Mr. Smarty Plants is very happy that you are thinking about the potential effects of your choice of mulch material on insect residents of your garden. Butterflies are beautiful and many other insects serve as pollinators in your garden. However, I am a little dubious that the larva you found in your mulch is a butterfly caterpillar. Butterflies lay their eggs on the host plants that their caterpillars will eat. The caterpillars are pretty much "eating machines" and munch away, growing until they have reached the size to pupate and form their chrysalis. They don't really spend time in mulch unless they accidentally fall to the ground or have eaten up their host plant and are searching for another. I suspect what you found in your mulch is the larva for a species of beetle. Many beetle larvae overwinter in the soil. Here are a few common species of mostly orange butterflies that you would find in Bexar County from the check list on the Butterflies and Moths of America webpage. You can see their larvae on each species page:
Now, for the matter of using recycled tire mulch, there are several reasons NOT to use it for mulch in your garden.
Aggie Horticulture has a very good article, Mulches for Enhanced, Low-cost, Low-maintenance Landscapes, that you might find helpful and you can also read an another excellent article, Mulches, from University of Missouri Extension. You might also want to read RUBBER MULCH–Beware from Nature's Way Resources.