transparency

The 2010-11 Certification Revenue Estimate

The State of Texas will have an estimated $77.7 billion available for general purpose spending in the 2010-11 biennium, 9.5 percent below the corresponding amount for 2008-09. (See Tables 1, 2, and 3.) This figure represents the sum of the 2008-09 ending balance, 2010-11 tax revenue, and 2010-11 non-tax receipts; less estimated transfers to the Economic Stabilization Fund (ESF); and adjustments to General Revenue-related dedicated account balances.

Tax collections in 2010-11 will generate $67.5 billion; and non-tax revenues will produce an additional $8.8 billion. Factoring in the $2.4 billion ending balance carried forward from 2008-09, these three sources total $78.6 billion. Against this amount, $1.2 billion must be placed in reserve for future transfers to the ESF, and $0.2 billion must be added for various adjustments to General Revenue-related dedicated account balances.

Taking all state revenue sources in all funds into account, the state is expected to collect $180.3 billion in revenue for all state funds during the 2010-11 biennium.

Texas Economic Outlook

The Texas economy was weakening in the latter months of fiscal 2008 and began losing nonfarm employment in fiscal 2009 in response to a worsening national recession. The state's average employment in fiscal 2009 was nearly 106,000 lower than the average employment for fiscal 2008. The outlook is for continued job losses in fiscal 2010 through the fourth quarter of calendar 2009. Beginning in the first quarter of calendar 2010, job growth will resume, but at a very slow rate. Even with the improving economic climate, the average employment in fiscal 2010 will decline a further 127,000 from fiscal 2009. Fiscal 2011, improving upon the previous year's slowly rebounding job market, will see average employment increase by 218,000 from fiscal 2010.

As Texas and the nation emerge from this recession, the Texas economy will expand at a modest pace, as measured by the rate of growth in Texas gross state product (GSP). Adjusted for inflation, Texas GSP should grow by 1.9 percent in fiscal 2010, following a decline of 1.8 percent in fiscal 2009. As the economy moves into full recovery, real GSP should grow by 3.4 percent in fiscal 2011, outpacing the national growth rate but well below the average annual pace for Texas real GSP of 4.0 percent during the 2006-07 biennium.

Texas Still Steps Ahead of the Nation. In fiscal 2008, Texas average nonfarm employment increased by 2.6 percent, while nationally job losses occurred in each of the last eight months of that fiscal year and the annual job growth was only 0.4 percent. Texas began losing jobs in fiscal 2009, ending the year with 1.0 percent fewer jobs, while nationally the decline was 2.9 percent. From peak employment to the most recent monthly job count estimates, Texas nonfarm employment has declined by 3.4 percent, and national employment is down 5.3 percent. In fiscal 2010, Texas employment is forecast to decline by a further 1.2 percent, before job growth strengthens in fiscal 2011 to increase by 2.1 percent. Over the span from fiscal 2008 to fiscal 2011, average Texas employment will not change substantially.

The unemployment rate in Texas rose to 8.0 percent at the end of fiscal 2009, compared to 9.7 percent nationally. This was the state's highest jobless rate since 1987, and was due mostly to losses in the goods-producing industries (oil/natural gas, construction, and manufacturing) and the trade sector. Because of slow job growth during the current 2010-11 biennium, state and national unemployment rates are likely to remain stubbornly high, only improving slightly in fiscal 2011. Fiscal 2010 will see the average unemployment rate in Texas increase to 8.2 percent, then average 7.7 percent in fiscal 2011. Nationally, these figures will be 9.9 percent and 9.5 percent, respectively.

Personal income growth was healthy through most of the 2008-09 biennium, but slowed markedly in its second fiscal year (to 1.7 percent) as job losses accumulated. Continued weakness in income growth is expected in fiscal 2010 (up 1.9 percent) before improving (to 4.5 percent) in fiscal 2011. Job growth helped nominal personal income increase by an annual average of 5.7 percent in 2008-09 compared to the previous biennium, but the recovering economy should temper this to a 2.5 percent average annual rate in 2010-11.

