deliver juvenile justice services. Merging them would improve care for juveniles in state custody, reduce administrative duplication and expand possibilities for increased federal funding, producing a two-year gain of $1.4 million in general revenue.

Texas has 24 health and human services agencies, some of which are coordinated to a limited extent by the Health and Human Services Commission (HHSC). These agencies should be consolidated into five integrated agencies to make them more cost-effective and to increase their responsiveness and accessibility to the public. This consolidation would reduce the cost of maintaining separate administrative support functions in the various agencies and allow the state to maximize its federal matching funding. This measure would produce general revenue savings of $9 million over the 2004-05 biennium.

The Texas Department of Economic Development (TDED) handles economic development, business marketing, and tourism functions. The Texas Department of Transportation (TxDot) has significant tourism functions as well. The state should consolidate tourism functions into a new Texas Office of Tourism within the Governor’s Office. In addition, Texas’ various economic development functions should be consolidated in the Governor’s Office as well, to help recover the ground lost in such key economic indicators as capital investments, jobs created and new and expanded industrial facilities. This change would result in a savings of $3.6 million in general revenue.

Reduce work force costs

Employees represent one of the largest costs of government, and Texas has more than 272,000 on the job. Work force costs include salaries, retirement and health insurance benefits, training costs and federal taxes. In fiscal 2002, Texas spent $8.2 billion on salaries and another $3.6 billion on benefits. In view of the multi-billion-dollar shortfall, Texas must trim its payroll costs. But across-the-board cuts can be counterproductive; reductions should be targeted to reduce duplication and increase efficiency.

The cost of health insurance for state employees and their dependents is substantial and rising. To cut costs and ensure that these benefits remain available, the Employees Retirement System should begin offering health benefits 90 days after a new employee’s start date; increase co-payments for office visits to $20 for all health insurance plans; and increase co-payments for visits to specialists by $15 for all health plans. These recommendations reflect practices in the private sector and would save the state about $121.1 million in general revenue over the next biennium.

The state employs an excessive number of people with supervisory duties. The private sector has learned that large numbers of middle managers do not necessarily ensure effective leadership and management; state government should as well. Right now, the largest state agencies average about one manager for every seven employees. One recommended ratio for the private and public sectors alike is one manager for every 11 employees. If Texas reduced its managerial ranks over time to achieve this 1:11 ratio, and made other management improvements, it could save nearly $110 million in general revenue over the next biennium.

All state agencies have human resource (HR) functions such as employee recruitment and selection, classification, benefits administration and training. HR functions in many relatively large state agencies appear to be substantially overstaffed, when compared to those in other public and private organizations. National norms suggest a ratio of one HR staff member for every 100 employees, and Texas’ large agencies should be required to meet this standard. Small agencies, by contrast, have little in the way of HR expertise and should be required to outsource their HR functions to private vendors. These steps could save the state $30.3 million in general revenue over the next biennium.

Texas operates telephone call centers to determine eligibility for the Children’s Health Insurance Program and process applications for other state programs. A Texas Department of Human Services (TDHS) children’s Medicaid call center pilot project in Houston more than doubled the efficiency of the current application process. Texas should offer children’s Medicaid call center services throughout the state and consider creating an Internet-based combined application for Health and Human Services programs. These initiatives could save the state $20.7 million in general revenue over the next two years.

More than 6,000 state employees will become eligible to retire in the 2004-05 biennium. Thousands more that are already eligible have chosen not to retire yet. Many states and private companies use retirement incentives to trim their payrolls and cut costs. Texas should offer cash bonuses of 25 percent of current annual salaries to persuade employees eligible to retire in the 2004-05 biennium to do so. This one act could save the state $32.8 million in general revenue over the 2004-05 biennium.

Improve asset management

Texas state agencies own real property assets valued at $3.8 billion. Property worth more than $154 million—more than 22,000 acres—has been evaluated by the General Land Office as underused. This indicates that the state owns much more real property than it needs, locking up valuable capital in assets from which it receives little or no financial benefit.

To remedy this situation, the state should require all agencies with properties approved for sale by the governor to complete those transactions in the 2004-05 biennium or risk a reduction in state funding. All agencies submitting legislative appropriations requests should be required to provide the Legislature with detailed information on the size, value and use of their real assets, so that the state can begin assessing agencies a biennial charge on properties they own as an incentive to keep or reduce those holdings to a minimum. Finally, the Legislature should create a citizens’ commission to recommend the closure of unnecessary or duplicative agency offices throughout the state. In all, these measures could save $33 million in general revenue over the 2004-05 biennium.

