Legislative Budget Board – August 5, 2014

Below is the HillCo client report from the August 5 Legislative Budget Board (LBB) meeting. 

The Legislative Budget Board (LBB) met to receive a report and testimony from the Comptroller of Public Accounts regarding the financial condition of this state.

John Helleman, Chief Revenue Estimator, Office of the Comptroller
Helleman’s Presentation to LBB
Additional Presentation on Net Revenue by Source

• Texas’ economy is continuing down same path of growth and expansion since the recession
• The state economy is growing faster than the nation as a whole
• Unemployment rate is down to 5.1%
• Sen. Craig Estes asked what unemployment rate is considered full employment
  • The number is a moving target; average is about 6% but the number has been going down over time
• Estes noted an economist could say Texas is at full employment at 5.1%
• In general, Texas always grows faster than the nation but the current rate is higher than has been seen in the past
• If Texas were a nation, it would have the 12^th largest economy in the world, slightly behind Canada and slightly ahead of Australia
• The US housing market is struggling to recover from the downturn but the Texas housing market is doing better
  • Single family homes up 9.2% from past 12 months
  • Multi-family homes up 18.5%
• There is currently about 3.8 months of housing stock on the market in Texas; Austin is just around 2 months; this causes increased housing prices
• Sen. Jane Nelson asked if increased property values will result in more Ch. 41 school districts
  • Not sure but more of the permanent school fund will be funded by locals because of this trend
• The price of oil has settled down recently; in the past 3-3.5 years the price has moved between $95-105; it has been relatively stable for a while now
• The current situation in Texas is focused largely on crude oil
  • Only 74 rigs are drilling for natural gas and around 824 are drilling for crude
• In the last 7 years, oil production has more than doubled in Texas; 2/3 coming from Eagle Ford area
• Employment should increase by 3.2% this fiscal year and again by 3% in 2015
• Personal income is continuing to grow in the state
• Real gross product should increase by 3.5% in 2014 and again by 3% in 2015
• Rep. Drew Darby asked about inflation
  • Over the last decade, inflation has been quite low historically; averaging between 1.5-2%; this trend should continue
• The rate of growth, although quite good, should moderate from rates seen in 2010-2011
• Have seen sales tax growth respond very similarly to other figures discussed
• As the state began to recover from the recession, sales tax growth was extremely high; as expected, growth rates have moderated
  • Last year the growth rate was around 7%; this year it is closer to 5%
• Rep. John Otto asked if interest rates start climbing, if it would have an adverse impact on the growth of the sales tax
  • It would slow down some; the building of brand new homes is nowhere back to the peak from ten years ago; that is the main driver of sales tax growth as far as home sales go
• Otto asked about the future impact of oil and gas pipeline construction
  • Sales tax from the mining sector is around $150 million; is leveling off at an extremely high level
• Nelson asked about the franchise tax; last year there was a bill that reduced the tax by 2.5% temporarily; would that be possible again for 2015
  • Yes
• Sales tax is the largest tax by a big margin; growing at slightly over 5% currently; same growth rate as Texas personal income
• Motor vehicle sales tax has been particularly robust; in 2009 the tax had a 22% decline in one year; an unprecedented decline; have seen several years where people are restocking
• Franchise tax appears to be on estimate for this year: about $4.7 billion; has become much more settled over the past few years
• The oil production and natural gas taxes are outperforming; prices have remained firm which is a factor contributing to this performance; expect this rate of growth to start slowing down; have yet to see shale technology applied widely in Permian Basin but the geology is conducive to this technology
• Lt. Gov. David Dewhurst asked about population growth, expected to grow at 1.7%; is it anticipated to continue increasing
  • Yes; have seen that rate for many years now; only saw a significant uptick after Hurricane Katrina
• Dewhurst asked about $7.8 billion in tax collections for May, what caused that; it was higher than other months
  • Franchise tax collections
• Rep. Sylvester Turner asked what impact these projections will have on the rainy day fund
  • Expect it to get a little more money than in December ‘13 certification; $8.4 billion expected at the end of FY 15, including impact of taking $1.7 billion to state highway fund if approved by voters 

