Perry’s Fiscal Flim-Flam

How the governor has spun disastrous economic policies into winning politics.



On March 12, 2009, Gov. Rick Perry smiled for the TV cameras at an upscale luxury hardware store in one of Houston’s tonier districts. He was there, reporters in tow, to reject $555 million in federal stimulus money for Texas’ unemployed. “The strings attached to these federal funds could very well strangle an economy that leads the nation in exports and Fortune 500 company headquarters, and I might add is doing far better than the vast majority of other states,” Perry told the cameras.

What he didn’t mention was that 47,100 Texans lost their jobs that same month, according to the U.S. Bureau of Labor Statistics– the biggest loss in the nation after California and Florida. Texas wasn’t escaping the blows of the worst recession since the Great Depression; instead, working families were being buffeted by job losses, stagnant wages and rising premiums for health care and insurance.

Four months after Perry touted Texas’ economic health and turned down the unemployment funds, the Texas Workforce Commission would be forced to borrow $2.1 billion from the feds and nearly double taxes on employers to replenish the state’s empty unemployment fund. “Because of a political calculation, he needed to not accept something so he could bash it,” says Rep. Jim Dunnam, a Democrat from Waco, of the $555 million. “At this point, Texas has borrowed $2.1 billion for the UI fund, and businesses will have to make up for it by increasing their taxes.”

To hear Perry as he stumps for reelection, things sound positively rosy for Texas families and businesses. As he touts his small-government “Texas model” on Fox News and at campaign stops, the governor flashes the same fetching grin and rah-rah enthusiasm that made him an Aggie yell leader. Nobody can cheer harder or louder for Texas, while jeering at his foes in the federal government in the same breath.

Over nine years as governor, Perry has honed his ability to spin reality—nowhere more so than when he touts the Texas economy. He loves to lambaste the federal government for its irresponsible spending while lauding his own budget prowess and “fiscal conservatism.” “The calls to ‘take the money now and deal with the consequences later’ are deeply troubling and, quite frankly, irresponsible,” he warned at the hardware store. “Texas leaders are obligated to address the current economic situation, while looking to the future and remembering the lessons of the past.”

But the economic “lessons of the past” haven’t caught up to Perry yet. More than $14 billion in federal stimulus money—which Perry is quick to denounce—saved the governor from possible political death by stanching Texas’ hemorrhaging budget, at least until the election cycle is over.

“They are going to postpone the whole mess as long as they can,” says Eva de Luna Castro, a senior budget analyst with the nonprofit Center for Public Policy Priorities. “I think the sentiment is that after redistricting is over some of them may not be around anymore,” says de Luna of the current Republican leadership. “There might be a lot more Democrats in office by then. Better to hand off a crisis to the new people and let them take the heat.”

It’s been a pattern throughout his governorship: politics dictates policy, and damn the consequences. What kind of economic “model” has Perry really built in Texas? In these pages we take a look at some of those “lessons of the past”—and at the consequences looming for Texas, whether or not Perry still governs the state in 2011.

“We do not think that we can justify to taxpayers providing a subsidized health insurance benefit for families that may be driving expensive cars like Lexuses and Escalades”

–Perry spokesperson Eric Bearse on chip

A family of four must earn $44,100 or less to qualify for CHIP.


Zero Solutions

When the Legislature kicked off in January 2003, with Republicans controlling the Capitol for the first time in 130 years, state leaders faced a $10 billion shortfall and an economic recession. Gov. Perry presented a budget filled with zeros. The idea was to “start from scratch,” according to Republican Talmadge Heflin, then the House Appropriations chair.

The Democrats were incensed at Perry’s zero-based budget. The former dean of the Texas House of Representatives, Paul Moreno, an El Paso Democrat, channeled the anger of many Democratic legislators in a 2003 op-ed in the Houston Chronicle: “To be sure the zero-based budget is an effective way for the Republican leadership to grandstand … it was a brilliant stroke of artifice and an appealing sleight of hand. Unfortunately, it was all symbol and zero substance: a zero-based budget based on zero solutions.”

Perry’s budget was catnip for conservative ideologues. Grover Norquist, the nation’s leading right-wing champion for limited government, touched down in Austin to make sure Perry and other Republicans held the line on reducing state services through budget cuts and privatization schemes. Texas, both Norquist and Perry clearly sensed, could become a national model for government-shrinking.

By the end of the legislative session, Texas had become the nation’s biggest privatization experiment. The state awarded Accenture, a Bermuda-based firm, an $899 million contract to run its eligibility system for Medicaid, food stamps, the Children’s Health Insurance Program, long-term care and Temporary Aid for Needy Families. More than 2,500 state employees were replaced by privately run call centers. The state’s 12 social service agencies were consolidated into five agencies, and the eligibility system was dismantled. At least 215,000 Texas kids were cut from CHIP.

After Accenture took over in 2005, another 127,000 children were dropped from CHIP and Medicaid roles.

