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Today, the Texas Legislature faces the most severe financial crisis in the state’s history. In the face of a $10 billion revenue gap, legislators and state officials are scrutinizing and challenging state spending as never before. Our state’s leaders are tackling an extremely difficult but essential task: they must set vital spending priorities under the scrutiny of a host of interest groups, and somehow make the state’s books balance.

To aid Texas policymakers and concerned citizens in their analysis of the state budget, this Special Financial Report highlights a detailed Comptroller study of the state budget based on changes in unit costs over time, an approach focusing on the “price” of state government.

It is broadly accepted—and rightly—that the cost of state government surged rapidly in the 1990s. Clearly, this was a period of significant expansion in state expenditures. In fiscal 1990, expenditures from all state Treasury funds (excluding trust fund spending) totaled $22.8 billion; by fiscal 2002, the total had more than doubled, rising to $55.7 billion. Over this period, state expenditures rose nearly six times as fast as the Texas population. Many factors drove this increase, including population growth, federal mandates and new programs.

Most analyses of state spending focus on the broadest program categories. Texas state government’s four largest areas of expenditure are public education, health and human services, higher education and transportation, which together account for four out of every five dollars spent by state government.

Some of the reasons for growth in these major categories are easily identifiable. Population growth is always a factor, as is inflation; a dollar in 2002 bought about a third less than a 1990-era dollar. Increases in Texas transportation spending over the last decade were due almost entirely to significant increases in the federal funding that supplies almost half of the state’s transportation revenue. Educational spending is driven in part by the fact that Texas is educating many more students today than it did a decade ago. Educational reforms, moreover, have reduced class sizes, requiring schools to hire more teachers. And the increased demand for teachers, in turn, required many districts to increase teacher pay.

On the individual program level, however, the specific reasons for spending growth can be less clear and much more difficult to isolate. A particularly useful concept for examining such spending in detail is the notion of unit costs—an approach which “normalizes” the dollars spent for growth in underlying service demand.

Unit Costs and Cost Indices

From fiscal 1990 to 2002, spending growth varied significantly among various agencies and among programs within agencies. The cost indices developed for this report track spending growth in 456 individual agencies, programs and program groups over the 1990-2002 period, as reflected in the state’s General Appropriation Acts.

For each expenditure area, the Comptroller’s review team identified a workload measure that tracks the demand for the specific service or program, and then calculated spending per unit of workload for each year, to show changes in unit costs over time. Some of these measures include:

  • public school payments per public school student.
  • highway construction per vehicle mile traveled on Texas highways;
  • the incarceration of adult prisoners per number of inmates incarcerated on August 31 of each year;
  • payments to nursing homes for elderly Medicaid recipients per average number of nursing home clients per month;
  • payments for prescription drugs for Medicaid recipients per Medicaid prescriptions issued annually;
  • the state’s contribution to pensions for retired teachers per active Teacher Retirement System (TRS) Pension Trust Fund member;
  • the cost of medical services for blind and disabled Medicaid recipients per average number of disabled and blind Medicaid recipients per month; and
  • payments for long-term community care services per average number of community care clients per month.

These eight programs are the largest included in this analysis; all had expenditures of more than $1 billion each in 2002. Together, they accounted for $25.2 billion in 2002, or 46.8 percent of all state spending. All indices with more than $100 million expenditures in Fiscal 2002 are shown in detail in spreadsheet format (.xls 31.2 KB).

For programs without workload data that accurately reflect demand for a service, the team employed population as a workload indicator, on the basis of cost per 10,000 Texas residents. Each agency’s employment served as the workload measure for salary and wage indices.

The detailed expenditure and workload unit data then were used to calculate a price index of unit cost—a ratio expressing real, inflation-adjusted expenditures per workload unit—for each spending area. (All “real” dollar amounts in this report are inflation-adjusted and expressed in constant 1990 dollars.)

These indices are a new tool for examining and comparing state spending, since they summarize trends in program spending growth in a single number.

Assuming the spending area received funding in 1990, the unit cost index for that year is set at 1.0. Any growth beyond 1.0 indicates an increase in real spending per unit of workload; for instance, an index of 2.5 equates to an increase of 150 percent over the 1990 level.

The individual indices were used to calculate a combined index for each of nine articles of the General Appropriations Act—articles that mirror the major categories of state spending, as follows:

Article I: General Government
Article II: Health and Human Services
Article III: Education
Article IV: Judiciary
Article V: Public Safety and Criminal Justice
Article VI: Natural Resources
Article VII: Business and Economic Development
Article VIII: Regulatory
Article X: Legislature

(Article IX contains riders applying to all agencies; expenditures from this article are included in amounts shown for the other articles. Article III was treated as two separate articles for the purpose of this analysis, to segregate public and higher education spending.)

The article indices, in turn, were used to calculate a statewide index. (A more detailed explanation of the index calculations appears in Appendix 1.)

Growth Leaders

According to Comptroller calculations, the total state government spending index for 2002 was 1.56, meaning that the unit cost of state government rose by 56 percent from fiscal 1990 to 2002. This spending growth, however, was unevenly distributed, and indices for the biggest budget items were easily outpaced by three relatively small sources of expenditure.

Perhaps surprisingly, spending growth has been highest in areas concerned primarily with administration. General government, a “catch-all” category covering a wide variety of the day-to-day tasks of state government, produced the highest index, at 3.99 in fiscal 2002—meaning that real, inflation-adjusted spending per workload unit rose by 299 percent. Only slightly lower was the natural resources category, with an index of 3.49. The only other category above the statewide index was the judiciary, which scored an index of 1.78.

Expenditures for these three articles combined accounted for just 6.9 percent of state spending in fiscal 2002.

By contrast, health and human services, the state’s largest budget category based on the definitions of the General Appropriations Act, accounted for 32.5 percent of all state spending in fiscal 2002. Spending growth in this area closely tracked the statewide expenditure index, at 1.52 in fiscal 2002.

The state’s second-largest budget expenditure is public education, accounting for 29 percent of statewide spending in fiscal 2002. Education spending growth over the last decade was fairly modest, however, producing an index of 1.38 in fiscal 2002. The public safety and criminal justice index was only slightly higher at 1.51.

Higher education, which accounted for 10.9 percent of state spending in fiscal 2002, generated the lowest index. The higher education index for fiscal 2002 was just 1.12, meaning that real spending per workload unit rose by just 12 percent over the 1990-2002 period.

The remaining three articles all had expenditure indices falling significantly below the overall state index. The largest of these in terms of total spending was business and economic development, which accounted for 13.3 percent of all state spending in fiscal 2002. This article had an index of just 1.30 in fiscal 2002. The Legislature and legislative agencies (Article X) scored a 1.34 index. Close behind these were regulatory functions, with a 1.22 index. These two articles accounted for just 0.7 percent of state spending in fiscal 2002.

For many of the state’s largest programs, workload or caseload growth explains most or all of the overall spending increase. In addition, article indices often are affected by a handful of extremely large individual indices, typically associated either with one-time or periodic expenditures, such as costs associated with weather-related disasters, or with programs that rose from very small fiscal 1990 expenditure bases.

Beyond, this, however, generalizations are difficult, since each program has a somewhat different mixture of spending growth resulting from workload and unit-cost growth rates.

Each of the major spending areas is discussed in greater detail below. Tables 1 through 3 in the Appendix summarize the results of the study.