Because the Texas economy has been relatively healthier than the national economy, net migration to the state fueled nearly half of Texas' population growth in the 2008-09 biennium. The population growth rate in Texas is expected to drop slightly in 2010-11, with continuing net migration into the state. Texas population will increase by 930,000 in 2010-11–an average annual increase of 1.9 percent–to reach an average of 25.7 million Texans in fiscal 2011.

Oil and Natural Gas Contracting. The mining and logging industry led the major Texas industries in employment growth during the 2008-09 biennium, but will lose a larger share of its jobs in 2010-11 than any other Texas industry. Texas' oil and natural gas sector had benefited significantly from higher energy prices, particularly those activities in support of exploration and development. With Texas serving as the headquarters for many companies in the oil and natural gas industry, the mining and logging industry's contribution to Texas personal income is more than five times the national share.

In the 2006-07 biennium, employment in mining/logging (based predominately on oil and natural gas activity) grew by a substantial 22 percent compared to the previous biennium. During 2008-09, jobs in the industry increased by almost 17 percent, with employment peaking at 240,200 in December 2008, but as market prices turned sharply downward in early fiscal 2009 employment dropped to 201,800 at the end of that year. The number of operating oil and natural gas drilling rigs in the state averaged 718 per month during 2008-09, but in 2010-11 the average monthly rig count will be exactly one-half that number (359). Mining and logging employment is expected to decline by 17.7 percent (an average of 9.3 percent annually) during the 2010-11 biennium.

Construction Suffering. The other goods-producing nonfarm industries are construction and manufacturing. Each lost employment in fiscal 2009 and each is expected to lose jobs again in the 2010-11 biennium. Construction and manufacturing jobs followed a similar pattern of growth in the first year of the 2008-09 biennium and losses in the second year.

The Texas construction industry contributed strong employment growth in 2008-09, even with the fiscal 2009 declines. In that biennium, industry activity shifted in part from the building of single-family homes to the construction of utility systems, refineries, and pipelines related to the state's oil and natural gas industry, as well as to heavy engineering construction related to the building of multi-family residences and highways. Although Texas fared much better than many other large states in the mortgage credit crunch, the drag of the national recession has taken a toll on all Texas construction sectors.

According to data from the Texas A&M Real Estate Center, new single-family housing permits in Texas declined from 125,000 in fiscal 2007, to 86,000 in fiscal 2008, and to 60,000 in fiscal 2009. Multi-family permits were stable in fiscal 2007 and 2008 at 56,000 units, but declined markedly to 24,000 units in fiscal 2009.

The outlook is for multi-family residential and nonresidential building construction activity to continue shrinking in the 2010-11 biennium, reducing construction employment by 6.2 percent per year in the 2010-11 biennium, a loss of 77,000 jobs from 2008-09 levels.

Exports No Longer Boosting Manufacturing. The value of Texas exports more than doubled between fiscal 2002 and 2008, but in fiscal 2009, for the first time in six years, the value declined. Although export growth will return in both fiscal 2010 and 2011, the sharp decline in fiscal 2009 will translate into a one percent drop in exports between the 2008-09 biennium and 2010-11. Shrinking export demand combined with hefty productivity increases and weaker consumer spending will cause the Texas manufacturing industry to shed jobs by an average of nearly 5 percent per year between the 2008-09 and 2010-11 biennia.

National forecasters expect the dollar's value to continue its slide relative to major world currencies, helping Texas exports to recover. On the flip-side, international purchasing demand is expected to revive slowly. Texas exports, at $159 billion in fiscal 2009, represented nearly 13 percent of the state's gross economic product, as well as 15.3 percent of all U.S. exports. Texas exports per capita are nearly twice the national average, with total exports forecast to exceed $181 billion in fiscal 2011. Even with the growth, total exports from the state will not recover to the record level of over $192 billion seen in fiscal 2008 until beyond the current biennium.