Improve use of information technology

The Texas Department of Information Resources (DIR) provides valuable technology-related services for state agencies, universities and local governments. The agency should be held accountable for the success of major agency information technology (IT) projects. The DIR’s Program Management Office (PMO) is not meeting its legislative mandates; DIR should recommend a funding formula and the PMO Legislative Oversight Committee should propose a performance measure to ensure that the office provides effective IT services for major cross-agency projects as required by state law. DIR also should establish performance measures for its telecommunications and purchasing functions to reduce overhead costs and state agency expenditures. DIR also should modify its strategic plan and biennial performance report to ensure that agencies comply with its rules and standards. The DIR’s TexasOnline Division should redesign its Web site to make it easier for visitors to find information and establish a public software clearinghouse to help reduce commodity software purchasing costs.The current cost of 44 major information technology (IT) projects now underway at Texas agencies and institutions of higher education now exceeds initial cost estimates by $361 million. Five cancelled projects alone cost the state more than $28 million. These cost overruns are an indication of serious problems in agency IT planning. To remedy this, the state should insist on better planning and performance by implementing a Return on Investment (ROI) program for all capitalized IT projects.

State and federal laws recognize and protect the right to privacy. In response to the events of September 11, 2001, new initiatives designed to protect our nation’s security have raised concerns among open government advocates that too much public information is being removed from public access. Civil liberties advocates, by contrast, worry that surveillance and law-enforcement initiatives may unnecessarily infringe on citizens’ right to privacy. A Texas Privacy and Security Act should establish privacy and security principles for the state and processes for governmental agencies to follow when withholding public information for privacy or security reasons.

Improve transportation efficiency

The Texas highway system is being overwhelmed by growth in traffic. At the same time, cuts in federal highway revenue seem imminent. One way to make sure the highway program keeps building is to issue grant anticipation revenue vehicles (GARVEEs)—bonds for transportation projects that use future federal highway funds to repay the principal, interest and any other costs associated with the bond issuance. The issuance of GARVEEs could produce an additional $965.8 million for the Highway Fund in the next biennium.

Large numbers of Texas drivers remain uninsured, despite a state law requiring insurance coverage. Other states use databases to track drivers’ coverage. Texas should hire a private vendor to create such a database to allow law enforcement to check on insurance coverage. Better enforcement of insurance coverage would remove uninsured motorists from the road, decrease Medicaid costs and increase insurance tax collections. In all, this measure could produce a $16.6 million gain to general revenue in the next biennium.

Increase state revenues

New taxes are the last thing a slower state economy needs. Still, Texas’ tax system can be administered more efficiently in ways that will yield additional revenue without raising taxes. Other non-tax methods could make a big contribution to the state’s bottom line.

In fiscal 2002, the Texas Lottery contributed nearly $957 million to the state’s public schools and teaching hospitals. Since the lottery’s creation, however, many states have joined together to create multi-state games that can offer larger base prizes and “rollover” jackpots that can grow into the hundreds of millions of dollars, generating nationwide interest and increasing sales. Texas does not participate in a multi-state lottery and is losing revenues to bordering states that do. By joining a national game, Texas could realize $101.5 million in additional nontax revenue over the 2004-05 biennium.

Texas should expand its enforcement activity on delinquent tax accounts. Although the Comptroller’s office collects delinquent tax revenue effectively and efficiently, significant amounts remain uncollected due to staffing limitations. Fifty additional enforcement positions would allow the agency to improve compliance and produce a net gain to general revenue of $83.4 million in 2004 and 2005.

Many taxpayers discover they owe tax to the state, but are reluctant to report it because they would owe penalty and interest on the tax due. The state may never discover these tax liabilities due to its limited audit coverage. An amnesty program would allow noncompliant taxpayers to remit taxes owed to the state without the burden of paying penalties and interest. It should produce $50 million in additional in general revenue for the biennium.

Texas should hire additional auditors to increase its audit coverage. Current audit coverage essentially is focused only on the largest sales tax accounts. Fifty new tax auditors would allow the state to audit additional large sales tax accounts and should produce a net increase to general revenue of $23 million over the next biennium.

Tax practice has changed and evolved over the years, but refund provisions in the Texas Tax Code have not. The current code contains ambiguities and loopholes that should be eliminated so that the state and taxpayers both clearly understand who can seek a refund and how the refund provisions should be applied. This measure would produce a general revenue gain of $20 million over 2004-05.

