Opening Remarks from Chair Otto
Read portion of a letter from Speaker Straus to the committee
Handouts 

Discussion of Oil and Natural Gas Price Declines
Texas Comptroller Glenn Hegar (and staff – Tom Currah and Phillip Ashley)

  • Provides handouts to committee
  • Points to table 1 – hard to find an average as there was a high of 12% change on tax collections and low was -6.6% and severance taxes even had more of a variance 
  • Figure 1 and 2 show amounts collected over 20 years, and how volatile severance taxes are for collections
  • Project moderate growth in next fiscal year
  • Job loss in specific industries (oil and gas and manufacturing industry) but still overall job growth in the state of Texas
    • But those industries with job loss do have a drag effect on Texas economy
    • 1/3 of mining companies will go bankrupt in next quarter or two
  • Sister states (energy states) are facing serious budget shortfalls yet the Texas budget continues to work
  • In regards to Certification Revenue Estimate released compared to Biennial Revenue Estimate
    • About $2.7 billion out of revenues had to be used (due in part to tax policy changes but the bulk was due to lower severance tax and a portion of sales tax being lower)
    • $2.7 billion is GR
  • Otto – Going into next session, is there about $600 million in non-dedicated GR available for supplemental?
    • Yes
  • Would like to have several more months of data to be able to get a better understanding of how the downturn of the oil and gas industry will impact in Texas
  • Only 25% of the revenues above 1987 severance tax collection really impact general purpose spending due to bifurcating of funds to go towards Fund 6/transportation  
  • Texas still remains in well position to gain rates above national average – in near term most likely Texas will not outgrow or outpace the US economy but history shows once we return to normal growth rates we should
  • Policy decisions from last session that will impact next session decisions – Prop 1 and Prop 7 of last session, moving money into transportation, assuming we get back to more growth in sales tax into next biennium and hit $28 billion number needed to move $2.5 billion over, probably no growth in sales tax for legislature to move and may take until next session to realize  
  • Otto – may predict a growth in sales tax but it has already been dedicated and moved to transportation
    • Yes
  • Otto – amounts going into the Fund 6 will be more difficult to plan based on the volatility earlier discussed
    • Yes it is difficult to determine – no one can predict severance taxes
  • Howard – Is Texas economy diversified? What % of oil and gas is funding state budget?
    • 13.9% gross state product in manufacturing and 13.5% in financing and 13.4% is oil and gas industry and in job growth have been losing in those industries but gaining in other sectors (ie health care sector)
  • Howard – other areas have been impacted, restaurants, etc in certain regions? When do we see prop 7 fund?
    • Yes in specific areas
    • In 2017 projection is that we will hit $28 billion in state sales tax collection and first $2.5billion above that will be moved over per prop 7. This will be occurring in 2018.
  • Howard – the transportation props did remove funding that would be available to appropriate in the future
    • Agree, was just giving committee a reminder
  • If look at tax estimates, as of today, they are tracking along with the certification estimate so really nothing new to give than what was given in October
    • But need several months of data to confirm the numbers continue to track along
  • When look at budgetary downturns – one of last areas they cut in their agency is the tax area, but as far as businesses that are delinquent they look for business that are coming back for refunds
  • Gonzales – in regards to data and data transparency – what is focus
    • Have a new program called transparency stars where they are asking for greater disclosure publicly, it is important and state needs to be leading the charge as well
  • Davis – asked about two lawsuits that could impact available revenue?
    • School finance expect a ruling later this year
    • CPS issues
