By Former State Rep. Ray Allen
Texas Insider Report: AUSTIN Texas Rep. John Otto was first elected to the Texas House of Representatives in 2004 and began his service in the regular session of 2005. I remember his entrance into the process a fact that wasnt always true for other freshman legislators (although I always made an effort to get acquainted with all incoming new members over the course of the seven terms I served.)
What stood out about John Otto in that first session is that he had a clear impact on important legislation in the highly technical writing and debate on revisions to the states franchise tax.
When I first took the oath of office in 1993 senior members explained to me that freshmen were generally best served by keeping a low profile listening to senior members and staying as far from the back microphone as possible.
In other words dont attempt to mess with the real levers of power until youve got some experience under your belt.
What made Rep. John Otto stand out as a freshman in the legislature was the fact that he arrived with a full tool-box of specific experience directly related to the top priority of state leadership.
A certified public accountant who logged five years audit experience with a Big Eight accounting firm then added 30 years of individual practice serving small businesses that make business decisions based in part on tax policy. Not surprisingly like most small business tax accountants John was decidedly conservative and he communicated complex ideas and formulas in the calm familiar terms of a long line of trusted east Texas good-old-boys.
He rapidly joined the ranks of House leaders amid the debate on revisions to the franchise tax and became the only freshman member in my memory to lead the discussion from the front microphone.
Now assuming his reelection next November Otto is warming up for his fourth legislative session and his plate is fully loaded with leadership charges. In addition to serving on the House Appropriations Committee and Chairing its subcommittee on General Government he is the
Vice Chair of the Ways 
and Means Committee and he chairs the
Select Committee on Fiscal Stability appointed by House Speaker Joe Straus.
The Speakers charge to the committee is to determine if Texas anticipated $15-18 Billion shortfall for the coming biennium is primarily the result of the current severe recession or the result of structural problems within the current taxing and spending patterns of the process itself.
To date the fifteen member select committee has held three hearings heard eight hours of invited testimony and the Chairman believes the picture is starting to come clear. Rep. Otto agreed to talk to me about some of the issues he thinks will be front and center in the 82nd legislatures budget debate.
The Interview
Q: Whats your 30 second summary of the causes of our coming budget shortfall?
A: The full answer cant be given in thirty seconds but its a combination of things. The revised business franchise tax (to date) has not collected the amount of revenue originally estimated. The states sales tax collections have fallen sharply compared to past years primarily as a result of the recession now impacting Texas. Texans are just not spending like they did when the economy was roaring.
But the testimony weve heard from numerous experts says one primary reason we are facing a severe shortfall is that we constructed our last two budgets escalating spending at a rate that matched our rapidly growing sales tax revenues and relying on $12 Billion in stimulus funding to close the gaps. The reality is that at the start of this budget cycle our economy had already started to cool. In short we grew our budget when times were good and didnt save enough for the bad economic times that always come later.
Q: How about more detail about our spending patterns when times were good? We balanced our budget as required by the constitution didnt we?
A: Yes the budget was balanced. But in our committee we have seen a pattern over the past few budget cycles that members and voters need to understand. Our sales tax revenues grew 9 and 12 year over year during the 2006 and 2007 time period. During this time period we had a robust housing market the oil and gas industry was good and Texans were borrowing against the equity in their homes. Each of those three events created the perfect storm for tremendous growth in sales tax revenues.
But if you measure average sales tax revenue growth in 20 year increments counting all the booms and busts our average growth in good times and bad is around 6. Our last two budgets used the revenues that were actually occurring but without taking into account there was no way we were going 
to sustain that revenue growth. What actually happened was a hard recession. Thats one of the primary reasons for our large shortfall next session.
When our economy was really booming we should have saved more than we did. We have to do a better job in the future of saving when times are good to meet the states needs when times are hard. We need to find a way to lessen the effect of the peaks and valleys in our primary source of state revenue.
If we dont learn this lesson now were bound to repeat it.
Q: But dont we have a rainy day fund for that exact reason and doesnt it have roughly $8 billion in savings?
A: Thats true but the rainy day fund has some structural problems that keep it from being the best match for our good times versus our hard times. First its based solely on oil and gas revenues and booms and busts in the petroleum business dont always match the general state economy.
I think we need a second rainy day fund that captures sales tax revenues when they exceed the average so they are available when we have declining or level sales tax revenue growth.
Q: What big challenges do you see ahead in regard to stabilizing future state budgets?
A: Im concerned about the rate of growth in spending for health and human services. If the current rate of growth continues the result will be a huge shift in state spending priorities. Today most of our budget spending is for public and higher education and health and human services are second.
But unless we can get some flexibility in how we manage Medicaid and other federal mandated programs its rate of growth will cause a shifting of the states priorities in spending in order to meet federal guidelines for health and human services.
Im telling my school superintendants that we have to get a handle on HHS spending or their percentage of the pie will decline.
Q: What kind of changes do you think are necessary to reduce the rate of growth of HHS spending?
A: We have to get the ability to institute cost sharing with those who are getting HHS benefits for two reasons. First zero costs to the consumer of Medicaid services drives over-utilization. If we had the ability to institute even small co-pays of $5 dollars for a doctor visit or a prescription it would reduce unnecessary visits and it would recover a small amount of our over-all expenditures.
It would act as a deterrent for fraudulent over utilization because the recipient of the service would have some skin in the game.
A second challenge we face is the sheer number of new people coming into the Medicaid system based upon the recently passed health care bill. Although the federal government funds some of the costs they fund only a portion of the costs and the cost share left for the state to pick up is becoming unmanageable.
If the current federal guidelines remain etched in stone there is no way we can continue to meet the states obligation to come up with the necessary funding.
Rep. Otto closed out our conversation his voice trailing off to silence …
"What are we going to do when the federal government cant continue borrowing enough money to sustain the growth of the system?"
Its a weighty question which lacks a satisfactory answer regardless of which side of the isle is your political home.
