The 76th Legislature will have $58.0 billion available for general revenue related appropriations for the 2000-01 biennium. This revenue will come from three sources: tax collections; non-tax receipts such as fees, land income, and interest; and the 1998-99 biennium ending balance. From these revenues, approximately $471 million will have to be transferred to the Economic Stabilization Fund, sometimes referred to as the "rainy day fund." (See Figure 1.)
The Biennial Revenue Estimate (BRE) projects revenue accruing to 364 funds and accounts in the state treasury. Aside from certain fund balances, only four funds affect the discretionary spending detailed in the appropriations bill. These funds, which are referred to as "general revenue related funds," are the General Revenue Fund, the Available School Fund, the State Textbook Fund, and the Foundation School Fund. The remaining funds depend upon federal receipts or revenues that are dedicated by the constitution or by statute. A prime example is the constitutionally-dedicated State Highway Fund.
The state's tax system is the main source of general revenue related funding. Taxes are expected to contribute 76.5 percent of all general revenue related funds. In comparison to the 1998-99 biennium, tax collections for the upcoming budget period are expected to show a 4.6 percent increase.
As has been the case since 1988, state sales tax revenues will continue to account for more than half of all state tax collections. For the 2000-01 biennium, the sales tax is expected to provide 62.0 percent of available tax revenue and 47.4 percent of all revenue available for general purpose spending. The sales tax will remain Texas' most important state tax, but the dizzying growth in collections observed throughout 1998 will not continue indefinitely, especially in light of the economic troubles in Asia and the ensuing gyrations in the stock market. Sales tax collections in the 1998-99 biennium are expected to register a 14.9 percent growth rate over collections in the preceding biennium. For the 2000-01 biennium, the biennial growth rate is expected to moderate to 8.5 percent-a significant drop, but still in line with historical rates.
Most other major state taxes also should register moderate increases during the biennium. Subject to many of the same factors affecting the sales tax, motor vehicle sales tax collections are expected to cool off relative to their torrid growth in fiscal 1998 and grow at a biennial rate of 7.8 percent. Likewise, franchise tax collections are anticipated to reach new heights during the biennium, but the rate of increase will fall short of the 1998-99 pace. Slower national economic growth and a general weakening in corporate profits in such sectors as high-tech are two reasons for the expected deceleration in franchise tax revenue growth.
Running counter to the general trend in continued tax revenue growth, motor fuel tax revenues will register a substantial drop-on the order of 34.2 percent-in the 2000-01 biennium. Here, the driving force is not the economy (fuel consumption is still expected to increase), but a delay of the June and July 1999 motor fuel allocations from the General Revenue Fund to the State Highway Fund, as mandated by the 75th Legislature. Without the delay, motor fuel tax collections during the 2000-01 biennium would be expected to grow by 5.9 percent over the collections in the preceding biennium.
While tax collections provide the most important source of general revenue related funds, non-tax revenues are still important. Total non-tax revenue receipts to general revenue related funds will be $9.7 billion in 2000-01. Lottery proceeds have become the single largest source of non-tax revenue and will contribute $2.2 billion during the 2000-01 biennium. This represents a continuation of the flat revenue performance seen in fiscal 1998-largely a result of maturation of the lottery and associated issues.
Other major sources of non-tax revenue include interest income and the proceeds from state investments. Most interest and dividend earnings accruing to general revenue related funds are produced by the Permanent School Fund (PSF). Revenue from the PSF is expected to decrease slightly during the 2000-01 biennium because stocks have accounted for an increasing share of the PSF investment portfolio over the past several years.
Looking beyond the four general revenue related funds, the state will receive $40 billion in federal receipts and other revenues dedicated for specific purposes and thereby unavailable for general spending. Federal receipts-on the order of $27.7 billion-account for the majority of this revenue. This money is earmarked for such expenditures as highways and transportation, education, Medicaid, and other health and human services.
Taking all state revenue sources into account, the state is expected to collect $94.0 billion in revenue for all state funds during the 2000-01 biennium.
