Financial Analysts Say a Cuts-Only Budget is Bad for Texas, Balanced Approach Needed

The folks in charge at the state capitol may think they are being prudent and business-like when they propose to close the current revenue gap with cuts alone. But the Standard & Poor’s bond-rating agency, which knows a thing or two about how businesses and governments make ends meet, takes a dim view of the cuts-only strategy. A February 16 S&P report on “Texas’ Budget Challenge” says: “we believe that many of Texas’ current budget challenges are the result more of previous fiscal policy decisions that created structural budget deficits than of a weak economy‚Ķ.We also believe that a balanced approach that includes both revenue enhancements and expenditure cuts has a higher potential of success in preserving the state’s long-term structural budget balance than a strategy that relies solely on expenditure cutbacks.”

The S&P financial analysis suggests state cutbacks threaten to shift massive costs onto local governments, with “potential credit implications” for those local jurisdictions, including school districts. The analysis also says state leaders and lawmakers made a historic mistake when they moved away from a relatively stable funding source (local property taxes) toward sources that decline markedly when the economy declines (state general revenue derived, for example, from sales taxes). However, the S&P criticism is softened somewhat by the conclusion that “the state has a strong track record of closing sizable budget gaps that have emerged during prior economic cycles.”