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The Senate Committee on Finance met on March 30 to hear interim charges related to discussion of fiscal responsibility (budget transparency and state debt), franchise tax, and the sales tax holiday weekend.

Opening comments
Senator Nelson

  • When they met last time to discuss mental health, numbers did not include Medicaid and now they have the final total for behavioral health funding that includes Medicaid and those numbers were sent to the committee
  • State will spend $6.7 billion on behavioral health in the biennium $3.1 billion in Medicaid alone
  • Bettencourt – thinks this goes towards women’s health as well that they have been committing funds to
  • Seliger – this item will come up in appropriations, a looming crisis in mental health in the state of Texas (gave example of person jailed but no forensic bed in the state of Texas available)
  • West – given that this is a crisis how much additional monies need to put into the system and are there other systems of revenue can be used, if we had ACA monies would it have helped
    • Nelson – how we spend money, rider in budget said only give money to efforts in master plan
    • Nelson – will study if money we have is sufficient and where to get funds
  • Whitmire – waiting list of 400 criminals for bed in mental health facilities, some have waited a year and a half
  • Nelson – states investment is much more significant than it has ever been and it is a good time to ensure resources are being spent the right way
  • Huffman – problem is housing mentally ill in jail instead of where they need to be and maybe need to bring in criminal justice experts in decision process as well with DSHS
  • Whitmire – Dallas has pilot project that may solve the problem of taking people up into Oklahoma border area

Fiscal Responsibility – Budget transparency, promoting agency savings and reducing state debt
Budget Transparency and Incentivize Tax Savings
Ursula Parks, Director of Legislative Budget Board (LBB) & John McGeady LBB

  • Budget Format presentation and degree of transparency they provide
  • Texas format history and overview provided
  • We currently use a more strategy base approach
  • This format provides a higher level of detail and other supporting information
  • In current GAA 62% of strategies are just single programs but there are strategies that contain two or more programs but things like Medicaid are broken out in several strategies 
  • LBB has online application that allows each program to be viewed and queries made
  • State by program application – not widely known – available on website and provides all programs by strategy and details on it
  • Can also compare to prior biennial amounts
  • Data can be downloaded and searched
  • Gave a brief overview of documents and reports done by LBB (ie strategic fiscal review)
  • Texas is just one of three states that include performance measures
  • Only 16 other states say strategic planning is part of budget process
  • Provided a quick tour of comparison of what other states do during the budget process
  • From examples have learned that a good and transparent budget is what works best for the area and depending on purpose what may be overwhelming in one area may not be enough in other area
  • Transparent and usability of budget is a balance – it also serves as a public record of law
  • LBB is working to continue seeking transparency of budget bill and supporting documents
  • Nelson – committee needs to think of purpose, what are they trying to achieve as they go about developing the budget and purse zero based effort would be difficult
  • Nelson – any approach with a $210 billion dollar base budget will be difficult and would like to hear from committee what works, was the strategic review helpful
  • Hinojosa – can get overwhelmed with information and support information is helpful and is there a way to get ahead of the curve, feels we have good transparent process 
  • Nelson – supporting documents are so helpful and massive, is it possible to provide the State Budget by program at the same time as the budget, would love to have strategic fiscal review details earlier, some of larger programs become less transparent under certain formats so is there a hybrid approach
    • the document is a hybrid approach and changes have been made as they have progress – it has evolved over time and based on legislative needs
    • budget document is about displaying legislative decisions
    • working making budget by program is available and searchable format
    • direction can be done via legislation but LBB has taken direction without necessarily needing legislation
  • Hinojosa – process gets overwhelming, conference committee going through thousands of documents and are all working document available to the public
    • Decision documents are available on the website at the beginning of the hearing
    • Bigger push last session to ensure decision documents were available in real time
  • Bettencourt – spent little time on base budget but more time on supplemental requests, don’t really have ability to compare requests and perform certain analysis but needs more tools to look at base budget, wants more emphasis on base budget
    • Thinks information is available but agrees to have discussion on how to bring it to the front
    • Zero based budgeting means different things to different people but thinks it is a wonderful exercise for state agencies to go through as an internal tool in their budgeting process
  • Bettencourt – when is last time third party performances reviews done outside of a legislative agency
    • On occasion agencies will enter into process to get feedback on certain program
    • LBB evaluates agency program and processes and SAO does audit work and certain auditing in the Comptroller office
    • Did not provide any template to GLO they went into the process themselves
    • Bettencourt – would like to see this replicated in other agencies and a top down guideline from the LBB
  • LBB has additional contracting oversight – seeing even more than they realized reliance on contractors for IT and other projects and looks forward to bringing that to the committee
  • Bettencourt – lack of detail in IT when working on budget last time
  • LBB – look at IT and contractor and it will a fruitful area to review and will have report that will come out to discuss findings and best practices, themes across agencies in making procurements and will have some pretty robust recommendations and looking to do it in advance of the next session
  • LBB still waiting for agencies to comply with reporting requirements
  • Nelson – encouraged by GLO zero based budgeting report, would encourage all agencies to consider a zero based budgeting approach, start with nothing and look for efficiencies
  • Nelson – will need to look at every penny we spend and is it the best use of dollars – makes slight reference to oil prices
  • Uresti – assuming top ticket items might need to be broken down further, is there any study on how efficient it is to use a two year budget versus a one year budget
    • Is not aware of a report that looks a two year versus one year but will look into it
    • Personally prefers two year because it gives enough time to make decisions for next budget cycle and flexibility has been built in to address items popping up including writing supplemental bill at start of session
    • Most larger states – 19 do biennial budget but they meet every year so they have a budget session and a policy session but believes that number may be dropping in favor of a one year budget
  • Taylor – could have several format such as the ability to drill down in detail starting with larger overall picture and instead of getting reports after session, more real time may be helpful
    • That is what LBB is moving towards currently
  • Hancock – operating from database structure, if in database then set it up so the legislators can access
    • Requests go into large database
    • Program details happen as a parallel function but separate
    • Many templates are available now that is open to public
  • Taylor – the information is available now but what about next session, would like real time numbers
    • Timing question, but it is the conversation they are having now
    • Open to continuing that conversation
  • Bettencourt – performance measure data, would like to see sample reports, a roll up by department would be fascinating
    • A data source they mine to answer questions, sometime committee is not aware of
    • The measures are subject to audit
  • Nelson – again reiterates the hope agencies will go through the zero based budgeting exercise
  • LBB another part of charge was about how the state identifies and realizes savings – handout was provided to committee, 1% threshold program was reviewed
    • There are other mechanisms in place where the LBB tries to identify savings
    • GEER reports also see a need – reduce, eliminate, change program or enhance it
  • Birdwell – do GEER reports include federal encumbrances that could be impacted when changing a program
    • LBB puts out a report on largest federal programs
  • Hinojosa – what about dedicated accounts
    • Has done work over last few sessions but there are still some significant GRD accounts and most in treasury balance now is GRD

