Last week, LSR identified and explained the first five of the current Legislature’s top 10 issues for 2009.

Here come the final five.

The Legislature appropriated unprecedented amounts of money for property tax relief in 2006 and 2007. Yet a June 2008 Lone Star Foundation study shows that much of the relief never reached its intended recipients. Local government adjusted rates in 2007 to compensate for the 50-cent reduction in school maintenance and operation tax. That, combined with appraisal increases, ate up almost all the relief the Legislature intended. Instead of tax relief, what Texans saw was more government spending.

The question looming over this session is, will the Legislature do anything meaningful about this problem? Requiring voter approval when local government wants to raise taxes more than inflation and population growth (as was proposed in HB 2006 in 2005) would likely solve this problem.

But local government gets to use tax dollars to hire lobbyists, making meaningful relief a challenge.

Both houses did have interim committees study the property tax system. Both proposed several changes to the appraisal process and the method by which property values are arrived at and appealed. These reports will likely get some attention in the upcoming session.

Also, lawmakers filed bills to increase the homestead exemption for school property taxes, either to $30,000 or $45,000.

Making such a change requires a constitutional amendment. These bills do not provide any tax relief to business, nor do they address city and county tax increases.

Conventional wisdom around the Capitol is that this will be a tight budget session. A major campaign theme for 2010, however, is that this budget session is not nearly as tight as what other states are dealing with (e.g., California, with its $42 billion deficit). Fewer than 10 states have surpluses. Texas is one of them.

But the term "surplus" is a bit deceptive. First, the anticipated revenue is roughly flat, due to the economy. Second, the quirks of the federal Medicaid formulas are such that, as a result of improvements in the per-capita average income of Texans compared with the national average, the formulas will require Texas lawmakers to appropriate more money to receive the same federally-mandated bundle of services.

Also, enrollment growth in the public schools has to be funded, the State Board of Education would like to order new phonics-based reading books, and the temporary formulas enacted in 2006 have now created some additional equity issues within the school finance budget.

The state also has to pay for damage caused by Hurricane Ike.

The base budget exceeds the Comptroller’s available estimate of revenue. But the Economic Stabilization Fund (the "Rainy Day Fund") has a record balance due to high oil and gas prices, a portion of the taxes on which are dedicated to the fund. A key budget issue for the upcoming session will be how deeply to dip into the fund.

Additionally, the state may receive some money from the federal stimulus package. Whether or not to accept it, and for what purpose, is rapidly emerging as a key budget issue.

Bottom line: Texas is doing better than most other states (especially California), so it should be able to balance its budget without a tax increase. However, the state is going to have to be careful and prudent with its funds. The budget may not be quite as tight as 2003’s, but it also doesn’t have much extra cash to spend, either.

The Texas Department of Insurance is undergoing Sunset review this session, bringing insurance issues front-and-center this session.

The biggest insurance issue, by far, is how to fix the financing of the state-run Texas Windstorm Insurance Association. When TWIA runs out of money (as it did due to Hurricane Ike), it assesses every homeowners insurance carrier in Texas, reimbursing them over five years through tax credits. This both creates a hole in the state budget and serves as a disincentive for new carriers to come to Texas, because it basically exposes someone who writes in Dallas, for example, to losses occurring due to coastal hurricanes.

The most common proposals to shore up TWIA financing involve some form of bonds, issued when needed. The fight occurs over how to pay the debt service on those bonds. Should all the risk of coastal hurricanes be borne by coastal property owners or should some be borne statewide? Obviously, legislators from the coast have a very different opinion on this issue than their inland colleagues.

Also, the TWIA rates are regulated by the state, and insurers argue these rates are below cost and make it very difficult for private insurers to offer windstorm coverage. TWIA rates will also likely emerge as an issue.

The other big property and casualty fight will occur over file-and-use versus prior approval. The crux of the issue is whether legislators trust markets to come up with an appropriate rate for homeowners insurance, or whether they believe the government should have a role in setting rates. This issue showed up in several campaigns in 2008, so it’s quite politically charged.

Health care providers and insurance companies are fighting, as usual, and efforts to regulate doctor billing practices or insurance company profits will likely be debated.

The marquee issue for education is likely to be the structure of the Texas accountability system. This question was carefully studied through the Interim. Any reform adopted will likely reduce the impact of the state’s standardized test, the Texas Assessment of Knowledge and Skills (TAKS), on accountability ratings. The idea of using a moving average of more-than-one year’s scores was recommended by the interim committees. Expect disagreement between the business community – which wants higher standards — and the education lobby – which seeks lower standards but doesn’t like the press to portray its mission that way.

The target revenue system will get a careful look in 2009. In 2006, the state put temporary school funding formulas in place to ensure no school district lost money as a result of the 2006 school finance legislation. These temporary formulas, however, are creating equity problems in the school finance system, because they are based on a one-year snapshot. Therefore, to avoid a successful school finance lawsuit, the Legislature needs to examine the school finance formulas. The extent of the rewrite remains to be seen.

Another big fight will surround textbook funding. Much of the State Board of Education’s activity the past three years has revolved around improving the English-Language Arts standards to have them based more on phonics and more explicit, with the standards getting more difficult at each grade level, instead of being vague and repeating standards at grade levels. Now the board wants the Legislature to pay for new books based on new standards. The problem is — thanks to the 2003 "total return" amendment to the Texas Constitution — the Permanent School Fund balance is low. That amendment both drained the corpus of the fund and placed a restriction on spending when the fund balance is low. As a result, the Legislature may not rely on the usual source of finance for textbooks, income from the Permanent School Fund.

The Legislature will likely rewrite state law on eminent domain, when the government forces a landowner to sell private land.

There is widespread agreement among lawmakers that there need to be more restrictions on the use of eminent domain.

Gov. Rick Perry has proposed a constitutional amendment banning the use of eminent domain for economic development. The issue moved onto center stage as a result of the 2005 Kelo v. New London decision of the U.S. Supreme Court, where the court upheld the use of eminent domain for economic development purposes but said that states can ban its use for that purpose.

"Government shouldn’t use eminent domain to take someone’s land without trying to buy it from them first," Perry said at a recent press conference. "It is wrong for any government to make a lowball offer, then respond to an owner’s righteous refusal by taking the land. The government owes land owners a genuine good-faith negotiation, not a land grab."

Right after Kelo, the Legislature passed SB 7, which wrote into statute a ban on using eminent domain for economic development.

Perry supports HB 4 and SB 533, by Rep. Rob Orr (R-Burleson) and Sen. Robert Duncan (R-Lubbock)

The Texas Farm Bureau said the bill does not go far enough, because it misses "diminished access protection" – meant to make sure land owners are compensated fully for property taken prior to devaluation from having access to the property reduced or totally blocked.

Sen. Craig Estes (R-Wichita Falls) filed SB 18, which contains diminished access protections.

Two years ago, the Legislature passed HB 2006, a comprehensive reform bill for eminent domain. Perry vetoed it over the eminent domain provisions.

Advocates of privatized toll roads, including officials at the Texas Department of Transportation, have expressed concerns about the cost to taxpayers of diminished access protections.

Some reforms to eminent domain -- including much of HB 2006 -- have widespread support, such as requiring condemning units to make good-faith offers and clarifying the language in SB 7 preventing takings for puroses of economic development. But the diminshed access language could be a major fight in the 2009 session. O