Goods exported to other countries cannot be taxed by states under the U.S. Constitution. Texas allows foreign buyers to claim exemption from sales taxes or to receive sales tax rebates for purchases made in the state that are immediately exported. The system governing this process is cumbersome, inefficient and encourages cheating. By shifting to the same system other border states use, which requires a shipping receipt or import document to be presented for a refund, Texas could generate $48.5 million in additional sales tax revenue over the next biennium that could be used to support vital programs for the Texas Border area.

The economic slowdown in the economy has highlighted a problem with unemployment insurance (UI). The state’s current funding method for UI creates wide variations in the taxes paid by employers each year. The state, moreover, recently was forced to borrow $500 million from the federal government at 6 percent interest to ensure that it can continue paying its UI claimants. Texas should take steps to limit fraud to keep employer costs as low as possible. Doing so could save the state’s Unemployment Insurance Fund $8.3 million over 2004-05.

Heath and Human Services

Rising costs, technological innovation and expanded expectations are changing the face of the health care industry in America, producing both problems and opportunities for state government. The state is a major purchaser and provider of health care services, which account for about a third of the state budget. In fiscal year 2002, about $18.7 billion out of a total $57 billion in the state’s budget went for health and human services. Given the size of this expenditure, Texas has a huge stake in ensuring that it delivers health and human services as efficiently and effectively as possible.

Medicaid, a joint state and federally funded program that provides health services for low-income, elderly and disabled persons, is Texas’ largest health expenditure. In 1980, Texas Medicaid accounted for 10 percent of the state budget; today, its share is 22 percent. Texas’ Medicaid expenditures are rising almost twice as fast as the national average (about 7 percent per year compared to 4 percent). This rapid growth is due to expanded eligibility, larger-than-expected enrollments, accelerating prescription drug prices, increasing hospital and nursing home costs and a decrease in Texas’ federal Medicaid matching rate.

Texas also provides health care funding for prisoners and the mentally ill or disabled, as well as children who qualify for the state’s Children’s Health Insurance Program. As an employer, Texas purchases health insurance and finances workers’ compensation for state employees. The state also provides health care services through its statewide system of university medical schools and related hospitals.

Enhance health care and human services quality

Texas pays for nursing home care for seniors and disabled Texans that sometimes harms or endangers them. Better contracting practices using quality indicators and a system of payment incentives for quality initiatives could improve nursing home care. A change in state payments to reimburse nursing homes only what Medicaid would have paid for all clients, regardless of Medicare-eligibility status, would allow the state to redirect those funds to quality initiatives.

Texas’ current medical transportation system for Medicaid recipients is expensive and ineffective. HHSC should contract out the management of the Medicaid Medical Transportation Program to transportation brokers to improve service and contain costs. Doing so could produce general revenue savings of nearly $4.3 million in the next biennium.

Disease management (DM) is the common term for a series of methods designed to improve the health of individuals with chronic illnesses while decreasing the costs of their care, usually by reducing hospitalizations and emergency room visits. Texas should contract with private companies to provide DM services to some Medicaid recipients while guaranteeing general revenue savings of nearly $8.6 million over the next biennium.

Medicare beneficiaries rely heavily on prescription drugs, but more than a third of the time have no prescription drug coverage, and many more have insufficient coverage. In Texas, an estimated 748,000 Medicare recipients lack prescription drug coverage. Drug prices continue to increase at rates that far exceed inflation, making affordability a major concern for seniors. Texas Medicare recipients should be allowed to purchase pharmaceutical drugs at the lower Medicaid price.

Reduce health care costs

The 2001 Texas Legislature required the Texas Department of Human Services (TDHS) to provide six months of continuous Medicaid eligibility for children whose families no longer qualify for welfare assistance by February 2002. The period was to be extended to 12 months by June 2003. DHS implemented the six-month eligibility period but has not yet instituted the 12-month period. HHSC, which subsequently assumed responsibility for Medicaid, estimates that extending eligibility to 12 months would mean that Texas Medicaid would pay for more than 161,000 additional children each month in fiscal 2004 and more than 187,000 additional children each month in fiscal 2005. Retaining the six-month eligibility period and postponing implementation of the 12-month period until fiscal 2006 would save $282.3 million in general revenue over the next biennium.

Rising prescription drug prices in Medicaid and other state health plans are creating a substantial strain on the state budget. To contain these costs, Texas’ Vendor Drug Program for Medicaid recipients should contract with a pharmacy benefit manager to take advantage of the most advanced cost management techniques. The Employees Retirement System and Teacher Retirement System, moreover, could generate savings by expanding their use of required prior authorization for certain drugs that are costly and subject to inappropriate use. These measures could save the state $164.8 million in general revenue over the next two years.

