On Tuesday, the Economic and Revenue Forecast Council (ERFC) met to adopt an official outlook based on Gov. Ferguson’s 2026 supplemental operating budget proposal. The outlook helps to illuminate the long-term impacts of his proposal, but the treatment of reversions prompted the Office of Financial Management (OFM) to claim that there could be a separation-of-powers problem at the ERFC. I disagree; instead, there is an accounting gimmick issue that needs to be addressed.

Gov. Ferguson’s budget would leave a shortfall of $1.880 billion in 2027–29

The official outlook estimates that Gov. Ferguson’s budget would leave an unrestricted ending balance in funds subject to the outlook (NGFO) of $98 million in 2025–27 and negative $1.880 billion in 2027–29. As I’ve written, the net policy level changes proposed by the governor would reduce appropriations by $85 million in 2025–27. According to the outlook, the cost of continuing the governor’s new policy proposals would increase appropriations by $289 million in 2027–29. Note that the $1.880 billion shortfall in 2027–29 does not include (per statute) an estimate of the cost of the collective bargaining agreements that will be negotiated with state employees for that biennium.

Because employment growth is expected to be less than 1% and the governor proposed an appropriation from the budget stabilization account, his proposal is not required to balance over four years. The governor’s public budget documents included only a balance sheet for 2025–27, not a full four-year outlook.

To his credit, according to the methodology memo prepared by the budget outlook workgroup, the governor’s proposal did not assume 4.5% in annual revenue growth in the second biennium. (The outlook statute allows the state to assume revenues will grow by 4.5% a year in the second biennium, even if revenue growth is officially forecasted to be slower than that. Assuming these phantom revenues was one of the reasons for the state’s ongoing budget shortfall.) The official outlook indicates that assuming the phantom revenues would have added $2.168 billion in resources; thus, the proposal could technically have balanced over four years.

For transparency’s sake, I am glad the governor chose not to assume 4.5% revenue growth in the second biennium. However, for the sake of budget sustainability, I wish he had shown the Legislature a way to address the budget problem this year and balance over four years. If the Legislature follows suit and doesn’t balance the budget over four years, it will just be deferring the pain until next year.

Reversion assumptions are an accounting gimmick

The purpose of the outlook process is to force legislators to consider and plan for the long-term fiscal impacts of their budget choices. The 4.5% revenue growth assumption and the recent practice of changing the reversion assumptions are ways to obscure the true budget picture.

Reversions are appropriations that are not ultimately spent. As I showed last week, reversions were not part of state balance sheets until 2012. Beginning in 2013, reversions were assumed at 0.5% of GFS appropriations. Then, in 2023, the Legislature decided to assume a higher percentage. The reversion assumption has shifted with each budget proposal since. A higher reversion assumption translates into a higher ending balance; consequently, changing the reversion assumption can mean the difference between balancing the budget or not.

The ERFC’s methodology meeting last week was surprisingly contentious on the subject of reversions. Gov. Ferguson’s proposal assumed that reversions will be 1% in each year. However, the ERFC would not agree to include that assumption in the official outlook. Instead, the official outlook assumes reversions of 1% in 2026 and 0.9% thereafter.

The meeting Tuesday was still more contentious on this point. The OFM director requested an alternative outlook that reflects the governor’s reversion proposal, saying, “I think that probably over the course of the interim there are some additional conversations warranted with the councilmembers and with workgroups over the way in which our methodology process works.” She also said, given the current composition of the ERFC (eight legislators, the director of OFM, the director of the Department of Revenue, and the state treasurer), “I do have concerns about a sort of separation-of-powers issue when I see the Council take votes that deviate substantially from the [governor’s] proposal.”

This seems a bit out of proportion to me, given the result. The alternative outlook using the governor’s proposed reversions estimates that the unrestricted NGFO ending balance would be $135 million in 2025–27 and negative $1.766 billion in 2027–29. It does not materially change anything.

A second alternative outlook, requested by Rep. Couture, assumes reversions of 1% in 2026 and 0.75% thereafter. (These were the assumptions for the enacted 2025–27 budget.) Given these reversions, the unrestricted NGFO ending balance would be $43 million in 2025–27 and negative $2.050 billion in 2027–29.

Meanwhile, if the governor’s proposal had used the pre-2023 assumption of 0.5% in each year, I estimate that the unrestricted NGFO ending balance would be negative $232 million in 2025–27 and negative $2.516 billion in 2027–29.

So, although the ERFC’s choice of reversion assumption (between 1% each year and 1%, then 0.9%) does not significantly change the balance of the governor’s proposal, using the pre-2023 standard assumption would mean that the governor’s proposal wouldn’t even balance in the current biennium.

Thus, the broader question—what should the reversion assumption be?—is meaningful, but I don’t think the composition of the ERFC has anything to do with it. The underlying issue is deviations from previous accounting norms.

All this fuss could easily be avoided by returning to the pre-2012 practice of not assuming any reversions. This is the most sustainable and transparent solution: Simply balance appropriations within resources. The reversion assumption and the 4.5% revenue assumption are both accounting gimmicks.

If the ERFC prefers to continue using these gimmicks, the ERFC could at least agree ahead of time on the reversion assumption for an outlook period and require every budget proposal during that period to stick to the agreement. (Again, a 0% assumption would be best!) Generally, accounting assumption uniformity would make budget proposals more transparent.