More than any time in recent history, the three-year economic outlook for Texas will be determined largely by the health of the global economy.
Driven by the North American Free Trade Agreement, reduced tariffs, and liberalized trade rules with Mexico (and, to a lesser extent, Canada), Texas international exports' share of total state economic output has more than doubled since 1985-rising from 6 percent of Gross State Product (GSP) in fiscal 1985 to an estimated 14 percent of GSP in fiscal 1998.
After increasing at an average annual rate of approximately 12 percent from 1994 through 1997, Texas export growth dropped to an estimated 8 percent in 1998. The current Texas economic forecast assumes a generally weak world economy, with the recession in Japan and other Pacific Basin countries (excluding China and Taiwan) continuing at least through the end of fiscal 1999. As such, Texas' export growth rate is expected to slump to a mere 1 percent in 1999. State export growth will rebound to a more respectable 8 percent in fiscal 2000 and then to 10 percent in fiscal 2001 as the world economy recovers.
Four industries-electronics, computers and industrial machinery, chemicals, and transportation equipment- now account for almost 70 percent of the state's exported products. Although hurt by falling semiconductor demand in the Pacific Basin, Texas electronics exports should benefit from increased exports to the rapidly expanding motor vehicle industries in Mexico and Canada. Combined, those two nations account for 60 percent of the state's electronic industry shipments. Similarly, Texas transportation equipment exports will continue to boom in response to the rapid growth of maquiladoras and the North American "continentalization" of vehicle production that has been made possible by the free trade agreement. Although buoyed by increasing computer sales to Europe, overall Texas industrial machinery export growth will be more subdued as major oil-producing countries cut back their drilling programs in response to low oil prices. Finally, Texas chemical exports have been and will remain vulnerable to falling demand and increased production capacity in the Pacific Basin.
While it is becoming increasingly important to Texas as a trading partner, the Pacific Basin still only accounts for 15 percent of Texas exports. As such, even a prolonged economic downturn in that region, while definitely felt, would not have a disastrous effect on the Texas economy. In contrast, Mexico and the rest of Latin America, which account for 52 percent of the state's exports, are vital. Assuming a successful International Monetary Fund restructuring of Brazil's foreign debt, the region should experience moderate economic growth through fiscal 2001. Canada and Western Europe, which account for 25 percent of Texas exports, are expected to register more modest growth during the forecast period.
Based on the world export assumptions discussed above, continued moderate growth in the U.S. economy, and relatively low-but eventually recovering-oil and natural gas prices, the annual real GSP growth rate in Texas is expected to slow down from 5.4 percent in 1998 to 3.6 percent annually over the period 1999 through 2001. (See Figure 2 and Table 1.) Thus, even with the moderating state economic growth, the continuing attractiveness of Texas to businesses and migrants from other parts of the country should allow the state to continue to outpace national economic growth by an average annual rate of 1.4 percent through the end of fiscal 2001.
Largely because of falling stock market earnings, the average annual increase in state personal income growth will drop to 6.1 percent in 1999-down from 7.2 percent in 1998-only to rebound to a 6.7 percent average annual rate in fiscal 2000 and fiscal 2001. Finally, the nonfarm employment growth rate is expected to fall from 3.7 percent in 1998 to an average annual rate of 2.7 percent for the three-year period 1999-2001; and the unemployment rate is expected to rise slightly from a near-record low of 4.9 percent in 1998 to 5.4 percent in 2001.
The 76th Legislature will have an estimated $58.0 billion available for general purpose spending in the 2000-01 biennium. This figure represents the sum of the 1998-99 ending balance, 2000-01 tax revenue, and 2000-01 non-tax receipts, less the estimated transfer to the Economic Stabilization Fund. (See Table 2.)