University tuition was also deregulated. State employees and teachers shouldered $790 million in new co-pays, premiums and other out-of-pocket costs. As advocates warned of further cuts hurting Texas families, Perry and his political consultant Dave Carney met with Norquist and wealthy Republican donors John Nau and James Leininger on a yacht in the Bahamas. Afterward, Perry told the Dallas Morning News he was “having a progressive discussion about school finance.”

“The governor is a very serious scuba diver,” Norquist quipped later to the Austin American- Statesman. “I managed not to drown.”

Two years later, after the state spent $214.6 million on the Accenture contract, their privatization plan would be quashed. Commissioner of Health and Human Services Albert Hawkins (see story, p. 3) announced he was stopping the experiment. The privatized eligibility system was plagued by computer glitches and long waits for services, not to mention embarrassing gaffes. In 2006, hundreds of applications with Social Security numbers and other sensitive information were mistakenly faxed to a Seattle warehouse. The state’s eligibility system still hasn’t recovered. But Gov. Perry’s new economic model was humming right along, winning approving nods from small-government ideologues like Norquist.

“The governor certainly believes that privatization is an appropriate cost-saving approach.”

— Perry spokesperson Kathy Walt

Accenture contract cancelled in 2007. Texas spent $30 million on problems with Accenture contract plus $10 million hiring back state employees. Accenture and its subcontractors were paid $214.6 million.


Tax-Swap Fiasco

Under court order to fix Texas’ inequitable school finance system, Perry and the Republican leadership blew through two regular sessions and three special sessions without a solution. Their problem: How to raise money for public schools without calling it a tax?

Perry turned to a Democrat: his old friend and sometime political foe, former Comptroller John Sharp. The legend is that the two patched things up at an Austin skeet shoot. Together, they created the Perry-Sharp business tax.

The idea was to lower property tax rates, making up the difference with a hodgepodge of taxes including a business income tax, a tax increase on cigarettes and closing a tax loophole on used-car sales.

Perry lauded his plan during a March 29, 2006, press conference, saying it would provide a $15.7 billion property tax cut: “If Texans want a fairer and broader business tax without loopholes, a stable source of revenue for our children’s education, and substantial property tax relief, then we’ve got a plan that works for them.”

The timing couldn’t have been better. Caught in a contentious re-election race, Perry could campaign on property tax cuts while also seemingly solving the school funding problem. The tax bill wouldn’t come due until long after election day.

The “fairer and broader business tax” had more loopholes than a rollercoaster. Many businesses avoided paying the tax altogether. And in the end, taxes increased for everyone except the wealthiest 20 percent of Texans, according to the CPPP.

Perry knew the numbers didn’t match up, says Rep. Dunnam.

“I think Perry will say and do anything to get re-elected. I’ve never seen anything more to his personal philosophy beyond getting re-elected,” he says.

The tax swap didn’t solve the school funding crisis. A majority of the revenue is now generated by the $1 dollar cigarette tax. Those aligned with Norquist, like Perry, don’t mind expanding consumption taxes, nor do they mind filling in the budget gaps by slashing social services. Or, as Norquist is fond of saying, “reducing it to the size where I can drag it into the bathroom and drown it in the bathtub.”

State Rep. Jim Keffer, a Republican from Eastland, was forthright about the leadership’s intentions to starve state government. Former chair of the House Ways and Means Committee, Keffer persuaded fellow lawmakers on the House floor to vote for the swap with the pledge that “Grover Norquist is in favor of HB 3.”

Last month, the LBB warned lawmakers that there will be at least an $11 billion shortfall in 2011—thanks to the 2006 property-tax cuts. Dunnam, and other legislators, predict the shortfall will be much worse.

“We are hearing anywhere from $15 to $20 billion,” he says. “You think 2003 was bad. You ain’t seen nothing yet.”

“Legislators should avoid digging a multi-billion dollar budgetary hole by passing a temporary tax cut that would surely lead to a permanent tax hike next year.”

–Perry Press Release 2006

“We expected that of the $7.1 billion a year in property tax relief that the state paid for, that the revenue increases would cover about 60 percent of that. … As it turned out … the new revenue covers about 36 percent.”

– John O’Brien, director of the Legislative Budget Board, about the Perry-Sharp tax swap

How do you raise $ without calling it a tax? Quick Fix lower property taxes

pay for it by raising taxes on: used car sales

BIG PROBLEM $2.5 Billion annual revenue generated by tax swaP scheme $4.6 Billion annual shortfall Taxes Increased for EVERYONE EXCEPT FOR THE wealthiest 20% of texans

“When Washington came calling with money… he told them, ‘Thanks, but no thanks. We’re doing just fine without you.’ ”

—sarah palin at Feb. 7 Perry rally in Cypress

$14 Billion federal stimulus money
used to balance state
budget for 2010-11


Saved by the Stimulus

Rick Perry is a master of political timing. Touring the state with his NASCAR, Perry portrays himself as a regular, taxpaying Joe Six-Pack instead of a career government employee living in a $9,000 a month taxpayer-subsidized mansion.

