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House Pensions, Investments, & Financial Services met on March 3 to hold an organizational hearing with invited testimony only. A video of the hearing can be found here.

This report is intended to give you an overview and highlight of the discussions on the various topics taken up. It is not a verbatim transcript of the discussions but is based upon what was audible or understandable to the observer and the desire to get details out as quickly as possible with few errors or omissions.

Finance Commission of Texas

Charles Cooper, Commissioner TDB

  • Texas Finance Commission is comprised of 11 members appointed by the Governor; mission is to ensure banks, and other regulated entities operate soundly and responsibly
  • Is not a state agency, but are authorized to adopt rules

Texas Department of Banking

Charles Cooper, Commissioner TDB

  • Aim to reduce regulatory burden and work in coordination with the federal reserve; no cost to the GR fund
  • Ensures Texas has a safe, sound, and competitive financial system
  • Have a decline of banks in Texas, only 410 banks operate here; are many reasons for that
  • Anchia – What about state-chartered banks?
    • National banks come to us and want to convert, and have discussions with them about that because it is a big decision
    • There is a sentiment we need to get as far from D.C. that we can; cost of our assessment is 60% of what it costs the national bank
    • Largest conversion was Frost Bank, and they just wanted to be closer to the decision makers
  • Have had 58 “problem” banks, we pick up regulation; Texas has been relatively free of bank failures, and in 2019 there was only one bank failure due to insider abuse and fraud
  • Highlights the effects of COVID-19 on banks; currently banks are mostly operational, but have some safety restrictions
  • Nationwide, banks have disbursed $156 billion in PPP loans; Texas has disbursed $12 billion, and is third behind California and New York
  • Cybersecurity is one of the largest issues for banks as cybercrime is increasing
  • Parker – Thanks Cooper for his work; 8 banks that are troubled at present, can you categorize those?
    • Are all in the “light” category, and is a combination of things; most are related to some type of financial deterioration, maybe cybersecurity issues, etc.
  • Parker – Cyber is the top threat, do you feel you have received adequate resources from the state to combat that?
    • Yes, have been adequately served but we all need to focus on communication; are trying to make banks focus on specific tactics, like using Ransomware

Office of Consumer Credit Commissioner

Leslie Pettijohn, Commissioner Consumer Credit

  • Are a self-directed, semi-independent agency; issue licenses and registration
  • Last session, pawn shops are now an optional license
  • Highlights the effects of COVID-19 on certain financial entities; loan originations have declined due to the intermittent closure of institutions, employment benefits have reduced the need for loan, stimulus monies, and prohibition on the foreclosure of loans
  • Overviews the jurisdiction of the commission
  • Policy
  • Last session, Sunset legislation was enacted and have implemented all of those
  • Policy issues
  • Currently cannot do remote work related to unlicensed locations; stakeholders have asked for change in statute for this issue
  • Anchia – Are there other policy considerations?
    • Need to know where business is being conducted, is usually better to do this at a licensed location; need to be mindful of consumer protection
  • Need to ensure consumer lending laws meet market needs, appears there is an availability gap; legislature may need to re-look at if statute is preventing this
  • Uncertainty for credit access businesses, at the state level are unclear requirements in Chapter 383, cities have enacted their own ordinances, and at the federal level there are a lot of confusion
  • Anchia – Is a need for consumers to access short-term high-risk bridge loans, but the state needs to protect consumers from predatory contracts; like the Griddy contracts in the energy sector
  • Anchia – CSOs are a “safe harbor” to engage in short term consumer credit activity; are you alluding to this concerning regulatory uncertainty?
    • Yes
  • Federal rule making directly impacts the delivery of financial services; has been 3 recent rulemaking actions from the state that have been contested:
    • Interest rate authority/interest rate
    • Rule identifying the “true” lender
    • CPB issued rules on debt collection
  • Parker – Any issues that are arising from COVID that you have not mentioned?
    • Have mentioned there is a higher rate of loans in forbearance that we need to watch; other trends have been pretty positive

Department of Savings and Mortgage Lending

Caroline Jones, Commissioner

  • Thrift industry grew significantly last year due to the Charles Schwab banks relocating to Texas
  • Saw growth in Community Bank portfolio; Keystone National Bank has also requested to be a state bank, application is under review
  • Highlights the effects of COVID-19
  • During the winter storm 50% of savings banks lost water, power, or were not able to get to the banks
  • Have seen growth in mortgage lending; from last year, new license applications grew by 25%
  • Consumer complains mainly are made on loan servicing companies
  • Commission is up for a voluntary reaccreditation
  • Parker – Growth of the mortgage piece, give us an overview what the regulatory framework for qualification is to
    • Specific requirements, look at criminal history, look at credit history, etc.
  • Parker – Areas of concern?
    • None at this time, monitoring credit quality issues to see if there is a lag impact; the same on the mortgage side as well
    • Stephenson – Thanks for their work on this issue