The 1998-99 Ending Balance
Just as the federal government and many other states are observing substantial budget surpluses, so, too, is Texas. The general revenue related fund balances at the close of the 1998-99 biennium are estimated at just over $4.4 billion. (This figure includes $1.1 billion in the state's tobacco litigation settlement proceeds.) Robust economic growth in 1998 followed by moderating growth in fiscal 1999 is the main force behind the revenue surplus.
Under the provisions of the Texas Constitution, half of all undedicated and unencumbered balances in the General Revenue Fund at the close of the biennium must be deposited to the state's Economic Stabilization Fund (ESF). Because of this provision, the estimated 1998-99 ending balance is expected to trigger a $471 million transfer to the ESF.
As discussed below, Texas' vigorous economic growth rate has propelled corresponding growth rates in major tax collections to heights that have not been seen for a number of years.
Taxes provide the most important source of general revenue for the state. As in years past, sales and use tax collections will continue to dwarf all other tax revenue sources, with the motor vehicle sales tax a distant second. The franchise tax, which serves as the state's general business tax, is the third largest general revenue source and the largest state tax not levied on consumption.
In fiscal 1998, Texas sales and use tax receipts exceeded $12 billion, registering a 9.9 percent year-over-year increase-a growth rate not exceeded since 1989. Other consumption taxes, most notably motor vehicle sales and rental taxes and the hotel occupancy tax, experienced similar gains. Many other states saw similar strong growth that year.
Federal income tax revenue also displayed unexpected gains during this period. The national economy, extremely strong for the last several years, is now showing signs of cooling. Likewise, state economic growth-as well as the growth in tax collections-can be expected to moderate through the 2000-01 biennium.
The sales and use tax is levied at 6.25 percent. Subject to certain exemptions, the tax is paid by businesses and consumers for a wide range of goods and services purchased or brought into the state. The sales and use tax also includes the boat and boat motor sales tax and the motor lubricant sales tax (the latter of which is dedicated to the State Highway Fund).
Sales and use tax collections are expected to rise moderately during the 2000-01 biennium, topping $27.5 billion for the two-year period. Compared to the $25.4 billion that is expected in the current biennium, this represents an 8.5 percent biennium-to-biennium increase.
The 9.9 percent growth rate in sales tax collections in fiscal 1998 was fueled in part by strong sales in the service sector (12.2 percent growth) as well as in the construction sector (16.7 percent growth). In contrast, the retail sector, a major contributor to the sales tax base with 53.7 percent of all taxable transactions, saw taxable sales increase 8.0 percent from fiscal 1997 to 1998.
State sales and use tax collections will continue to account for more than one-half of all state tax revenue in the upcoming biennium, as has been the case for the past decade. In fiscal 1998, the sales and use tax accounted for 59.9 percent of general revenue related state tax receipts. In 1962 (the first year the tax was collected), the sales and use tax was levied at 2.0 percent and accounted for 20.4 percent of general revenue related state tax receipts.
Motor Vehicle Sales Taxes
The state's principal motor vehicle taxes consist of the motor vehicle sales tax, the motor vehicle rental tax, and the manufactured housing sales tax. Combined, these taxes will contribute approximately $5.0 billion to state revenue during fiscal 2000-01, up 7.8 percent from the $4.6 billion expected in the 1998-99 biennium. The largest of these taxes, the motor vehicle sales tax, which, like the sales and use tax, is levied at 6.25 percent, is projected to generate $4.5 billion in the upcoming biennium.
Approaching the end of the 1998-99 biennium, auto sales are expected to remain steady, fueled in part by low interest rates and dealer incentives. The growth in motor vehicle sales tax collections, however, is expected to decelerate during the 2000-01 biennium, with most revenue gains attributable to higher prices and the continuing shift in consumer preferences to trucks and sport utility vehicles.