Mike Morrissey, Office of the Governor

• Otto noted there was a conference call with select committee studying border efforts; what ideas have been developed to pay for the border surge; is the intent to put money back in dedicated funds that are being used, if so, when will information be distributed regarding funding
  • Since that call there have been several discussions; there was a timing problem for getting budget execution done; one idea is using money that is anticipated to lapse, have to work on mechanics for budget execution using a lapse; if that can’t be done in time other possibilities will be used; should be able to pay back the radio infrastructure fund with budget execution
• Darby asked what other possibilities include; want to ensure the money is put back into that important fund
  • Trying to identify $200-400 million which is likely to lapse in accounts; do not have a specific list, some will be GR
• Darby asked about the Governor’s disaster relief fund, why wasn’t it used
  • The largest question about that account at the time was where we are in relation to hurricane season; willing to use some of that money as part of a budget execution proposal
• Darby asked if any other accounts come to mind
  • There are additional criminal justice funds within the Governor’s office
• Rep. John Zerwas asked about conversations involving use of the radio infrastructure fund; how was that determination made to use that fund
  • It was a question of timing, had to find funds that were available in a timely manner; also it was a question of what the emergency powers allowed; allowed for certain funds to be used if an emergency is determined to exist; funds are more appropriate to be used if they are more closely tied to the issue being addressed

Martin Huber, Deputy Comptroller, Office of the Comptroller

• Received a letter from the Governor proclaiming an emergency
• After receipt of that letter the office had two days to certify receipt of the letter and identify funds available for use in that emergency where there was remaining budget authority
• The comptroller identified budget authority limited to DPS, TPWD and some in SOS funds
• Comptroller then received  follow-up letter noting that those agencies reported that those funds were not available for use in the emergency
• Then the Governor identified the radio infrastructure fund as having available capacity; the appropriation was made for $38 million, $5 million of which is expected to be received into the fund by the end of the year

Mike Morrissey returned

• Zerwas asked about the sense of urgency and why the disaster relief fund wasn’t considered
  • There was a need to get a certain amount of funding secured; the disaster money wasn’t used first because of the potential that it would be needed for other uses such as fires, hurricanes, other situations like the West explosion; the disaster fund is used in conjunction with the legislature and not seen as a personal fund for the Governor
• Turner asked about Rider 6 and how “emergency” is defined in these situations
  • The Governor sets forth a set of facts that he believes constitute an emergency
    • apprehension of illegal immigrants represented a significant increase from the past
    • many illegal immigrants in the past have been criminals
• Turner noted the numbers of immigrants being used were from 2008-present; this emergency could have started back in 2009 and could continue through the future; if that rationale is what warrants the emergency power it is a concern; what made this situation so unique that down the road any governor couldn’t consider anything an emergency
  • This situation has been in place at some level for several years; the Governor has been seeking federal assistance for some time; the rise in unaccompanied minors diverted the border patrol from their traditional duties into taking care of the minors
• Turner noted there should be a heightened level of emergency when the legislative process is bypassed to fund emergency measures; should be clearly defined; do not want to set a bad precedent; when was the last time Rider 6 was utilized this way
  • The rider in some form predates Governor Perry’s term; has been modified to account for the disaster relief fund as well; possibly the first time it has been used in this manner
• Turner asked if this method of bypassing the LBB has been used before
  • Unsure
• Turner asked if this emergency continues and funds only cover a few months of National Guard service, will the legislative process be used to continue this funding; do not want to tap funds and create dire circumstances in other areas particularly DPS; LBB can meet quite quickly to address these situations
  • Will be happy to work with the LBB on an overall funding package through the fall; that is the plan going forward
• Sen. Juan Hinojosa asked when the National Guard effort will run out of money
  • A few months
• Hinojosa asked about the cost per month for the border surge
  • $12 million per month
• Hinojosa asked about reimbursing local governments for their expenses
  • Those conversations are underway
• Hinojosa agreed that disaster relief funding should be saved for possible hurricanes
• Dewhurst believes there is a need for doing what is being done and that is why a meeting was held before the Governor announced the emergency to discuss the situation; border patrol believes 25% of immigrants coming into Texas have criminal records; on top of that, there are a multitude of unaccompanied minors; this represents a serious problem; expect to need an LBB meeting in early October to fund the efforts when the initial funds are depleted; what needs to be done
  • Everyone involved should be trying to identify possible lapsing funds in the next few weeks for use in those efforts; need to determine what that amount will bring; after that an Art.9 rider may need to be used with carry-forward authority
• Turner noted it will be important to have some degree of management to determine when we are no longer in a state of emergency and the efforts are no longer needed; some sort of metrics are needed to make that determination
  • Happy to talk about those metrics and what they might be
• Nelson noted Senate Finance will meet next week and will be addressing these issues; would like to have answers to some of these questions