Service Industries' Growth in 2010-11. Among service-providers, all the industries except information added jobs during the 2008-09 biennium. Education and health services added 82,000 jobs, federal, state and local governments added 71,000, professional and business services grew by 63,000, and leisure and hospitality tacked on 57,000. Those industries added jobs in each year of the 2008-09 biennium, although international and national recessions began to take a toll in fiscal 2009, which was exacerbated in Texas by the collapse of oil and natural gas exploration.

The impact of those economic factors continues to weave through the service-providing industries, and job growth in the current biennium will not match the growth in the last one. The outlook for 2010-11 is for professional and business services to expand by a comparatively weak 5,000 jobs, and leisure and hospitality will add 32,000. Education and health services, an industry for which the demand for its services is tied to demographic factors, is more resistant than most industries to economic weakness; it is expected to add more jobs in the current biennium (89,000) than in 2008-09. The information industry contracted in 2008-09, and with the saturation of domestic markets, cost competition, and decline in demand for printed news media, will contract even more in fiscal 2010-11. Texas financial activities avoided the worst of the national recession, but began to suffer job losses in the first quarter of calendar 2009. The industry will lose about 21,000 jobs in fiscal 2010-11. The trade, transportation, and utilities industry generally mirrors the overall health of the state economy, and as such, is experiencing job losses in fiscal 2009 and 2010; losses in fiscal 2010 will exceed gains in fiscal 2011, resulting in a net loss of about 25,000 jobs in 2010-11. Government, called on to provide more services during economic downturns, is expected to increase employment by 71,000 in 2010-11, a gain of 2.0 percent per year, with the majority of the growth at the local level.

Forecast Concerns. There are indications, such as the return to growth in the U.S. Gross Domestic Product in the third quarter of 2009, that the economy has reached a turning point–moving from contraction to expansion–but that does not yet mean general economic conditions are back to normal levels. For instance, Texas single-family housing starts reached a low point early in fiscal 2009, but, while now growing slightly, remain well below long-term averages. As the global recession expanded beyond housing and credit activity, many areas of the Texas economy weakened, including consumer and business spending, and, as noted earlier, exports.

The state's highest unemployment rates since 1987, coupled with an increase in the savings rate, is reflected in worsening retail sales activity over the past year. Lower prices and pent-up demand for automobiles and other goods and services will eventually serve as a source of economic growth, but the timing and strength of this boost are surrounded by uncertainty.

The economic forecast underlying this revenue estimate assumes Texas job losses are continuing to trend downward and will reach bottom during the fourth quarter of 2009. The first quarter of calendar 2010 is expected to see slight job growth, with the rate of growth gradually gaining strength through the end of fiscal 2010, and significantly improving in fiscal 2011. However, should Texas job losses continue into early calendar 2010, or the rate of job growth, once started, in fiscal 2010 is less than forecast, there would be negative implications for the economy and the state's fiscal situation. Similarly, if consumer spending continues to perform poorly into the second half of fiscal 2010 it is unlikely that sales tax projections will be met.

Concerns about the overhang effects of rising public and private sector debt, and a global credit crunch holding back investment, have affected the Texas economy. Further, in recent years Texas has benefited from strong growth in the global economy and the declining value of the dollar, factors that have boosted Texas' export growth, but many forecasters predict international markets will recover slowly. While economic growth in Asia will remain solid, it is now markedly slower than it has been for most of this decade.

Finally, while the forecast calls for gradually increasing oil prices, circumstances in which oil prices jump to–and most importantly, remain–at levels above $100 per barrel could have serious consequences for the U.S. and Texas economies. Although $100-plus prices could be salutary to the oil and gas sector of the Texas economy in the short-run, those gains would be expected to be overwhelmed in the longer term as the costs within the state for transportation, fertilizer, and general petrochemical industry feedstock increase.

The 2008-09 Ending Balance

The ending certification balance for 2008-09 was $2.4 billion after setting aside a required $870 million transfer to the ESF related to 2009 tax collections and to be transferred in fiscal 2010.