The franchise tax is the state's primary general business tax. All corporations, including subchapter S corporations, banks, savings and loan institutions, and limited liability companies doing business in Texas, are subject to the franchise tax. Until 1991, a firm's franchise tax liability was based solely on its net worth. The 72nd Legislature modified the tax to include earned surplus as an additional tax base beginning with the 1992 tax year. Earned surplus is essentially modified federal taxable income apportioned to Texas. The 1991 changes require the earned surplus tax to be paid to the extent that it exceeds the tax liability on net worth. In practice, taxpayers pay the higher of their net worth tax or their earned surplus tax. The current tax rates are 0.25 percent for taxable capital (net worth) and 4.5 percent for earned surplus.
While franchise tax revenues tend to follow the general direction of the state's economy, the revenue swings may be considerably sharper, more volatile, and of greater magnitude. Consequently, a short pause or downward trend in economic growth can send corporate profits plummeting. Because the earned surplus tax base constitutes as much as 80 percent of overall franchise tax collections, a simple hiccup in the economy can reverberate loudly throughout the franchise tax base. For example, because of strong economic growth, franchise tax collections are expected to grow from $3.4 billion in the 1996-97 biennium to $3.9 billion in the 1998-99 period, yielding a 14.8 percent biennial increase. However, because economic growth is projected to slow down starting in 1999, the biennial rate of growth for 2000-01 is expected fall off considerably, to 6.1 percent, generating $4.2 billion for the biennium
Oil and Gas Taxes
This group consists of the oil production tax, levied at 4.6 percent of value; the natural gas tax, levied at 7.5 percent of value; and the oil regulation tax, levied at 3/16th of one cent per barrel of oil produced in the state. (A fourth energy-related tax, the oil well service tax, is classified under "other taxes.")
Oil and gas tax collections in Texas have declined over the past decade, and the decline has become particularly pronounced in the last several years. The oil production tax accounted for only $303 million during fiscal 1998, lower than any preceding year since 1973. The drop-off in tax revenues is largely attributable to declining production and low prices, exacerbated by a price slide that started in fiscal 1997 only to continue well into the current biennium.
Statewide oil production levels have declined every fiscal year since 1972, when production peaked at 1.19 billion barrels. By 1998, production had fallen to 464 million barrels, yielding a 3.6 percent average annual decline rate. Production levels are expected to continue to decline as exploration activity becomes more concentrated overseas. In fiscal 1998, the average taxable price of oil was $15.19 per barrel; it is now expected to fall to an average of $13.06 per barrel for fiscal 1999. Revenue from the oil production and regulation taxes is expected to decline to $478 million in 2000-01 from $551 million expected in the 1998-99 biennium.
Due to a legislative "speed-up" enacted in 1983, odd-numbered fiscal years receive 13 months of natural gas tax payments while even-numbered years receive 11 months of payments, making year-to-year revenue comparisons difficult without adjusting for the payment cycle. Natural gas tax revenue came in at $575 million in fiscal 1998; adjusting for odd-year prepayments, this represents $624 million for fiscal 1998-a 6 percent decrease from adjusted fiscal 1997 collections. The decrease is attributed to a decline in natural gas prices because of ample supply and a mild winter.
The average price for taxable gas in fiscal 1998 was $2.12 per thousand cubic feet (Mcf), compared to $2.17 per Mcf in fiscal 1997. Gas prices are expected to decrease to $2.04 per Mcf in fiscal 1999; similarly, natural gas tax revenues are expected to fall to $1.1 billion for the 2000-01 biennium, from the $1.2 billion estimated for the 1998-99 biennium.
Motor Fuels Taxes
Motor fuel taxes are levied at the rate of 20 cents per gallon on gasoline and diesel fuel and 15 cents per gallon on liquefied gas. Approximately 75 percent of the motor fuel tax receipts must be allocated, per the Texas Constitution, to the State Highway Fund, with the remainder credited to the Available School Fund.
