LEGISLATIVE BUDGET BOARD Austin, Texas FISCAL NOTE, 77th Regular Session April 11, 2001 TO: Honorable Paul Sadler, Chair, House Committee on Teacher Health Insurance, Select FROM: John Keel, Director, Legislative Budget Board IN RE: HB3343 by Sadler (Relating to the creation, operation, and funding of a statewide group benefits program for employees and retirees of school districts.), As Introduced ************************************************************************** * Estimated Two-year Net Impact to General Revenue Related Funds for * * HB3343, As Introduced: positive impact of $618,757,000 through * * the biennium ending August 31, 2003. * * * * The bill would make no appropriation but could provide the legal * * basis for an appropriation of funds to implement the provisions of * * the bill. * ************************************************************************** This fiscal analysis assumes full participation by all the school districts. At lower participation rates, the assumptions for health care costs, tax rates, and other variables could vary significantly. General Revenue-Related Funds, Five-Year Impact: **************************************************** * Fiscal Year Probable Net Positive/(Negative) * * Impact to General Revenue Related * * Funds * * 2002 $42,757,000 * * 2003 576,000,000 * * 2004 576,000,000 * * 2005 576,000,000 * * 2006 576,000,000 * **************************************************** All Funds, Five-Year Impact: *********************************************************************** *Fiscal Probable Probable Probable Probable Change in * * Year Savings/ Revenue Savings/ Revenue Number of * * (Cost) from Gain/(Loss) (Cost) from Gain/(Loss) State * * Texas from Texas Foundation from Employees * * School School School Fund General from FY 2001 * * Employees Employees 0193 Revenue * * Uniform Uniform Fund -Texas * * Group Group Parks & * * Benefits Benefits Wildlife * * Trust Fund Trust Fund Department * * 0001 * * 2002 $2,562,755, $0 $851,000 100.0 * * $(52,000, 000 * * 000) * * 2003 3,442,363, 576,000,000 0 100.0 * * (2,206,150, 000 * * 935) * * 2004 3,591,071, 576,000,000 0 100.0 * * (2,833,491, 000 * * 497) * * 2005 3,748,510, 576,000,000 0 100.0 * * (3,226,886, 000 * * 637) * * 2006 3,915,670, 576,000,000 0 100.0 * * (3,620,342, 000 * * 513) * *********************************************************************** *************************************************************************** *Fiscal Probable Probable Probable Probable * * Year Revenue Revenue Savings/(Cost) Revenue * * Gain/(Loss) Gain/(Loss) from Other Gain/(Loss) * * from Available from State Funds from School * * School Fund Highway Fund 0997 Districts * * 0002 0006 * * 2002 $41,906,000 $129,150,000 $(23,000,000) $0 * * 2003 0 3,777,000 0 604,000,000 * * 2004 0 2,192,000 0 604,000,000 * * 2005 0 1,617,000 0 604,000,000 * * 2006 0 1,152,000 0 604,000,000 * *************************************************************************** Fiscal Analysis The bill establishes a statewide group insurance program for employees and retirees of independent school districts, charter schools, and regional service centers. The program would be administered by the Teacher Retirement System (TRS) and would provide the same level of benefits as the Uniform Group Insurance Program provides state employees. The state would be required to contribute a per employee/retiree amount equal to the amount the state contributes for state employees. Currently, state policy is to pay for 100% of the cost of employee-only and retiree-only coverage. The state would not be required to pay for dependent coverage. Participation by the school districts in the program would be mandatory. The bill increases the tax rate for several state taxes. The sales and use tax is increased from 6.25% to 7.25%. The hotel tax is increased from 6% to 7%. The franchise tax is increased from 4.5 % of net taxable earned surplus to 5.5%. The taxes on gasoline and diesel fuel would be increased from 20 cents to 25 cents per gallon, while the tax on liquefied gas would increase from 15 cents to 20 cents per gallon. Additionally, the annual tax assessed on operators of vehicles propelled by liquefied gas would be increased by one-third. The revenue increases from the higher tax rates would be deposited into the newly created Texas School Employees Uniform Group Benefits Trust Fund, which would then be used by TRS to pay claims and administrative expenses for the program. The bill amends the Education Code to allow, with local district or county voter approval, a new ad valorem tax to be levied for district or county participation in the new Texas school employees group health program. The tax rate would not count towards the current $1.50 maintenance and operations tax rate cap. The General Appropriations Act would have to specify, for each year, the effective tax rate that school districts could levy to participate in the new insurance program. Each year, the Comptroller would certify to each school district the tax required and the amount of ad valorem revenue necessary to participate in the program. The provision that would allocate motor fuels tax revenues for group benefits takes effect January 1, 2002, but only if the constitutional amendment proposed by the 77th Legislature, Regular Session, 2001, dedicating increases in the rate of a motor fuel tax to fund group benefits for employees of school districts were to take effect. If the proposed constitutional amendment were not approved, the dedication would not take effect. Methodology Program Costs For fiscal year 2002, TRS estimates that start-up costs would total $75,000,000. Based on a similar program in another state, TRS estimates that it would need approximately 100 full-time equivalent employees to administer this statewide program. Part of the cost could be funded with the remaining balances from the $10 annual fee collected from active employees in 1993-1996, estimated to be $23,000,000. Total cost for fiscal year 2002 is in addition to the $181,035,657 currently in the General Appropriations Act, as introduced, for TRS-Care, the existing program for retirees. TRS estimates that the cost of providing UGIP-comparable coverage to employees and retirees will total $2.474 billion in fiscal year 2003. Approximately 712,000 employees and retirees would be covered, at an annual per member cost of $3,473. By fiscal year 2006, the per member cost is projected to increase to $4,613, based on projected increases in health care costs ranging from 6-8% for medical claims, and 13-20% for prescription drug claims. Program participation is projected to increase to 784,870 by fiscal year 2006. TRS estimates that the number of active