The Economic Stabilization Fund (ESF)

As required by the Texas Constitution, a total of $870 million was set aside from fiscal 2009 receipts for transfer to the ESF by the end of November 2009. This transfer, which represents a portion of the oil and natural gas production tax receipts, is not included in the General Revenue-related funds available for 2010-11 biennial appropriations. The ESF reserve for transfers totaled $3.1 billion for the 2008-09 biennium.

With respect to 2010-11 revenues, the portion of state oil production and natural gas tax collections reserved for transfer to the ESF should total $1.2 billion over the biennium. Again, as required by the Texas Constitution, these estimated transfers to the ESF have been deducted from available revenues and balances.

At the end of the 2010-11 biennium, on August 31, 2011–and before the fall 2011 required transfer of fiscal 2011 revenues–the ESF balance should total $8.2 billion.

Tax Revenue

The state's tax system is the main source of General Revenue-related funding. Taxes are expected to yield $67.5 billion during the 2010-11 biennium, contributing 88.6 percent of total net revenues. Compared with the $69.3 billion collected in 2008-09, total General Revenue-related tax collections in 2010-11 are expected to register a 2.7 percent decrease.

Since 1988, state sales tax revenues have accounted for more than half of all state General Revenue-related tax collections. Motor vehicle sales and use taxes provide the second-largest source of general revenues, followed by the proceeds from the state's general business tax–the franchise tax. The franchise tax is the largest state tax not levied on consumption.

Sales and Use Taxes. In fiscal 2009, Texas General Revenue-related sales and use tax receipts totaled $20.9 billion, down 2.7 percent from 2008. The decline was the result of recessionary forces that have affected all major sectors of the Texas economy.

Contributing to lower collections have been the contractions in the Texas mining and construction industries. Each industry experienced substantial employment declines in fiscal 2009. For mining, lower energy prices, relative to the highs in 2008, resulted in decreased drilling activity, as well as less repair or replacement of equipment. Rotary rig counts, which had peaked at 946 in September 2008, dropped to a low of 329 in June 2009. Only recently have rig counts begun to tick up. For the construction industry, activity had begun to slow in fiscal 2008 and slowed further during fiscal 2009. The low point of new single family starts seems to have occurred during the first quarter of calendar 2009. However, levels of construction activity–and tax receipts from the sale of building materials–remain far below those of 2006, 2007, or 2008.

Sales and use tax collections from the retail trade sector, which accounts for approximately half of total sales tax revenue, declined by 2.1 percent in fiscal 2009. This sector saw gradual tax collection declines early in fiscal 2009, but in the last three months collections dropped steeply. Subsectors with the steepest tax declines include home improvement stores, furniture stores, and electronics stores, all three of which are affected by changes in the number of new homes built or existing homes sold.

Growth in sales tax collections is expected to be modest in the 2010-11 biennium. For the first half of fiscal 2010, sales tax collections across all industries–but notably oil and gas activities, construction, and manufacturing–are expected to show continued weakness. Tax collections from those industries should begin to improve and gradually strengthen over the second half of fiscal 2010, as the Texas economy recovers and jobs are slowly added. Stronger and more consistent tax collection growth is expected in fiscal 2011.

Sales taxes are expected to generate $43.6 billion in state General Revenue-related revenue in 2010-11. Compared to the $42.5 billion collected in 2008-09, this will represent a 2.7 percent biennial increase.

Franchise Tax. The franchise tax changed significantly beginning with reports due in 2008. The universe of business entities subject to the tax expanded to include partnerships, business trusts, professional associations, business associations, joint ventures, holding companies, and other legal entities. Business entities not subject to the franchise tax include sole proprietorships and general partnerships composed entirely of natural persons.

The base for the current franchise tax is "taxable margin" apportioned to Texas. "Taxable margin" is defined as the smallest of three calculated values: 70 percent of total revenue; total revenue less the cost of goods sold; and total revenue less compensation.