Because motor fuel tax revenues depend largely on population growth and business activity, collections are expected to increase moderately during the 2000-01 biennium. However, the amounts credited to general revenue related funds will fall sharply in 2000 because of previous legislation that delayed the June and July 1999 motor fuel revenue allocations from the General Revenue Fund to the State Highway Fund until fiscal 2000. The revenue allocation delay provided an approximate $330 million accounting gain to general revenue related funds for the 1998-99 biennium, but this gain implied a corresponding $330 million accounting loss for general revenue related funds in the 2000-01 biennium. Thus, even though the tax base will grow in 2000-01, motor fuel tax revenues available for certification will decline to $1.1 billion, down 34.2 percent from the $1.7 billion expected to be available in the 1998-99 biennium.
Tobacco and Alcoholic Beverage Taxes
Rapidly rising cigarette prices will push down combined tobacco tax collections over the next two years, while combined alcohol tax collections are expected to grow moderately. In the aggregate, tobacco and alcoholic beverage tax collections should total $1.96 billion in the 2000-01 biennium, a decline of $96 million (4.7 percent) when compared to the previous biennium's collections.
Texas taxes cigarettes at 41 cents per pack. Chewing tobacco, smoking tobacco, and snuff are taxed at 35.213 percent of factory price; and cigars are subject to a separate set of per-unit taxes based on weight, ingredients, and price.
The consumption of cigarettes has been declining since the mid 1980s, in part because of the widespread campaign to educate the public about tobacco's health consequences. Also, smoking in places accessible to the general public has become increasingly restricted. Consumption is expected to drop more sharply in the near future, when the tobacco companies are forced to increase their prices to fund payments to Texas and other states pursuant to tobacco litigation settlements. Therefore, cigarette tax collections (which increased each biennium between 1972-73 and 1992-93 and went unchanged through the 1996-97 biennium) are now expected to decline by 8.1 percent in the 1998-99 biennium to $1.0 billion. In the 2000-01 biennium, the collections are expected to drop 12.4 percent to $884 million.
Snuff accounts for the majority of the non-cigarette tobacco tax revenue. This is because the price of snuff has steadily grown; and, since snuff is often a substitute for cigarettes at work and in public places, its consumption has increased. Large cigar sales also have increased in recent years, producing a moderate rise in tax collections. As a group, cigar and other tobacco products tax collections are expected to increase by 2 percent in the 2000-01 biennium, reaching $129 million.
Texas imposes six alcohol taxes. The mixed beverage gross receipts tax, levied at 14 percent of gross receipts, accounted for more than two-thirds of total alcohol tax collections in fiscal 1998, compared to an 18 percent share in fiscal 1972. The mixed beverage tax differs from all other alcohol taxes because it is based on the value (rather than the volume) of the alcoholic beverages sold. Mixed beverage tax collections tend to move in tandem with the state's economic growth and have grown every year since 1988. Revenues are expected to continue to rise through the forecast period and should bring in $643 million for the 2000-01 biennium�an increase of 3.9 percent over the preceding biennium.
Collections from the beer and wine excise taxes and the airline/passenger train beverage tax are expected to increase moderately in the 2000-01 biennium. In contrast, liquor excise tax collections are expected to remain flat through 2001, yielding virtually the same annual revenue as in fiscal 1989. Reflecting a decline in the consumption of high-alcohol imported and ice beers, the malt liquor (ale) tax is expected to continue to exhibit a moderate decline in the next biennium. In the aggregate, total revenues from these five taxes should reach $302 million in the 2000-01 biennium, yielding a virtually flat biennial growth rate of 0.7 percent.
Gas, electric, and water utility tax collections are expected to drop 5.8 percent in fiscal 2000-01, down $25 million from the revenues collected in 1998-99. The anticipated decline reflects an anomaly caused by elevated electricity usage during the long period of exceptionally hot weather in 1998. Otherwise, the downward price effects of federal deregulation of wholesale electricity sales and state regulatory actions affecting the retail segment of this industry are expected to dampen revenue growth into the near future. As such, this tax is expected to generate $410 million in the 2000-01 biennium, compared to $435 million during the preceding biennium.
The public utility gross receipts assessment is expected to remain fairly level through the 2000-01 biennium, largely because the industry's taxable receipts are projected to stay flat over the next several years due to increased price competition incidental to electric industry restructuring.