    • Tax cases: Southwest Royalties and potential liability $500 million a year moving forward and refunds could be over $4 billion (exemption of sales tax on mining equipment). Other major tax case is the AMC case – estimated over a $4 billion impact in franchise tax ($1.5 billion a year) and it could also impact sales tax but have not extrapolated that out yet.   
  • Otto – is it possible in definition of personal tangible property could it mean that Texas might bring in more funds depending on result of the lawsuit.
    • Yes lawsuit could go either way
  • Giddings – enquires  about Texas loss of Jobs
    • Loss of jobs in this March and March of last year but have had gain in jobs in between and unemployment is still below national average and have been so over 110 months in a row (lost jobs in manufacturing and mining) but still have gained some jobs in other industries
  • Miles – is there an estimate on school finance lawsuit?
    • No, did not give an estimate since it depends on what supreme court rules on
  • Not every job is equal and does not have same impact to the economy
  • Giddings – in terms of hourly people – what is avg. wage or median wage?
    • Have access to numbers but can go to workforce commission to get those numbers
  • Sheffield – over next 9 mos what headlines would you hate to see the most that would anticipate hurting the economy the most?
    • Texas economy is tied to national and international market, constantly looking at other sectors – recessions are hard to predict. Political issue in Brazil, Chinese market and instability in Middle East can always impact. If prices are able to move up that would be good but if prices stay where they are at, or go down then that would not be good for Texas.
  • Otto – preparing to export LNG, we have good supply of natural gas – any predictions of when uptick in the market?
    • Currah – cannot really say when. Difference between U.S. natural gas prices and Texas will narrow and it will probably be beneficial. Natural Gas prices have been even lower than expected.
  • Otto – Cheap feed stock, not sure freight cost of shipping LNG but agrees would like to see narrowing in price
  • In regards to interim charge 5 on ESF – $9.6 billion in ESF and projected to go to $10.4 billion in the next biennium but because of HB 903 it gave Comptroller to a few more tools to try to match inflation
    • Sufficient balance in ESF of $7 billion and HB 903 gave Comptroller office ability to deliver returns above the amounts of the sufficient balance of ESF
  • If legislature continues to tap ESF any time they want to it will not be seen as a savings account anymore. However, if the dollars can be used to deal with long term issues, ESF is a good tool to have. But the legislature needs to take bites at long term liability issues each time they are in session.
  • Howard – suggesting that ESF be looked at as a way to address long term liabilities and take funding out each session?
  • Not necessarily taking funds out of the ESF but take positive steps as they have in previous sessions such as dealing with Texas Tomorrow Fund, deferred maintenance, and pensions.
  • ESF is one of many tools that credit rating agencies look at and they all look at it each differently and use a different formula
  • Howard – don’t want to use fund for ongoing expenses but it can help plug holes in ongoing expenses
    • The ESF has been used over time for variety of decisions and those policies are up for the legislature to determine
  • Otto – the reason the fund was established to smooth out the ups and downs of the economy and if the supplemental required funding from ESF then those are discussions to have
  • If looking at ESF for credit rating purposes, addressing long term problems is still a positive step but where that is taking from general spending and ESF is policy up to legislature
  • Rep. Howard – when talking about AMC impact ($1.5 billion a year), about $5.7 billion going to GR to franchise tax and $1.38 billion to property tax relief
    • AMC ruling will be several years from now, still has to go to Texas Supreme Court and decision will really impact further along the horizon
    • Southwest Royalty case could potential impact his biennium and school finance but there is not another major one on the horizon that could impact this budget cycle