Franchise tax receipts in the 2008-09 biennium reflected the new base and rates for the franchise tax. Receipts for all funds totaled $8.7 billion–a 51.3 percent increase over the amount collected in 2006-07, the last periods based on the taxable capital and earned surplus.

In 2006, the 79^th Legislature, 3rd Called Session, enacted HB 2, which established provisions for dedicating part of the franchise tax revenue collected to the Property Tax Relief Fund (PTRF). The dedicated revenue is the amount collected under the taxable margin based tax that exceeds the amount estimated to be collected under the prior capital and earned surplus based tax. For 2008-09, the amount allocated to the PTRF from the franchise tax was slightly more than $3.0 billion. The remaining $5.7 billion was held in the General Revenue Fund for general purpose spending.

The deep U.S. economic recession will continue to hold down franchise tax collections in 2010, but the slow economic recovery expected to take hold in that year will allow a modest rise in franchise tax revenue in fiscal 2011. A change made to the franchise tax by the 81^st Legislature, provides that a business with total revenue of $1 million or less owes no franchise tax. Prior to this change the threshold was $300,000. The change is estimated to reduce franchise tax collections by $172 million during 2010-11. The impacts of the economic recession and the legislative change will hold franchise tax collections in 2010-11 to $8.7 billion, level with collections in the prior biennium.

Motor Vehicle Sales and Rental Taxes. General Revenue-related tax collections in fiscal 2008, at $3.3 billion, were essentially unchanged from 2007 collections. In fiscal 2009, the Texas economy began to weaken and motor vehicle sales rapidly declined, and tax collections fell by 22.5 percent to $2.6 billion. Bankruptcies of major automobile manufacturers, along with rising unemployment and severe limits on borrowing, meant fewer potential buyers in auto showrooms. Those purchasing vehicles displayed a shift in preference away from trucks and SUVs toward more car-like crossover vehicles, as well as to smaller fuel-efficient vehicles. As a consequence, tax collections in the 2008-09 biennium, at $5.9 billion, were 7.5 percent below 2006-07 collections.

Motor vehicle tax revenue collections, as with the sales tax, will begin to recover in fiscal 2010 as job growth returns, consumer confidence increases, and the need to replace older vehicles is addressed. Following the extreme revenue decline in fiscal 2009, an increase of 6.3 percent is expected in fiscal 2010, followed by growth of 7.8 percent in fiscal 2011. Overall, and heavily influenced by fiscal 2009's steep decline, tax collections are expected to be $5.7 billion in the 2010-11 biennium, down 3.6 percent from 2008-09.

Oil & Natural Gas Taxes. Since 2002, oil prices have taken a generally upward path, rising from an average of $17.54 per barrel (taxable value) in January 2002 to $130.60 in June 2008. This price increase was the result of various forces, including persistent threats of supply disruptions abroad; hurricane-related production losses in the Gulf of Mexico; diminished production capacity; growing global demand; and the depreciation of the U.S. dollar. In the second half of 2008, the worldwide financial meltdown caused oil prices to drop sharply, reaching a low of under $33 in February 2009 partly because the dollar's relative value appreciated in this period of capital illiquidity. As markets sensed the financial crisis had peaked, the dollar again declined, helping oil prices to rise to over $67 by August 2009. For all of fiscal 2009, taxable oil prices averaged $59.88 per barrel; and oil production and regulation General Revenue-related tax revenues dropped to $885 million for the year, down 38.4 percent from the $1.4 billion collected in fiscal 2008.

Given the continuing trend of production declines, oil production and regulation taxes are anticipated to generate $1.8 billion in revenue in the 2010-11 biennium, a decline of 21.2 percent from 2008-09 collections of $2.3 billion. As the crude oil inventory level in the U.S. returns to normal and with improving economic activities in key markets, taxable oil prices are expected to average $64.04 per barrel in fiscal 2010 and $68.46 in fiscal 2011.