Most of the insurance that is purchased in Texas is subject to two types of taxes: insurance premium taxes and insurance maintenance taxes. While the tax base for each is generally the amount of gross premiums written, the rates vary depending upon the type of insurance written.
Insurance maintenance taxes are used to fund regulatory costs, and the tax rates are adjusted each year based on each regulatory agency's appropriation and unexpended balance from the previous year.
Insurance premium tax collections are deposited into the General Revenue Fund and are thus available for general purpose spending. Depending upon the insurer's proportion of Texas-based investments, property and casualty insurance tax rates vary between 1.6 percent and 3.5 percent, and title insurance rates may be either 1.3 percent or 2.0 percent. Life, accident, and health insurance is subject to a flat 1.75 percent rate; HMO gross revenues are also subject to the 1.75 percent rate.
Historically, insurance premium tax revenues have proved highly volatile, largely because of turbulence in the workers' compensation insurance market, the application of premium tax credits for past guaranty fund assessments to cover a number of major insolvencies, and legislative changes in the payment schedule. For the most part, the problems of the past have disappeared, and the tax base has stabilized. On the property and casualty side, many markets appear to have become more competitive. Given the state's generally lower motor vehicle claims and, in many sections of the state, lower homeowner claims, the overall outlook for taxable premium growth is projected to be fairly stable and slightly greater than 2 percent per year. The life, accident, and health side is also expected to exhibit relatively modest growth, driven in part by robust, albeit decelerating, growth in HMO revenues.
Overall, insurance tax collections are expected to increase moderately in the 2000-01 biennium, rising to $1.6 billion from the $1.5 billion expected for the 1998-99 biennium-a 4.9 percent biennium-to-biennium increase.
The inheritance tax is levied on estates that are required to file a federal estate tax return. Pursuant to a 1997 change in federal law, the first $650,000 of a decedent's estate will be exempt from taxes in 1999�a $25,000 increase from the 1998 exemption limit. The estate exemption will continue to increase gradually each year until it reaches $1,000,000 in 2006. In 1998, inheritance tax collections grew by a remarkable 57.4 percent�fueled largely by the settlement of a number of large estates. For the 2000-01 biennium, the tax is expected to bring in approximately $455 million�a 16.5 percent biennium-to-biennium decrease.
Hotel Occupancy Tax
The state hotel occupancy tax is levied at 6 percent of the charge for hotel stays under 30 days. For the 1998-99 biennium, tax collections are expected to reach $425 million, a 17.4 percent increase over the $362 million collected in the previous biennium. Revenue from the hotel occupancy tax has grown as a result of the strong Texas economy and increased tourism and convention activity.
Continued growth in the economy should guarantee an increasing revenue stream through 2001. Revenue from the tax is expected to rise by 11.3 percent during the 2000-01 biennium, generating $473 million in collections.
In addition to the $44.4 billion in tax revenue estimated for the 2000-01 biennium, the state's general revenue related funds are expected to collect $9.7 billion in non-tax revenue. Non-tax revenue comes from the interest and dividend earnings of the Permanent School Fund (PSF); state lottery proceeds; and other sources such as fines, professional fees, and the Disproportionate Share Program. Early in fiscal 1999, Texas acquired a new source of non-tax revenue through an out-of-court settlement with the nation's major tobacco companies. This settlement is expected to add $691 million to the state's coffers over the 2000-01 biennium.
Interest and Dividends
The state's interest and dividend earnings are expected to decrease by 7.2 percent during the 2000-01 biennium. The largest single source of this revenue is interest and dividend income earned by the Permanent School Fund (PSF) for the Available School Fund (ASF). Over the 2000-01 biennium, the State Board of Education is expected to continue restructuring its investment portfolio for the PSF, putting greater emphasis on capital appreciation.