As he continues to criticize the federal stimulus money, Perry spins a world where he’s singlehandedly saved the Texas economy. By the time the Comptroller delivers her revenue estimate next January telling a different story written in red ink, voters will have already made their decision.

“We’ve got a governor whose message is, I don’t need help from Washington, D.C., to balance our budget because I can balance it on my own. It couldn’t be more false,” Rep. Dunnam says. “It was balanced because of the stimulus.”

In fact, Texas used $14 billion of federal stimulus money to balance its budget for 2010-2011. Despite Perry’s newly minted disdain for Washington, D.C. and its $787 billion stimulus package, Texas used more stimulus money than any other state in the nation to fill its budget gap.

Despite the stimulus saving Texas’s hide, Perry has built his 2010 campaign around thumbing his nose at select stimulus programs. In addition to unemployment compensation, Perry also nixed Texas’ bid for $700 million in Race to the Top educational funds. In January, he sent a much-publicized letter to Secretary of Education Arne Duncan stating that Texas would not submit its application “In the interest of preserving our state sovereignty over matters concerning education and shielding local schools from unwarranted federal intrusion into local district decision-making.”

One of Perry’s main arguments against Race to the Top was the potential loss of curriculum standards created by the State Board of Education—which recently recommended cutting Thomas Jefferson from social studies textbooks because of his defense of the separation of church and state. Perry defended the controversial SBOE as he made a show of rejecting the education funding at a January press conference: “Through Race to the Top funding, the U.S. Department of Education seems to be coercing states like Texas to suddenly abandon their own locally established curriculum standards in favor of adopting national standards spearheaded by organizations in Washington, D.C.”

Texas also lost a bid for high-speed rail money because of a lack of leadership. While other states such as Florida worked diligently on putting together a transportation proposal for high-speed rail projects, the cash-strapped Texas Department of Transportation had no unified approach and no encouragement from the governor. In February, U.S transportation Secretary R
y Lahood, a former Republican congres
man, faulted a failure of Texas leadership in securing $1.8 billion in funding. “If Texas had had its act together, it would have gotten some high-speed rail money,” he told reporters after the stimulus awards were announced to 31 other states. Instead, Texas received $4 million to rehab existing Amtrak service.

The Texas Department of Transportation is in no budgetary shape to lose federal funding. In an April 2009 TXDOT letter addressed to Sen. John Carona, chairman of the Committee on Transportation and Homeland Security, the agency warned legislators that it will be broke by the first quarter of 2012.

“…our current unemployment system provides sufficient benefits to help unemployed Texans as they pursue employment.”

—July 24, 2009 Perry press release

Unemployment benefits only cover 1 in 5 of Texans who are out of work.
$9 Billion
Rainy Day
$11-$20 Billion


The Bill Comes Due

Next January, legislators will have more than TXDOT shortfalls to worry about. The federal stimulus money that kept Texas’ public schools and universities in operation for the past two years will have run dry by the fall of 2011. School districts will announce further teacher layoffs and steep education cuts. Legislators will be faced with anywhere from an $11 to $20 billion shortfall—and an estimated $9 billion Rainy Day Fund.

If previous sessions are any predictor, legislators and Perry will be looking for an easy way out. Perry has already asked state agencies to cut their budgets by 5 percent. The agencies will submit their cuts sometime this summer. “The leadership has already started suppressing the recognized need for money,” says de Luna Castro. “There are no public hearings, so no one will ever know how much funding was really needed.”

And while Perry brags on his achievements, the numbers tell another story: Texas is first in the number of uninsured children in the nation, No. 1 in air pollution emissions and No. 2 in the nation in incarceration rates, while state spending per pupil ranks 44th.

Thanks in large part to its governor’s politically motivated policy-making, Texas is in a mess of budget trouble. But as the old political adage goes, “if you’re explaining, you’re losing.” The red ink won’t be spilled till long after election day has come and gone.

On the campaign trail, Perry continues to conjure a folksy world where hardworking families always win and the American Dream is just within grasp. All the talk about budget cuts and shortfalls is just hating on Texas. His philosophy seems to be: “Why don’t you let us get on down the road?” as he once famously told a DPS trooper after his driver was pulled over for speeding. The state’s longest-serving governor doesn’t have time for explaining. He has campaigns to win.

“Texas is on the right path toward improved education, and we would be foolish and irresponsible to place our children’s future in the hands of unelected bureaucrats and special interest groups thousands of miles away in Washington, virtually eliminating parents’ participation in their children’s education.”

—Jan. 13, 2010, Perry press release

“Texas is not globally competitive. The state faces a downward spiral in both quality of life and economic competitiveness if it fails to educate more of its growing population (both young and adults) to higher levels of attainment, knowledge and skills. The rate at which educational capital is currently being developed is woefully inadequate.”

—Report by Gov. Perry’s Select Commission on Higher Education and Global Competitiveness, January 2009



#1 uninsured children
#1 air pollution emissions
#2 incarceration rates
#44 state spending per pupil