Ample supplies of natural gas in storage–attributable in part to previous warm winters, weak demand, and increased production levels–caused the market price for natural gas to fall below $3 per thousand cubic feet (Mcf) in August 2009, the lowest level since August 2002. The taxable natural gas price in fiscal 2009 dropped to an average of $4.96 per Mcf, a 33 percent decline from $7.37 in fiscal 2008. Taxable natural gas prices are expected to be lower in fiscal 2010, averaging $3.79 per Mcf, before rebounding in 2011 to an average price of $5.01 as storage volumes are worked off, Canadian imports decrease, minimal additions are made to LNG supplies, and demand growth offsets the expected new production from unconventional sources.

Although Texas production had been on an upward path since 2003 due in large part to the tremendous growth in output from the Barnett Shale formation and higher market prices, production–in response to the recent drop in market prices–is expected to trend lower toward levels last seen in 2007. Lower prices and production volumes–together with more refunds of taxes paid during prior years that are associated mostly with an exemption for high-cost, or difficult to extract, natural gas–are expected to result in natural gas production tax revenue of $587 million in fiscal 2010. The outlook for fiscal 2011 is for higher prices, stable production volumes, and somewhat lower refund levels. Fiscal 2011 natural gas production tax revenue is projected to be $1.4 billion, close to fiscal 2009's revenue but remaining lower than the four prior years. In the 2010-11 biennium, natural gas tax collections will total approximately $2.0 billion.

Insurance Taxes. General Revenue-related collections in the 2008-09 biennium from the state's insurance taxes were $2,706 million, an increase of 4.9 percent from 2006-07. In the 2010-11 biennium, as the state's economy moves into recovery, insurance tax revenue–although buoyed by an increasing state population–will decline slightly from the previous biennium due to several factors. First, it is expected, following an economic downturn, that both businesses and consumers will seek less expensive insurance policies with higher deductibles. Second, title insurance premiums are expected to be muted as new home construction struggles to recover and existing home prices remain stable. Also, premium tax credits that offset assessments against insurers to replenish the Catastrophe Reserve Trust Fund are expected to increase and the first full two year application of certified capital company (CAPCO) premium tax credits will be effective in 2010-11.

For the 2010-11 biennium, insurance tax collections are expected to decline by 1.1 percent to $2,675 million.

Motor Fuels Taxes. Three-quarters of the proceeds from the state's motor fuels taxes are dedicated to the State Highway Fund, with the remainder dedicated to the support of public education, a General Revenue-related activity. In the 2008-09 biennium, General Revenue-related motor fuels tax collections were $1.6 billion, a small 1.0 percent increase from the previous biennium reflecting a slowing economy and consumer responses to a sustained run up in fuel prices. Tax collections for 2010-11 are expected to rise to $1.7 billion, a 4.7 percent increase, as the economy recovers.

Cigarette, Cigar, and Tobacco Products Taxes. Cigarettes, which accounted for 94 percent of the tax revenue from all types of tobacco products sold in Texas in the 2008-09 biennium, were taxed at the rate of $0.41 per pack from 1990 through December 2006. Pursuant to HB 5, 79^th Legislature, 3rd Called Session (2006), the tax rate rose by an additional dollar to $1.41 per pack, effective January 1, 2007. That cigarette tax hike, a small tax hike on snuff, chewing tobacco and pipe tobacco imposed on Texas sales at the same time, and a substantial federal tax increase on all tobacco products effective on April 1, 2009, pushed tobacco retail prices higher and will result in lower taxable consumption of those products and, in turn, their associated tax revenues.

HB 2154, 81^st Legislature, Regular Session (2009) changed the taxation method, effective September 1, 2009, for tobacco products other than cigarettes and cigars (i.e., snuff, chewing tobacco, pipe tobacco, etc.) from a tax on the manufacturer's list price of those products to a tax on their weight. The bill's provisions will result in additional revenue of $105 million in 2010-11, from which allocations will be made to the Physician Education Loan Repayment Program Account and the General Revenue Fund.