Texas Public Finance Authority

Billy Atkinson, Chair TPFA

  • Provide financing for the construction or acquisition of facilities for State agencies
  • Are other debt issue agencies like major university systems, TWDB, and the Texas Transportation Commission; in the process $326 million debt offering for the Highway Department
  • 90% of the budget is salary-related, and the other is for the interest on managed debt
  • Have managed $7.6 billion in general obligation bonds over the last ten years
  • Master Lease Program could be used by all agencies; an opportunity to use the backing of the state in these master lease programs to better match the life of the loan to the life of the assets
  • Anchia – How do we capitalize on that? How do we get the word out? Where is the disconnect, is it the consultants who are incented in some way to increase the size of the offering?
    • Not sure and is underutilized for schools, like buses and other equipment
    • Does not think it is the FAs, but each school and our agency needs to look at that; legislation that enables it is the best place to control it
  • Anchia – What are the delivery method for this message? Need to follow up on this for a “gentle” legislative nudge
    • Yes, would believe a concerted debt would have a much better interest rate
  • Currently managing $3.7 billion in debt; debt issuance risk is a big concern, have to select the right people for the job
  • Concerned salary structure has to be competitive and competent to the marketplace; asking to be included in Article 9 in order to have larger salaries to retain and recruit the best

Lee Deviney, Executive Director TPFA

  • Provides a history of the Master Lease Program; only have about $23 million outstanding because of an Article 9 rider
  • Bill that has been proposed the last couple sessions on this has passed the House, and school districts have been supportive; not sure of any opposition
  • Anchia – Has been refiled?
    • Yes, Rep. Cole has refiled
  • Provides updates on current projects; are halfway done financing the Capitol Complex project, received a refunding financing from TSU, and have a request Texas Military Preparedness Commission
  • Notes that charter schools usually go through another issuer
  • Anchia – Do they go through a conduit issuer?
    • Yes, we are, but they typically go through their own
  • Anchia – Equipment Lease Program fell into misuse, and why?
    • Was back in the 90s and probably the agency might prefer a cash appropriation rather than making lease payments
  • Anchia – Are there any other omnibus bills that Rep. Cole’s bill could be a part of? Need to understand the scope of magnitude of savings here
    • Not aware of any; can work with the Bond Review Board and follow-up that
    • Anchia – Anything that could provide the tax payers relief could be followed up on
  • Issuer for unemployment compensation bonds when requested by TWC; is an interest-free period until March 15, there are rumors it could be extended to September
    • Should debt be a component, know how to issue those bonds

Bond Review Board

Rob Latsha, Executive Director of the BRB

  • Are curators for local debt issuance, administer the Bond Activity Program, and have become a data transparency agency
  • Appropriations for 2021 is over $850,000, have collected $1.2 million in fees
  • Concerned about the amount of work that is coming in, asked for restoration of 5% cut in order to prevent a backlog
  • FY 2020 received 42 applications on the state side and a 27.6% increase in local debt transactions
  • If new administration follows the previous, then will be flooded new tax-exempt refundings
  • Anchia – Did your most recent LAR include a request for addition staff?
    • Yes did, only asked for an additional tech
  • Anchia – Competing with the private sector to retain talent? Training young people, and then losing them?
    • 60% turnover ratio, lost many to the private sector and larger agencies
    • Yes, there is no way we can keep trained talent at current salary levels; next year will likely request salary increases
  • Anchia – In down markets, you can import talent as the private sector sheds jobs, but we may be about to go into a market where the state/smaller agencies lose talent
    • Yes, especially because larger companies such as Tesla and Oracle are coming into the state
  • Anchia – Comptroller termed this as a recession, what is the delta between what you can pay and what the market does?
    • It varies, a new analysis makes about 50% more with us, but senior analysts can make about 300-400% more in the private market
  • State has moved to over $62 billion in debt outstanding; lost one AAA rating
    • ISDs are now one-third of local entities debt
  • SB 1474 increased the work load for the agency, re-oriented in order for improvements in turnover

