Introduction
Across the country, states’ revenue growth has been leveling off since 2021, when an influx of federal stimulus funds, increased consumer spending, and a strong labor market boosted revenues (NCSL). Still, most states, including Texas, remain on solid financial ground. This session, the Legislature will draft a state budget from the $194.6 billion available for general-purpose spending, which includes a surplus of nearly $24 billion.
Although growth has slowed slightly, Texas still has ample resources to make targeted, efficient investments in public education, health care, and essential services.
Read on to learn more about the House’s Introduced State Budget (HB 1), its largest budget drivers, and other high-profile issues under consideration.
Available Revenue and Budget Limits — What the Legislature can spend
The 89th Texas Legislature has $194.6 billion available for general-purpose spending, which can be used for almost any purpose in the budget. General-purpose spending includes estimated GR revenue for the 2026-27 biennium plus $23.8 billion of carryover balance from the previous biennium, commonly referred to as a “surplus.”
Although there is $194.6 billion available to spend, Texas has budget caps that limit spending. There are two constitutional limits and one statutory cap that restrict appropriations. The Legislature can only spend up to what the lowest cap dictates: as of now, that is the Tax Spending Limit. Under this limit, the House can only spend up to $4.8 billion more in GR than the amount expended in the introduced House budget. This would cap total GR spending at $158.8 billion. However, non-tax revenue or tax revenue that is constitutionally appropriated are not subject to the limits. The limit may increase as GR funds are expended in the Supplemental Budget (which allows for last-minute expenditures for the previous fiscal year). Any spending over the limit requires a simple majority vote to “bust the cap.”
Economic Stabilization Fund (ESF) Set to Reach Constitutional Limit
The projected ending cash balance in the Estimated Economic Stabilization Fund (ESF), also known as the Rainy Day Fund, is $28.5 billion.
Rainy day funds are useful tools for ensuring that the many services the state provides to its most vulnerable residents can continue during economic downturns. However, even the architects of the original ESF never expected it to grow as large as it has. Unless additional appropriations are made from the Economic Stabilization Fund (ESF), it will reach its constitutional cap in fiscal year 2026. Any funds that would have been transferred to the ESF will instead remain available for general-purpose spending and be subject to spending limits.
Highest Budget Drivers in HB 1
HB 1 includes $335.7 billion in All Funds for the 2026-2027 biennium. This is around 16.3% more than was appropriated in the 2024-25 General Appropriation Act, but only 0.8% more than what was actually spent during the biennium.
General Revenue (GR) funds under HB 1 total $154 billion. GR funds are the most flexible funds available to Legislators. The largest drivers of the General Revenue budget are Education (Article III), Health and Human Services (Article II), and Public Safety and Criminal Justice (Article V). These three articles make up nearly 90% of the proposed GR appropriations. The following sections of this report provide a high-level view of the highest-funded agencies within these articles, which make up the vast majority of state funding.
Article II — Health and Human Services
Article II spending, primarily driven by Medicaid and the Children’s Health Insurance Program (CHIP), plays a crucial role in safeguarding the health and well-being of Texans. State funding for healthcare is essential to addressing issues like the high uninsured population, the reduction in coverage due to Medicaid unwinding, maternal mortality and morbidity, and ongoing challenges in the healthcare workforce. Article II also funds Texas’ child protective services and foster care system, which, despite being a priority in recent sessions, has faced longstanding challenges.
The House All Funds recommendation for Article II is $102.9 billion, an increase of $1.3 billion from the 2024-25 budget, largely to manage the rise in caseload growth. Federal Funds make up the largest portion of funding. GR funds and GR-D Funds total $45 billion, an increase of $0.9 billion from 2024-25.
Health and Human Services Commission
The HHSC is the primary state agency that administers Medicaid and Children’s Health Insurance Program (CHIP) services. Under HB 1, HHSC receives the largest appropriation within Article II at $93.8 billion in All Funds for the 2026-27 biennium. GR Funds total $38.7 billion.
Medicaid
Funding recommendations total $80.6 billion for Medicaid in All Funds, including $31.9 billion in GR Funds and $0.1 million in GR-Dedicated Funds for the Texas Medicaid Program. Included in these amounts is $74.2 billion in All Funds for Medicaid Client Services. This is an increase from the 2024-25 biennium for Medicaid funding due to a $4.1 billion increase in All Funds for Medicaid client services to stabilize caseload growth while compensating for the decrease in federal reimbursements from poor federal medical assistance percentages. Furthermore, 642 temporary full-time-equivalent (FTE) positions have been allocated to continue managing the Medicaid unwinding resulting from COVID-19 continuous coverage ending during 2023.