In 2008-09, cigarette and other tobacco product tax revenues to all funds totaled $3,004 million, an increase of 59.8 percent from 2006-07 that resulted from the state's cigarette and other tobacco products tax rate increases in 2007. For 2010-11, revenues are expected to decrease slightly, by 1.5 percent to $2,958 million. Of this amount, $1.1 billion will be available for general purpose spending, $1.8 billion will be allocated to the Property Tax Relief Fund, and $22 million will be allocated to the Physician Education Loan Repayment Program Account.

Alcoholic Beverage Taxes. Over three-quarters of the revenue from the six alcoholic beverage taxes are generated by the mixed beverage tax, which is levied at 14 percent of gross receipts. Over the past two biennia, total alcoholic beverage General Revenue-related tax revenues posted double digit gains, 15.0 percent in the 2006-07 biennium and 11.9 percent in 2008-09, in which revenues were almost $1.6 billion. In 2010-11, tax revenues will grow by 7.7 percent, as the economy rebounds from the economic recession, reaching $1.7 billion.

Utility Taxes. Combined utility tax General Revenue-related revenues in the 2008-09 biennium were $1,023 million, an increase of 3.6 percent from 2006-07 but substantially below the earlier biennium's 34.0 percent growth. Total revenues are expected to rise by only 2.2 percent in 2010-11, to $1,045 million, reflecting the slow economic recovery and lower energy production costs.

Hotel Occupancy Tax. Following a robust 29.5 percent increase in the 2006-07 biennium, hotel occupancy tax revenues grew at a more modest 10.2 percent in 2008-09, reaching $715 million. As the national economy declined in the last biennium and into the current one, tourism and business travel activity have significantly slowed. Hotel occupancy tax revenue is expected to grow by 1.4 percent to $725 million in 2010-11, as compared to 2008-09.

Other Taxes. The state's remaining taxes include the currently dormant inheritance tax and taxes on such disparate subjects as cement, sulphur, coin-operated machines, oil-well services, attorneys, and bingo rental receipts. Other tax collections are expected to generate $107 million in the 2010-11 biennium, a decline of 30.9 percent from the $155 million collected in 2008-09 due primarily to the impact of significantly reduced Texas drilling activity on collections from the oil well service tax.

Non-Tax Revenue

In addition to the $67.5 billion in tax revenue estimated for the 2010-11 biennium, the state's General Revenue-related funds are expected to receive $8.8 billion in non-tax revenue. This represents a 15.0 percent decline from the $10.3 billion in non-tax receipts in 2008-09. Non-tax revenue comes from the total return distribution from the Permanent School Fund to the Available School Fund, state lottery proceeds, fees, and other sources.

Interest and Investment Income. For the 2010-11 biennium, General Revenue-related interest and investment income is expected to decline 85.5 percent from 2008-09 collections, from $1,607 million to $233 million. The $22 billion Permanent School Fund (PSF) historically produces most of the investment income accruing to General Revenue-related funds, but a change in the PSF distribution method and turmoil in the financial markets has resulted in dramatically lower projected distributions for the 2010-11 biennium.

In September 2003, voters approved an amendment to the Texas Constitution to change the way funds are transferred from the PSF for use in providing aid to school districts. Under the old system, only earnings from interest and dividend proceeds were transferred. With the change a disbursement system known as "total return" was put in place. Put briefly, the PSF disbursements under the new system are calculated by applying a percentage distribution rate times the average market value of the PSF for the previous 16 state fiscal quarters. The percentage distribution rate is adopted biennially by the State Board of Education.

To help insure the integrity of the PSF corpus, the 2003 amendment included a provision governing the size and timing of the disbursements. In previous biennia that provision never came into play because the value of the corpus consistently increased. Because of that provision, the performance of the PSF portfolio since fiscal 2008, and recognizing the uncertainty still surrounding the financial markets, this estimate assumes there will not be a PSF distribution to the Available School Fund (ASF) in fiscal 2011 due to overall fund performance not meeting the provisions of Article VII, Subsection 5(a)(2) of the Texas Constitution. However, State Board of Education determined that the fund performance test was met for fiscal 2010, and voted on November 20, 2009, to allow a partial distribution of $60.7 million to the ASF. The State Board of Education will meet in November 2010 and at that time may consider a PSF distribution for fiscal 2011, subject to fund performance.