State Securities Board

Travis Iles, Commissioner SSB

  • 5 Governor-appointed commissioners responsible for administering and enforcing the Texas Securities Act
  • Periodically updates rules to ensure that investors are adequately protected and that unreasonable burdens on legitimate capital-raising activities are avoided
  • 5 year inspection cycle
  • Work over the last year has been unprecedented with the work load and results; are focusing on the law-enforcement program in order to get bad actors out of the market
  • Have managed to accomplish law enforcement authority; have managed 5 arrests during the pandemic and have handed down 14 indictments
  • Anchia – Have investigative competency and law enforcement competencies; do you make referrals to the AG or DA?
    • Usually depends, determine if it is a federal or state criminal referral; if it is a state referral, will had off to the appropriate DA and assist in the case
  • Anchia – What are the common fact patterns that give rise to action by the agency?
    • Criminal work is tethered on fraud; is misrepresentation of facts, omission of material facts, etc.
    • Do not concentrate on particular asset classes; have been national leader in cryptocurrencies
    • Do have those tasked on white collar crimes on the federal side
  • Important legislation during the 85th has gratefully increased our workload by requiring firms to turn in reporting requirements; in 2018 received 128 reports from firms, last year 332, and now have received 185+
  • Have not seen dips in revenue, deposited $177.5 million to GR in 2020; this year, deposited $95.5 million so far
  • Have amongst the lowest occupational license fees and are firmly in the lower quartile; things appear to be trending in a positive direction
  • Stephenson – What about loss of security people to the feds due to salaries?
    • Has been an issue, 15.1% losses in 2020; have lost 6 this year alone
  • Stephenson – Did most go to the SEC?
    • Cannot say, lose most on the consultant side
  • Parker – Have historically had discussion on changing funding mechanisms, what is your option on that?
    • Will defer to the will of leadership, whether through that mechanism of funding or through the appropriations process
  • Parker – Are we making progress with regard to more rapidly resolving fraud cases? Enough resources to get this done faster?
    • More resources would be great, could do more
  • Parker – If resource issues were not a factor, would the caseload be significantly higher?
    • Yes
  • Parker – Are these fraud cases under $10,000 or are they larger sums?
    • In an oil and gas case we have worked through, it was approximately $1.5 million; $100,000 cases can be more meaningful to different people due to economic circumstance
  • Stephenson – Increasing limitations for investments in Texas?
    • Securities coming in are from non-Texas firms, and the driving factors for some of our fees are a result of Tier 1 and Tier 2 changes
  • Stephenson – SEC was so expensive to register here, could get it higher to get more to invest here?
    • Private markets are bigger than public; do not see an idea of those private market dealings

Credit Union Commission

John Coloff, Commissioner Texas Credit Union Department

  • 9 members appointed by the Governor and aims to provide oversight for Texas-chartered credit unions; manage 176 credit unions
  • Department is annually reviewed and reaccredited every five years; Sunset bill will be a part of this cycle, outstanding Sunset recommendations require statutory changes
  • Despite the impact of the pandemic, have earned an aggregate of 70 base points in 2020
  • Anchia – Troubled credit unions on your watch list?
    • Have about 17 on the watch list, 4 of which are rated as 4s, 13 are rated as lighter issues
  • Anchia – What cases them to be rated as such?
    • Rated on risk, many times what we see are management’s failure to keep up with the institution

Texas Treasury Safekeeping Trust Company

Mike Reissig, CEO TTSTC

  • Agency reports to the Comptroller; highlights COVID-19 response, have operated remotely but maintain staff in the office to conduct things like wire transfers
  • Comptroller’s office is very careful with cybersecurity; are constantly training
  • Invests funds with the consultation of three entities provided by statute; have over $86 billion invested across short-term and long-term
  • Overviews the types of funds, largest of which is Tobacco; also invest in SWIFT, but do not manage said fund
    • Invest in the ESF and administer local government pools
  • Are winding down companies that fail
  • Anchia – Are “wind downs” liquid assets? Or illiquid to maximize the value to the state?
    • Ruchit Shah, CIO – Is the latter
  • Anchia – Do you have a portfolio value?
    • Ruchit Shah, CIO – Can get that to you, are “winding down” $27 million in aggregate; can provide the report from the performance perspective
    • About halfway down with those that are no longer active with us
  • Texas is the only state with a federal reserve account; save millions in fees among other actions
  • Trust company acts as custodian for the Comptroller’s Unclaimed Property Division in the Treasury
  • Anchia – CAPCO, have an FTE that manages; is a legacy program that has not been re-renewed?
    • Correct
  • Anchia – What is the size of that program?
    • Was $400 million, and the program is now in wind down, but can send the latest CAPCO report
  • Parker – Assess what the cost of the state to manage the ETF fund? What is the largest single realization of any investments made so far?
    • Ruchit Shah, CIO – Original amount of investments was $182 million and has gained $27 million in aggregate
    • Ruchit Shah, CIO – $9 million on a specific bio-technologic company, can follow up
    • As for the internal costs, there is no marginal cost, just time-allocation; can get to you

Closing Remarks

  • Anchia – Some bill ideas have come out of this committee today