Since the state is unwilling to expand Medicaid to cover more Texans, there are alternative options that can help address the uninsured crisis. LSG will explore these in a future report.
Personal Care Attendant Wage Increase
Additionally, the appropriated amounts to increase Medicaid client capacity services include approximately $436.2 million in GR Funds to raise the base wage of personal care attendants to $12 per hour and to increase funds related to the associated payroll costs.
Women’s Health Programs
The 2024 report from the Texas Maternal Mortality and Morbidity Review Committee revealed an alarming 80% of pregnancy-related deaths are preventable, with higher rates reported among Black, Hispanic, and non-White women. In light of these findings, Texas cannot afford to ignore the need for systemic improvements in Women’s Health Programs.
Approximately $439.1 million has been recommended for Women’s Health Programs, including Healthy Texas Women, the Family Planning Program, and Breast and Cervical Cancer Services. This is an increase of approximately $20.4 million from the 2024-25 biennium. Approximately 76% of these funds are from GR Funds, and the agency has requested additional funding to provide better birth outcomes and maintain client access to these programs. Separately, an increase of $10 million dollars in GR Funds has been allocated to expand the Women’s Preventative Mobile Health Unit Services as well.
Mental Health Services
Mental and behavioral health services recommendations total $8.5 billion in All Funds for the 2025-26 biennium. This is a decrease of $2.3 billion from the 2024-25 biennium, primarily due to decreases related to one-time construction projects at state mental health hospitals. The amount is partially offset by an increase of $165.9 million in GR Funds for 2,595.4 FTE positions at state mental health hospitals. Separately, HB 1 includes an intent to provide $58.8 million in GR Funds for youth mobile crisis outreach teams with the ultimate goal of improving mental health outcomes.
Foster Care
The Department of Family and Protective Services (DFPS) is the key state agency that manages client services for foster care youth. Funding recommendations include $973.3 million in All Funds for foster care payments and expanding the Community-Based Care (CBC) model across Texas. The CBC model was first authorized in 2004 by the Texas Legislature with the intent to shift from state-administered services to Single Source Continuum Contractors (SSCCs) to deliver foster care services regionally with a community-centered approach. The CBC initiative has been launched in seven regions, with plans to expand statewide, and it currently supports approximately half of the youth in foster care.
*HB 1 and SB 1 are nearly identical in recommended appropriations for Article II.
Article III — Education
Instead of making meaningful investments in our public school system, HB 1 continues to underfund schools while prioritizing property tax cuts and private voucher programs over the needs of Texas students and teachers. Schools across the state have faced budget deficits, program cuts, campus consolidations, and closures, largely due to the state’s failure to increase school funding. A 2024 survey by the Texas Association of School Business Officials (TASBO), which gathered responses from 313 school districts representing half of the state’s students, found that nearly 80% of respondents are grappling with deficit budgets or insufficient resources.
Public Schools Underfunded by at least $20 Billion
Article III is the largest driver of the state budget, with the majority of funds going to the Texas Education Agency (TEA) for public education. HB 1 recommends $89.5 billion in All Funds for Public Education in the 2026–27 biennium. Although funding recommendations for the TEA indicate a $12.8 billion (16.8%) increase from 2024–25, much of this increase is allocated for property tax relief rather than directly funding schools. Additionally, this figure includes $1 billion slated for the Education Savings Account (ESA) proposal, which does not go toward public schools. General Revenue funding for Public Education is $43.5 billion.
Of the $12.2 billion increase to the TEA’s Foundation School Program (FSP) for formula funding to school districts, $6.5 billion is allocated for property tax relief, and only $4.9 billion is earmarked for actual public education funding increases, contingent on legislative action (Rider 79).
Meanwhile, the basic allotment (BA) —the per-student funding that serves as the foundation of school budgets—remains frozen at $6,160 per student in both the House and Senate proposals (Rider 3). Adjusted for inflation, the BA should be approximately $7,800 in FY 2026 and $7,980 in FY 2027—a gap that would require an estimated $25 billion to close (each $100 increase in the basic allotment costs about $740 million per year, per TEA).
Public education advocates are urging lawmakers to increase the basic allotment to help districts cover rising costs for essentials like supplies, transportation, and textbooks.
A Note on Earmarked Funds from the Last Session
Following the 88th Legislative Session and subsequent Special Sessions, $4 billion earmarked for public education and $500 million designated for “school choice” went unspent due to the failure to pass corresponding legislation. Since these funds were contingent on action by the 88th Legislature, the earmarks have effectively expired.
