January 13, 2003
The Honorable Rick Perry, Governor
The Honorable William R. "Bill" Ratliff, Lieutenant Governor
The Honorable David Dewhurst, Lieutenant Governor-Elect
The Honorable James E. "Pete" Laney, Speaker of the House
The Honorable Thomas R. Craddick
Members of the 78th Legislature
In accordance with Article III, Section 49a of the Texas Constitution, I present herewith my revenue estimate for the remainder of fiscal 2003 and the upcoming 2004-05 biennium.
As I cautioned in my October 15, 2001 Certification Revenue Estimate, " . . . the events on and following September 11 could significantly challenge the assumptions behind the current economic forecast, and it may become necessary to provide a revised forecast once the direction and pace of the economy become clearer." It has become clear that the national and state economies have failed to grow to the degrees expected at the time that the current budget cycle began, and given the continued economic uncertainty as a consequence of the ensuing events--most notably the continuing war on terrorism and the evolving situation in the Middle East--I have been forced to adjust downward my estimate for the state's economic growth and revenue stream.
For 2004-05, the state will have $7.4 billion less than the amount appropriated for 2002-03. All totaled, the state will have $54.1 billion in funds available for general-purpose spending. The balance on hand at the close of the 2002-03 biennium--after setting aside $135 million for the required transfer to the Economic Stabilization Fund--is expected to be negative $1.8 billion, absent any legislative action to remedy the imbalance, as the anticipated economic growth has not materialized.
General revenue-related tax and fee collections in 2004-05 are expected to reach $56.4 billion. Tax revenue collected during the 2004-05 biennium will provide about 86 percent of these funds. Approximately 62 percent of this tax revenue will come from the sales tax. Other significant sources of general revenue include motor vehicle sales taxes, the franchise tax, the natural gas tax, insurance premium taxes, and lottery proceeds.
In addition to the general revenue-related funds, the state will collect $57.8 billion in federal receipts and other revenues dedicated for specific purposes and therefore unavailable for general-purpose spending. State revenue collections from all sources and for all purposes will total $114.2 billion.
This estimate is based on my current economic forecast, which indicates that, consistent with the national trend, economic output in the state will rebound in the next biennium, rising from an average annual growth rate of 2.7 percent in 2002-03 to 4.2 percent in 2004-05. In contrast, the state experienced a 5.4 percent average annual economic growth rate during the boom years 1995-2000. Compared to the national economy as a whole, the state economy is expected to lead national growth by almost half a percentage point annually over the upcoming biennium.
In addition to the obvious fiscal difficulty in which the state finds itself concerning the 2004-05 budgeting process, the liquidity of the treasury must be addressed by the Legislature before the end of the current fiscal year, or the state's credit rating may be affected.
I must emphasize, as I did in 2001, that this estimate remains subject to revision as the state economy responds to national and international events over the next several months. I shall continue to monitor the fiscal situation and report to you as necessary.
Carole Keeton Strayhorn
c: John Keel, CPA, Director, Legislative Budget Board