This is a rush transcript from "Your World With Neil Cavuto," October 8, 2009. This copy may not be in its final form and may be updated.

NEIL CAVUTO, HOST: All right, a battle as big as Texas, because it involves Texas. The race for governor is really heating up there, and we are right in the middle of it.

Remember when Governor Rick Perry was here bragging about this right here on "Your World"?


GOV. RICK PERRY (R), TEXAS: The state of the Texas, which is one of the few in the country that has got a budget surplus — we have got $9 billion in our rainy day fund.


CAVUTO: All right, did you hear that, $9 billion in a rainy day fund?

Well, the woman running against him sure caught it — she is here — says that he is taking credit for something he had nothing to do with.

Republican senator Kay Bailey Hutchison joining me right now.

Senator, does the $9 billion not exist? What? What — what are you saying?


Well, it does exist, of course, and it was put in place years ago. And it is very important that we have a rainy day fund. But the reason we do is because of the stimulus money that was used to balance the budget, $12 billion. In fact, Texas was the biggest user for balancing the budget of the stimulus funds. So, you know, I — I think that we just want to make sure that people know we are going to be going into the next legislative session with a $12 billion deficit that is going to be, of course, a — a challenge to make it up.

But I want to do it by cutting spending.

CAVUTO: Well, why — why do you think it will be — regardless of where he got it, whether it`s stimulus funds or not, why do you think it will be a $12 billion deficit if the money is there? You`re saying the money is not there?

HUTCHISON: Well, I am saying that we have to make up what was spent with stimulus money, because all of those same expenses are going to be on ongoing into the next...

CAVUTO: I see.

HUTCHISON: ... into the next biennium. All of the economic experts in Texas are saying that we have a structural $12 billion deficit for the next biennium.

CAVUTO: Senator — and I have touched on this in prior interviews with Governor Perry — you are two superstars in Texas, two Republican superstars. And you`re like Godzilla and Rodan going at each other. You - - you`re leaving a safe Senate seat to do this. Why? Do you fear that Republicans could implode?

HUTCHISON: I am so concerned, because, during the last 10 years, our Republican Party has started losing elections on a regular basis. We lost five of the six largest counties in Texas just last year, McCain and Cornyn. And that is not good for the business environment going into the future.

Secondly, we have gone from 88 Texas House members that are Republicans to 76. We`re two away from losing the Texas House. Even the Democratic state party chairman is saying that they`re going to take over the Texas House, especially if Rick Perry is the nominee.

So, I`m very worried about the impact to the whole country if the Texas Republican Party does not get its act together and start producing the Ronald Reagan big tent, welcoming people in, so that we win elections.

CAVUTO: No, I can see where you`re coming from, Senator. And I know you poll very well. And there are other polls that show Governor Perry polling well.

But are you afraid, whoever wins the nomination, it gets so bloody that the Democrat just walks right in?

HUTCHISON: Well, I am hoping very much, Neil, that it does not do that. I do not want a nasty campaign.

I want to talk about why I am running, what the differences are, the importance of rebuilding the Republican Party, putting Texas on sound footing financially, which we really are not, and then addressing the issues, like education and transportation.

I think it is — there are many things that are not being done to prepare Texas for the next 25 years. We are the best state in America. We are a pro-business state that doesn`t have a state income tax. We have right-to-work laws, good tort reform laws. All of those things do attract people.

But we have to have an educated work force to keep attracting business, and, right now, we have the highest dropout rate in America. So, I want to address those issues that I think have been languishing for the last 10 years. CAVUTO: Senator, very good having you. We will watch it closely.

HUTCHISON: Thank you.

CAVUTO: Senator Kay Bailey Hutchison.

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