No Specific Items for Teacher Pay
Even though teacher salaries lag behind the national average by more than $8,500, the House Introduced Budget does not include specific funds for teacher pay raises. A 2024 Charles Butt Poll found that although the median gross salary in 2023 has risen 9.3% since 2020, it pales in comparison to the 18.7% rise in consumer prices in Texas during the same period. The same poll found that 78% of Texas public school teachers have seriously considered leaving their position in the past year.
Rider 79 proposes $4.9 billion in additional funding for school districts, which could be used to increase teacher pay. However, its allocation depends on decisions made by the 89th Legislature and could be directed toward other purposes. Using the funds to increase the Basic Allotment would also support teacher pay, as 30% of any additional revenue to the BA must go toward teacher compensation. TEA’s Teacher Vacancy Task Force recommended this strategy in its final 2023 report.
Although Rider 56 increases funding for the Teacher Incentive Allotment (TIA), it does not provide an across-the-board teacher pay raise. By 2027, TIA funding is expected to reach fewer than 20% of Texas public school teachers, making it far from a comprehensive salary increase. Additionally, teacher unions largely oppose merit-based pay tied to STAAR scores. Instead, the Legislature should explore differentiated pay based on experience, advanced degrees, and certifications to better support educators.
Increased Funding for School Safety Allotment
The proposed House budget includes $400 million to increase the school safety allotment, contingent upon enacting legislation in the 89th Session, to assist school districts in implementing school safety initiatives (Rider 77).
The 88th Legislature’s HB 3 increased the school safety allotment from $9.72 per student ADA (average daily attendance) to $10 per student ADA and $15,000 per campus. Districts can use the allotment for “school hardening” measures, such as increased armed security, arming teachers and staff, surveillance cameras, metal detectors, and door-locking systems.
$1 Billion for Education Savings Accounts (ESA)
The House’s proposed Budget includes $1 billion for ESAs, contingent upon the actions of the 89th Legislature. This is an increase to the $500 million originally proposed for ESAs during the 88th Legislative Session.
Whether they are called vouchers, education savings accounts, or tax credit scholarships, voucher programs undermine our public school system, cost taxpayers more money with zero accountability or transparency, and deepen inequities. To add insult to injury, numerous credible studies have found that voucher programs do not improve student outcomes. The state is already $20 billion behind in education funding and cannot afford to divert funding from public schools.
Billions of Dollars for Property Tax Cuts
Following the post-pandemic state revenue growth, 48 states enacted some form of tax cuts (NCSL). In Texas, the state leveraged its $11 billion surplus in 2021 to increase the homestead exemption from $25,000 to $40,000. In the 88th Session, Texas allocated $13 billion of its $33 billion surplus to further property tax relief—raising the homestead exemption, accelerating tax compression, and capping appraisal increases for non-homestead properties at 20% for three years. These measures were approved by 83% of voters under Proposition 4. This session, Governor Abbott and Lt. Governor Patrick have once again prioritized additional property tax cuts.
HB 1 allocates $51 billion for cumulative property tax relief, with $47.5 billion dedicated to maintaining the cuts mandated by HB 3 86(R), including increased tax compression (Rider 76). The remaining $3.5 billion is designated for new property tax relief, contingent on actions taken by the 89th Legislature. The Senate Introduced Budget, SB 1, has less money for new property tax relief — $3 billion — with the stipulation that it be used to increase the homestead exemption from $100,000 to $140,000. Additionally, it sets aside $500 million in General Revenue for property tax relief for businesses.
As long as Texas remains a prime destination for businesses and job seekers, the state will continue to see population growth, driving up property taxes. Without the option of an income tax or a similarly significant revenue source, state leaders will be compelled to continuously allocate funds to offset rising property taxes with no clear endpoint. Rather than relying on this cycle, the state should explore alternative revenue streams to bolster school funding and increase state contributions, enabling Independent School Districts (ISDs) to reduce local property tax rates.
At the same time, there are more efficient and cost-effective ways for the state to provide relief to homeowners facing steep increases in property taxes. A report by Every Texan highlights several of these strategies, with the key takeaway being that tax cuts should be targeted, rather than applied universally.
Article V — Public Safety and Criminal Justice
In April 2024, Texas 2036 reported that Texas prison facilities housed 132,955 inmates. The state has a moral and legal obligation to ensure the safety and well-being of both incarcerated individuals and the frontline workers responsible for managing inmates and parolees. Our budget priorities should reflect this responsibility.
