The Office of Program Research estimated earlier this month that the operating budget shortfall is about $1.5 billion in 2025–27 and $4.3 billion over four years.

Gov. Ferguson has proposed a supplemental operating budget that leaves a positive ending balance of $140 million in funds subject to the outlook (NGFO) at the end of 2025–27. It does not balance over four years, and it is not clear what the estimated ending balance is in 2027–29 because the Office of Financial Management did not include an outlook in the budget documents.

The proposal would appropriate $79.017 billion from the NGFO for 2025–27, an increase of $1.159 billion (1.5%) over enacted 2025–27 appropriations. The change is comprised of a maintenance level increase of $1.244 billion and a policy level decrease of $85 million.

The proposal would make several changes to existing resources. First, it would transfer a net of $123 million from other funds to the general fund–state (GFS), including $75 million from the public works assistance account.

Second, under current law, the first $500 million of capital gains tax revenues are deposited in the education legacy trust account (ELTA) and any additional revenues in a year are deposited in the common school construction fund. This is meant to be a way to manage the volatility of capital gains revenues, so that extraordinary revenues are used for one-time construction projects rather than ongoing expenditures. Gov. Ferguson proposes depositing the first $575 million a year in capital gains revenues in the ELTA during 2025–27. Consequently, the NGFO (of which the ELTA is a part) would have an extra $150 million in revenues this biennium.

Although the proposal doesn’t rely on general tax increases, it would increase business and occupation taxes for prescription drug resellers (increasing revenues by $26.5 million) and increase sales taxes for data center refurbishments (increasing revenues by $63.0 million). The proposal would increase revenues by another $55.6 million by “clarifying that only entities that actually pay the [insurance] premiums tax may claim the related B&O exemption.”

Additionally, the proposal would transfer $880 million from the budget stabilization account (BSA) to the GFS for general use and appropriate $139.2 million from the BSA for fire suppression. (The $139.2 million appropriation would occur in the budget bill, and, because employment growth is estimated to be less than 1% this year, the appropriation could be enacted by a simple majority of the Legislature.)

The BSA ending balance in 2025–27 would be $1.026 billion. Combined with the unrestricted NGFO ending balance, total reserves would be just 3% of revenues. (The state treasurer recommends that reserves equal 10% of revenues.)

Under the four-year balanced budget statute, the requirement is waived in a biennium in which money is appropriated from the BSA via the low employment growth provision. The four-year balanced budget requirement is an important budget sustainability tool that forces the state to consider long-term fiscal impacts and helps to avoid bow wave spending. Further, as Lt. Gov. Heck argued earlier this month, ignoring the four-year requirement doesn’t solve the budget problem, it just defers the pain. Suspending the four-year requirement would not only defer the already-known 2027–29 problem, it would also allow the Legislature to create new bow waves.

Moreover, using the BSA for general spending would mean that we might not have enough in reserves to bridge revenue gaps in case of a recession. And the credit rating agencies have all said that using reserves to address ongoing budget problems could lead to downgrades.

Our current shortfall is not the result of falling revenues; it is the result of spending choices. The state spent substantially more in 2023–25 than it collected in revenues, and that pattern continued in 2025–27 (even as the Legislature adopted a historically large tax package). The only way to really deal with the problem is to reset spending to the revenue level and continue to balance the budget over four years.