employees will increase by 3% annually, and the number of retirees will increase by 4.4% annually. Total cost of coverage for fiscal year 2006 is estimated to be $3.620 billion. For fiscal year 2003, the projected cost of $2.474 billion is partially offset by the $268 million currently in the General Appropriations Act, as introduced, for TRS-Care since that program would cease operation in fiscal year 2003 under the provisions of this bill. Revenues The estimate of revenue effects is based upon analyses done by the Comptroller's Office. The fiscal implications of raising the state sales and use tax rate to 7.25 percent were estimated using current state sales and use tax revenue projections from the 2002-2003 Biennial Revenue Estimate. The incremental increase was adjusted for behavioral responses, effective date, and projected through 2006. There would be no impact on units of local government. Note: Article 8, Section 7-a of the Texas Constitution dedicates sales taxes collected on the sale of motor lubricants to the State Highway Fund 0006. This analysis assumes that the dedication would continue and that these revenues would not go to the trust fund. The increase in sales tax revenues would range from $1,724.8 million in fiscal year 2002 to $2,636.1 million in fiscal year 2006. Under current law, the state hotel occupancy tax rate is 6.0 percent, and revenue collected from the tax is deposited to the credit of the General Revenue Fund 0001. Estimated 2002-2003 revenue from hotel occupancy tax forms the basis for the incremental gain in revenue resulting from the tax rate increase. The gross estimates were adjusted for effective date and projected through 2006. The increase in hotel occupancy tax revenues would range from $44.4 million in fiscal year 2002 to $66.6 million in fiscal year 2006. The franchise tax estimate is based on the amount of tax collected on taxable earned surplus at the existing tax rate and adjusted to reflect the incremental increase in the tax rate. The difference between the original tax amount and the increased amount would be credited to the trust fund. The estimate assumes that the franchise tax collected on net taxable capital is unaffected and is credited to the general revenue fund. Although the effective date of the franchise tax provision is either July 1 or September 1, 2001, the fiscal impact is assumed to begin in fiscal year 2002. The increase in franchise tax revenues would range from $339.7 million in fiscal year 2002 to $429.1 million in fiscal year 2006. The current tax rate for gasoline and diesel fuel is $0.20 per gallon. This bill would raise the tax rate to $0.25. The current tax rate for liquefied gas is $0.15 per gallon. This bill would raise the rate to $0.20. Estimates of increased tax revenues were obtained by adjusting the Comptroller's 2002-2003 Biennial Revenue Estimate to reflect the increased tax rate. The resulting incremental gains for 2002 and 2003 were adjusted for changes in consumer behavior due to increased prices and effective date. Note: This estimate assumes that a constitutional amendment dedicating the revenue from increases in the rate of a motor fuel tax to fund group benefits for employees of school districts would be passed by the voters. If the amendment did not pass, there is some ambiguity concerning the final disposition of the motor fuel taxes subject to tax between September 1, 2001 and November 6, 2001. The increase in fuel tax revenues would range from $625.5 million in fiscal year 2002 to $795.12 million in fiscal year 2006. The preceding fiscal impacts from increases in the sales tax, hotel occupancy tax, franchise tax, and motor fuels taxes reflect the static effect of the tax increases. Overall impact shown in the table above reflects the estimated dynamic tax feedback effects and will not match the cumulative totals of the individual items. If it is assumed that all school districts participate and contribute to the school district employee insurance program required under this bill, at a tax rate of 6.7 cents the School Employees Primary Health Coverage Fund would receive an estimated $604 million beginning in fiscal year 2003. This revenue offsets the amount the state would otherwise contribute. For the tax rate established by the General Appropriations Act to be one that would adequately fund the proposed insurance program for school district employees, it would have to be based on projections tied to the targeted state contribution for future group insurance program costs, as well as projected district property values and district participation in the proposed program. However, a key determining factor for identifying the tax rate and related local funding, the state contribution for future insurance premiums, is not identified in the bill. The bill would reduce a school district's tax rate by an amount equal to the portion of the tax rate associated with the district's group insurance expenditures in the final year of the preceding biennium for the first school year the proposed group insurance program is in effect. This would result in savings to Tier 2 state aid, but these savings will depend on the extent to which school districts participate in the new program. Based on an 18 percent total group insurance expenditure growth assumption (three percent employee growth and 15 percent insurance cost per employee growth), the state would experience an annual savings, associated with Tier 2 state aid, beginning in fiscal year 2003 of $576 million if all school districts participate and contribute to the proposed insurance program. Local Government Impact Implementation of a health insurance program to be funded under the provisions of this bill would have cost implications for local school districts. School districts will be required to use existing resources or levy additional taxes to fund the program. In 1999-2000, school districts contributed more than $900 million to employee health insurance benefits. To the extent that a district is already contributing to a health insurance program, there may be little or no additional cost, or even a savings. For the districts who are not paying as much for health insurance the additional taxes levied will represent an additional burden. School districts, in some cases, may experience tax rate increases or decreases as a result of their participation in the health insurance program. Because the bill does not define the tax rate needed to participate, no specific revenue projection for the local tax can be made. Revenues would also vary by the degree to which districts choose to participate. Source Agencies: 701 Texas Education Agency, 304 Comptroller of Public Accounts LBB Staff: JK, CT, SC, SM, RN