HB 1 recommended appropriations for Article V total approximately $19.9 billion in All Funds, an increase of 2.1% from 2024 to 2025. GR funds for Article V amount to $19.4 billion, a 44.6% increase from 2024-25, mostly due to the loss of the American Rescue Plan Act (ARPA) funds that the state used in place of GR, as well as salary increases across multiple agencies.
The largest portion of Article V GR funding is intended for the Texas Department of Criminal Justice (TDCJ), which incarcerates offenders in state jails, prisons, and private corrections facilities, provides funding and oversight of community supervision, and supervises offenders on parole. Recommended appropriations for TDCJ total $9.4 billion.
Pay Raises for Correctional Officers
Despite being a priority in recent sessions, TDCJ had the highest turnover of state employees in fiscal year 2024. HB 1 includes $3.6 billion GR funds for a 10% pay raise for correctional officers and overtime costs for correctional officers, supervisors, and wardens. TDCJ found that the correctional officer salary increase implemented in 2022 had the most significant impact on staffing levels compared to any other hiring initiative.
Funding for Health Care in Prisons
HB 1 includes $259 million to address the rising costs of Correctional Managed Health Care, which provides medical services to TDCJ prisoners. However, this amount is approximately $145.5 million less than TDCJ requested to ensure effective overall quality of health care, replace aging equipment, and add additional staffing positions.
Climate Control for Prisons
The majority of state prison facilities lack air conditioning. In 2023, summer temperature regularly exceeded 100°F, with an average high of 106°F. A 2022 study found an average of 14 deaths per year between 2001-2019 were associated with heat in Texas prisons without air conditioning. Extreme heat heightens the risk of violence, suicides, and deaths, challenging the TDCJ’s mission.
The House’s Supplemental Budget includes $515.8 million in major repairs and restoration projects which includes $118 million to install air conditioning in TDCJ facilities, which would add 16,000 air-conditioned beds to the system (Article IX, Sec. 17.15).
Body Cameras for Correctional Officers
The 88th Legislature appropriated funding to deploy-worn cameras to correctional staff working at 23 maximum security facilities throughout the state. The House’s Supplemental Budget includes an item to expand the program to all correctional facilities with $85.4 million to provide an estimated 18,000 body cameras for correctional staff statewide (Article IX, Sec.17.15).
*HB 1 and SB 1 are nearly identical in recommended appropriations for Article V.
Other Budget Items of Interest
$6.5 Billion for Border Security
Both the House and Senate proposed budgets allocate $6.5 billion for border security. At the same time, Governor Abbott is asking Congress to reimburse the state for $11 billion spent on border security over the past four years. At the time, Gov. Abbott justified the expenditures by saying the Biden administration was failing to secure the border. However, President Biden is no longer in office, and state leaders continue to fund border security at even higher levels than last biennium.
$5 Billion for the Texas Energy Fund
Texas Energy Fund (TEF) provides grants and loans to incentivize the construction, maintenance, modernization and operation of dispatchable electric generating facilities in Texas. HB 1 includes $5 billion in General Revenue for the TEF, which was already appropriated $5 billion in the 88th Session.
The LSG did not support the creation of the TEF during the 88th Session and does not support additional funding unless legislation or initiatives are introduced to address the fund’s lack of technological neutrality, its narrow focus on dispatchable energy resources, and its exclusion of energy efficiency initiatives.
$2.5 Billion for Water Infrastructure
Contingent upon legislation, HB 1 would deposit $2.5 billion of GR into the Texas Water Fund (TWF), which was established after Texas voters approved its creation in November 2023. The 88th Legislature appropriated $1 billion for the TWF to bolster existing water financing programs administered by the Texas Water Development Board (TWDB). SB 28 by Sen. Perry from the 88th Session required that 25% of the Texas Water Fund be allocated to the newly created New Water Supply for Texas Fund to explore new water sources, including aquifer storage and recovery, desalination, and produced water.
However, more investment is needed. The 2022 State Water Plan (SWP) estimates that implementing its over 2,400 water management strategy projects will require $80 billion over the next 50 years. Of that, $47 billion (or 59%) would be needed in the form of state financial assistance.
The Senate proposal also includes $2.5 billion for water infrastructure and supply, although it is not specific to the Texas Water Fund and is included in the Supplemental Budget, rather than the base bill.
The LSG will provide further analysis of the changes made throughout the House markup process and the conference committee stage.
Report by: Alexandria Flores, Sydney Medina, Samantha Ruelas