​Ursula Parks, Director of the Legislative Budget Board (LBB)

  • There is a balance of about $4 billion after approps were made and bulk of that is in GR-D and only $600 million is in pure GR
  • To extent there are supplemental needs – will have to use balance amounts and cannot use perspective revenues coming in, they left about $2 billion under the spending limit
    • Medicaid was not fully funded and will likely be a demand on the supplemental (amount depends on cost containment efforts)
    • FSP could go either way depending on student counts and property appraisals
    • TRS care could also be a supplemental demand
  • $5.4 billion of assumed amount used for certification in GRD – projection from LBB
    • Now they are down just under $3.5 billion in the amounts used for certifications
  • Dedicated balances have been significantly reduced from where they were and also significant effort to reduce fees
  • Tax related actions totaled a little over $ 4 billion last session – homestead exemption and franchise tax which created an increase demand for general revenue
  • In addition, shifting money from GR to transportation when it comes in effect next time, it will take a certain amount of money out of GR to go to transportation
  • Significant policy actions were taken by the legislative body that will impact next session
  • Total GR approps were right at $106 billion and under CRE came to $110 billion which left about $4 billion under pay as you go limit but there will be several demands against it
  • Howard – Out of $4 billion available, $3.5 is in GRD – so how does that impact what legislature can do?
    • Think of it as one big bucket with small pockets of money and those pockets can only be spent for a particular reason but those funds can be used for certification purposes. If the legislature spends $2 billion on supplemental then those approps would be backed with GRD funds and that is appropriate but in following GAA if they decide to spend everything in TERP and fully apporp all the funds in that account, then it would be an immediate draw and would have less GR to draw on from subsequent biennium.
  • Discussion continues on efforts to wean off of GRD and use GRD funds for what they were intended for or make a different investment and no longer dedicatee those funds
  • Darby – TERP was designed to give resources to municipalities in non-attainment to address emission problems and have about $1 billion in assets in TERP funds and there will be demands on the resources to help correct issues and if body chooses to fund at a higher level air programs then it will put budget pressure on GAA
  • Giddings – highly important that legislature continue down the road they are going, TERP funds collected for a reason and need to unwind GRD  
  • Otto – when we lower amounts used in certification are we not being more truthful? Important to use the funds they are dedicated for and that they continue on the path to be truthful and transparent
  • Walle – in regards to Medicaid dollars ….
    • $4 billion in left over balance and a potential draw would be a supplemental and a likely  possibility would be funding Medicaid – a cost against the $4 billion
    • If approps are not enough to fund entitlement then LBB will bring to legislature an amount needed to fully fund and that funding would have to come from current funds – not future revenues
  • Walle – does 1115 waiver impact?
    • So purely fiscal standpoint, if waiver is lost or some other significant change on they jointly run the program or change in FMAP or legislature has not fully funded cost growth then they are demands that would need to be appropriated in 2017.
  • Walle discusses need for services now such as flooding in Harris county
    • Have put funding in supplemental before for natural disaster recovery, disaster funding could be another pressure on $4 billion
  • Otto – even if successful 15 month extension of waiver it will not get them all the way through next biennium
    • No
  • Bonnen – Cost growth estimate?
    • $700-800 million range last session and it was not funded and how it plays out in 17 remains to be seen, will need to look at cost containment measures (some will not manifest ie reduction in therapy rates did not occur)

Discussion of Texas Economic Stabilization Fund (ESF)
Ursula Parks, Director of the Legislative Budget Board (LBB)