Texas should increase health insurance for small businesses by allowing small employers who band together in coalitions to be treated as single employers under state law. The main reason many small employers do not purchase health care coverage is cost. This change would permit very small employers to take advantage of the economies and purchasing power that employers with about fifty employees have.

Recover state health care costs

The federal Medicaid Disproportionate Share Hospital (DSH) program provides financial assistance to hospitals that care for large numbers of indigent patients. Texas should take advantage of new provisions in federal law that allow the state to increase its share of program reimbursements for state-owned hospitals from 100 to 175 percent of uninsured care costs. This would bring state-owned hospitals about $192 million more in DSH payments over the 2004-05 biennium.

Texas also should create a system of co-payments for Medicaid prescription drugs and Medicaid non-emergency services furnished in a hospital emergency room. Such co-payments would allow Medicaid recipients to share responsibility in their health care costs and reduce the unnecessary use of high-cost pharmaceuticals and procedures, saving the state $22.9 million in general revenue in 2004 and 2005.

Texas often can recover funds for health services it provides from third-party insurers like private insurers and health maintenance organizations. To increase such recoveries, HHSC should contract separately for third-party recovery services and ensure that the new contracts contain provisions that would improve recoveries for clients who are eligible for both Medicaid and Medicare. Texas also should consolidate recovery activities within HHSC and provide it with law enforcement status to improve its monitoring of third-party insurers. These steps could save Texas $18.9 million over the next two years.

Texas also should enhance its Medicaid fraud and overpayments efforts. More staff resources are needed at the Health and Human Services Commission and the Office of the Attorney General to ensure that fraud and overpayments cases are worked thoroughly and in a timely manner. Other measures, such as law enforcement status and the use of administrative subpoenas and assets seizure, would help make these efforts as effective as possible and assist with the containment of Medicaid costs, producing general revenue savings of $18.6 million over the next biennium.

2003—and Beyond

The recommendations of Limited Government, Unlimited Opportunity are intended to help the Legislature meet the immediate spending crisis, and to improve government efficiency in ways that should minimize the likelihood of future shortfalls. This is a vital first step toward the goal of limited but effective government.

Limited Government, Unlimited Opportunities represents the best ideas and efforts of dozens of seasoned professionals who share an in-depth knowledge of government and a commitment to Comptroller Strayhorn’s goal for the project: to create a smaller, more efficient and more responsive government—one that serves the interests of taxpayers who are its true employers and ultimate customers.

The challenges facing the 2003 Legislature are great, but the Comptroller’s office hopes that this report will represent a vital contribution to the tasks facing our leaders. It will allow the state to begin paying down the shortfall while making a hugely important contribution to its future prosperity.

We urge policymakers to consider these recommendations and to act on them. In this session, we can begin laying the groundwork for a more prosperous future, and guaranteeing Texas an important role in the national and international economies.

Those of us in government owe the state no less.

Estimated Savings and Revenue Gain in this Report
(Dollars in Millions)

  FY2004-2005 Savings/Gain to the General Revenue Fund FY2004-2005 Savings/Gain to State Dedicated Funds* FY2004-2005 Savings to Federal Funds FY 2004-05 Savings/Gain to All Funds FY2004-2005 Change in FTEs
Report Total $1,697.6 $1,117.1 $833.8 $3,648.5 (4,163.5)
Education $246.7 $0.0 $0.0 $246.7 (7.5)
General Government $738.5 $1,110.7 $81.3 $1,930.5 (4,032.0)
Health and Human Services $712.4 $6.4 $752.5 $1,471.3 (124.0)

  5-Year Savings/Gain to the General Revenue Fund 5-Year Savings/Gain to State Dedicated Funds* 5-Year Savings to Federal Funds 5-Year Savings/Gain to All Funds 5-Year Change in FTEs
Report Total $4,071.1 $1,083.2 $1,703.6 $6,857.8 (5,775.5)
Education $790.8 $0.0 $0.0 $790.8 (7.5)
General Government $2,097.9 $1,064.0 $299.2 $3,461.0 (5,644.0)
Health and Human Services $1,182.4 $19.2 $1,404.4 $2,606.0 (124.0)

Note: Numbers may not add due to rounding.
*State Dedicated Funds include all General Revenue-Dedicated Accounts and Other Funds in the Treasury, including Treasury Trust Funds.