Lottery Proceeds. With an expected small decline in per-capita lottery sales counterbalanced by growth in the population eligible to play these games, lottery transfers to the Permanent School Fund and other General Revenue-related accounts are projected to total $2,002 million in the 2010-11 biennium, an increase of 0.9 percent from the transfer of $1,984 million in 2008-09.

Remaining Revenues. In addition to the two revenue sources discussed above, the non-tax revenue category includes licenses, fees, fines and penalties; the sales of goods and services; land income; contributions to employee benefits; settlements of claims (including tobacco settlement proceeds); unclaimed property; third-party payments from private vendors in the state-federal Medicaid program; and federal payments to the state for treating indigent patients, among other revenue sources.

Texas began receiving regularly scheduled court settlement payments from tobacco product manufacturers in fiscal 1999. In the 2010-11 biennium, General Revenue-related Texas tobacco settlement receipts are expected to total $1,012 million, a 2.8 percent decline from the $1,042 million received in 2008-09. Future tobacco settlement payments likely will be negatively affected by the cigarette tax increases imposed recently by the federal government, Texas, and other states (and their local governments). The resulting higher consumer prices are likely to accelerate the national decline in cigarette consumption, reducing the sales volume of the settling cigarette manufacturers and thereby causing lower settlement payments to states.

With respect to federal payments, General Revenue-related revenues from the Disproportionate Share Program, which helps pay for indigent care at state and local hospitals and the closely related Upper Payment Limit Program, which pays eligible health care providers at the generally higher Medicare rates–rather than Medicaid rates–for each procedure, are expected to total $595 million in 2010-11. State vendor drug rebates from major pharmaceutical manufacturers participating in Medicaid's vendor drug program will reach $709 million in 2010-11.

Revenue to All Funds

Revenue collections to all funds will total $180.3 billion in the 2010-11 biennium. Of this amount, General Revenue-related receipts will total $76.2 billion, and dedicated federal income will account for $67.3 billion.

Most of the federal funds or income will be used for health and human services, highway construction and maintenance, and public education programs. Of special note in this biennium is the American Recovery and Reinvestment Act (ARRA) of 2009–generally known as the federal stimulus program–through which the federal government is awarding funds to the state government as well as directly to local governments and other entities in the form of grants, loans, and contracts. The 81^st Legislature (2009) appropriated $14.4 billion from the ARRA funds for fiscal 2009, 2010, and 2011 in anticipation of known allocations available to the state government; and created (in HB 4583) the American Recovery and Reinvestment Act Fund 0369 to receive all ARRA funds reaching the state treasury in order to accurately account for activities from this funding source. In fiscal 2009, the state treasury received $2.7 billion of ARRA funds and made expenditures of $2.5 billion. The remaining ARRA revenue anticipated to be received during the 2010-11 biennium is presented in Table A-5. Total ARRA funds received by all entities in Texas will not be known for several years until all funds are awarded due to many Texas institutions, businesses and state entities still competing for grants, loans, and contracts.

A second large source of all funds revenue is the State Highway Fund's share of motor fuels tax revenue, which is constitutionally dedicated to highway construction and maintenance and public transportation.

Total revenue to "all funds" does not equal appropriations to all funds because the total estimated revenues do not include the fiscal 2009 ending balance in the General Revenue Fund, which provided part of the $182.2 billion all funds appropriation for the 2010-11 biennium.

In addition, total estimated revenues do not include certain local funds that are appropriated but not deposited into the State Treasury, but they do include certain revenues that are deposited in the State Treasury but are not appropriated, such as royalties deposited to the Permanent School Fund.