  • Handouts reviewed which included ESF history
  • Between FY 1990- FY 2015 there was $19.1 billion in total deposits, $10.6 billion total appropriations and the FY 2015 ending balance is $8.5 billion
  • Investment strategy was modified last session
  • How transfers can me made were covered in slide 3 – most transfers are oil and natural gas related transfers
  • Appropriations can be made from ESF at any time and for any reason with a 2/3 vote of all members present  
  • Since 1990 six sessions appropriations have been made from ESF and have used entire balance before
  • Even when spend down ESF credit agencies were still ok, did not downgrade Texas given the total fiscal package  
  • Koop – does state have additional reserve funds or is ESF only reserve fund
    • Will defer to Comptroller, ESF is main reserve fund
    • Individual state agencies may have revenue dedicated to them, TERP used as an example
    • If emergency then make appropriations from GR or ESF
  • Koop –what do credit agencies look at in regards to debt?
    • Piper Montemayor with Comptroller – In regards to debt they look at it in several ways – look at general obligation debt supported with general revenues and with other revenues
    • Montemayor – Potential for repayment and some will take into accounts other expenditures such at TRBs
  • Koop – it encompasses more than just a debt, its obligations that are within the budget that may not be able to pay back
    • Montemayor – That is correct, rating agencies look at long term obligations that may put budgetary pressure on the budget, it includes debt and may also include pensions  
  • Purpose of appropriations from ESF
    • Public education was the largest and includes TRS care $3.5 billion, $3.2 billion for general deficit reduction, $2.4 billion for economic development and that includes $2 billion for SWIFT, HHS $1.1 billion
  • Legislative body determined the sufficient fund balance in ESF is $7 billion
  • Howard – inquired on more background detail of how SFB was determined, evidenced based decision
    • LBB staff noted there were certain factors that were to be reviewed
  • Howard – pointed out that the minimum balance is in order to make transfer, but notes the minimum balance does not have to be kept at all times
    • Confirms the minimum balance is just for if a transfer must be made
  • There is also an ESF cap, the Maximum Fund Balance it is $16.2 billion (if federal funds were excluded from calculation it would be $11.4 billion)
  • Otto asked if federal funds were excluded when ESF was created
    • Yes
  • Otto – As a result of funds consolidation federal funds are now being deposited into fund one and now part of cap calculation
  • Otto – carried a bill last session and thinks transfer now taking place to transportation will not allow hitting cap as quickly but one day they may hit the cap and spillover out of rainy day fund would be excellent to address one time needs but not going to get there with this cap in place and thinks this is a potential stream of revenue that can address some of the comptroller issues brought up
  • Howard – 10% seems to be an arbitrary number anyway, standard and poors top rating says ESF of 8% and on top of that discussing a biennial budget and… does it make it 20%?
    • Yes, effectively
  • Otto – a spill-over out of ESF will be a an excellent way to address things without ongoing expenditures, this would be limited to addressing balance sheet issues
  • Walle – refers back to page 9 of the handouts, since 2008 there has been over $4 billion in ESF and it continues to rise, but with 2/3 vote to tap it have tied hands to try to take care of issues and there seems to be a sense to horde the fund  
  • Otto does not recall reason for 2/3 threshold but does not see it as a problem when they wanted to tap it, what sessions has ESF has not been touched
    • Not in 72nd, 74-77th,  80th, 81st and not since 83rd
    • This is the only “savings account” the state has, would be in trouble if there was not this account to access
  • Otto – rate build up and spikes in ESF balance were due to oil prices and if those prices do not rise they ESF will not replenish itself as quickly and will not see same rates as in previous years
  • Darby – will see more stripper wells qualify for lower severance taxes, how will that impact? If they close production they will be entitled to a lower rate?
    • Currah – there is an exemption for low producing wells and could be up to 100% if prices go low enough, triggered the 50% exemption last month but not sure extent to which it will be claimed. Does not anticipate a huge hit but yes reclassify from oil to natural gas could also impact – they are following closely
  • Texas has dedicated revenue stream for ESF but not many other states have that
    • Texas only one of 9 states that have that dedicated funding method
  • Darby – what effect does pay as you go limit ESF – how is it calculated?
    • ESF treated differently – not subject to pay as you go limit but is subject to spending limit

Paul Ballard, Texas Treasury and Safekeeping Trust Company

  • Putting money to work in ESF starting in Sept 1 and 4th quarter was one of worst quarters, however
    • Dollar-cost averaging slowly into the market
  • Can report today the fund is currently at positive .57 (57 basis points) and has moved ahead of treasury pool
  • Structure of portfolio was provided to the committee
  • Believes strategy will earn rate of inflation
  • Capriglione – in regards to the sufficient balance of ESF, if SFB goes down can more funds be invested?
    • Can invest portion above SFB, if SFB goes down then it would change the amount of funds they are authorized to invest 
  • Giddings – are investment decisions made by Comptroller investment advisory board? Details on their role?
    • The Comptroller board is advisory so strategy was presented to them and then they recommend approval and Comptroller has final say over approval
    • Buck stops with him in regards to investment decisions, Comptroller has right to reject but believes decisions fall on himself (Ballard)
    • A wholly owned subsidiary but would still call themselves a state agency

Otto gave concluding comments noting he would give all committee members an article in regards to U.S. steel operations in Texas, impacted by oil and gas sector, and it identifies each district that will be impacted.