By increasing the fund's proportion of stocks in relatively smaller, developing companies (as opposed to larger, more highly capitalized firms) and fixed income securities, long-term income is expected to increase. However, in the short term, which includes the 2000-01 biennium, income to the ASF is expected to decrease slightly. Also, declining fund balances should cause a small reduction in earnings for the state's other deposits.
The lottery game mix slightly favors the instant ticket games, with 58 percent of total fiscal 1998 sales in this category. The number of on-line game offerings was expanded in fiscal 1998.
As state economic growth decelerates and the lottery matures, net proceeds are expected to stabilize. Because administrative expenses have consistently been lower than the 15 percent cap originally set in the Lottery Act, the Legislature reduced total allowable administrative expenses to 12 percent of ticket sales beginning in fiscal 1998. The Legislature also directed the lottery to lower the amount paid to prizes by five percentage points.
In fiscal 1999, more than 52 percent of gross lottery revenue will be returned to players as prizes, and the state will receive almost 36 percent. For the 2000-01 biennium, lottery revenue is expected to remain relatively constant, on the order of $2.2 billion, or 2.1 percent below the collections for the 1998-99 biennium.
Fees and Other Revenue
Revenue from fees, licenses, third-party reimbursements, and other sources (including the recent tobacco settlement) is expected to decline slightly from the $6.7 billion estimated for the 1998-99 biennium to $6.1 billion for the 2000-01 biennium. For the most part, this decline reflects falling revenues from the state's state/federal Disproportionate Share Program, which helps reimburse state and local hospitals for the cost of indigent care. As part of its 1997 budget agreement, Congress approved a phased reduction in federal Disproportionate Share Program payments to the states from fiscal 1998 through fiscal 2001. Because of this, total contributions from participating state agencies and local hospital districts are expected to decline by almost 12 percent from $2.4 billion in the 1998-99 biennium to $2.1 billion in the 2000-01 biennium. Most Disproportionate Share Program revenues are allocated to the contributing state and local hospitals, but $570 million in undedicated general revenue will be available from the program for general purpose spending in the 2000-01 biennium.
Third-party reimbursements, which include payments from insurance companies and other private sources to help finance health and human service programs, should remain relatively flat at just under $700 million for both the 1998-99 and 2000-01 biennia. Approximately $400 million of the 2000-01 revenues will come from reimbursements to the state's Medicaid program from pharmaceutical companies participating in the vendor drug program and the National Heritage Insurance Company, which processes the state's Medicaid claims. Another $300 million will come from local governments for state-provided purchasing services and other miscellaneous third-party sources.
After the participating state agencies spend state funds on administrative functions, the federal government reimburses general revenue for part of those costs. These "earned federal funds" are expected to decline by 14 percent: from $106 million in the 1998-99 biennium to $91 million in the 2000-01 biennium. Most of the projected decline reflects conservative budgeting practices by state agencies, which do not want to overestimate federal funds before they are received.
Tobacco settlement payments constitute the state's newest source of "other revenue." In January 1998, the state of Texas settled its claims against the nation's major tobacco manufacturers for the costs that the state incurred in providing Texans with health care for illnesses related to the use of tobacco products. The settlement requires the manufacturers to deposit substantial payments into the state's General Revenue Fund for at least the next 25 years. In fiscal 1999, the state will receive $1.1 billion from the settlement. Beginning in the 2000-01 biennium, these payments will be adjusted for the effects of inflation, the volume of manufacturers' cigarette sales, and the manufacturers' net profits. After such adjustments, the payments are expected to total $691 million for the 2000-01 biennium. Subsequent payments should come in at approximately $500 million per year.
The magnitude of future settlement payments will depend to some extent on whether the federal government seeks reimbursement for the federal share of Medicaid payments made for Texans covered by the Texas settlement. Also, as agreed upon in the January 1998 settlement, $50 million from the tobacco companies' first payment to the state (in September 1998) was diverted to the private attorneys as an advance payment for their fees. In the event that the private attorneys accept the federal arbitration panel's fee award, the attorneys would have to return the $50 million advance to the state's General Revenue Fund.