John Colyandro, Texas Conservative Coalition Research

  • Written testimony submitted which highlighted transparency legislation passed last session
  • Transparency can be hindered by too many formats, too much information
  • Could simple reformatting exercise help – example of what is proposed was handed to committee things like
    • Provide a simple line item and couple MOF in column format across the page
  • Significant policy change could impact budget like in health care
  • Hinojosa – presentations by LBB they identify cost drivers like for Medicaid, is that what is being talked about
    • Yes, things like caseloads, etc – that maybe noted in Fiscal Size Up but now know today that CMS has done things that will impact the budget
    • Significant budget drivers that are noteworthy – example given no mention of change from federal fund to GR in the actual budget for women’s health
  • Nelson – what do you think of hybrid approach to whatever gives the most transparency
    • Strategy based is used term for current budget but many items are not (program support is not program or strategy in Art II example)
    • Clarity – Medicaid dollars flow through so many programs
  • Bettencourt – handout shows emphasis on support and uses and maybe goes back to earlier comment on database system with ease to print out various reports and agrees it is a useful tool
  • Hancock – difference between Senate and House, Senate has large portion of body in process where in House it is a smaller group of entire body that sits in on the process
  • Kolkhorst – thinks ultimate final product has line items with a lot of detail, leaves a lot of authority to Governor through veto process
  • Nelson – may file zero based budgeting bill again, which includes coordinating with Sunset Process or another approach take the top two – health care and education or ask agency heads to just do it

State Debt
Opening Comments Sen. Nelson

  • Thinks state should maintain a prioritized list of debts of which ones that should be paid off first and which ones don’t make sense to pay off right away  

Laura Bell, LBB

  • Began with list of state debts total outstanding $259 billion – breakdown $212.4 billion local debt, $6.1 billion conduit debt, 
  • Kolkhorst – to confirm out of $259 billion, $212 is local debt?
  • West – asked about Tuition Revenue Bonds
    • Not being shown as self-supported because they are supported by general revenue
    • Identifying it separately in the list
  • Kolkhorst – more examples of not self-supporting debt
    • TFA for buildings
    • Pg 6 of handout also shows break out of totals
  • Confusion of committee members on debt discussion of supported vs not support debt
  • Birdwell – clarifies – thinks they are talking about $41 billion debt but not sure how breakdown on handouts add up, but there is a $4 billion debt service payment reoccurring on $19 billion debt
  • Method of finance breakdown on $4billion on debt service provided in handouts
    • $137 million of debt services paid for in federal funds asked West?
    • TxDOT matching federal funds
  • West – total outstanding and authorized debt of budget is 2.65 percent, what is breakdown
    • LBB will get them total amounts  
  • Pension liability – shows unfunded accrued liability on handout
    • Nelson – TRS is significantly higher than ERS, because of contributing members difference how to compare
    • LBB health of pension funds better measurement than total number of liability
    • Uresti – Texas Emergency Retirement System includes local firefighter system
    • Funded ratio for each statewide pension plans is provided in handouts as well as other details (each plan unfunded liability)
    • State efforts to address pension liabilities reviewed
  • Texas Guaranteed tuition plan also reviewed
    • West – still unfunded liability?
    • Payments are required through 2036 but assets depleted by 2020
  • Nelson – it seems there needs to be a prioritized list of state debts – what makes most financial sense to pay off should monies become available, “who can give us a list?”
    • LBB is happy to participate and coordinate with all the agencies and entities that would be involved
    • LBB said they will start working on it
  • Kolkhorst – where to go to show total debt service paid annually for all of the state of Texas, public needs to know overall
    • Bond review board compiles local debt information so maybe they could speak to the process
  • Bettencourt – HB 1378 requires local entities to post debt on website or state site, had anyone sent in that information to post on state site
  • Kolkhorst – none of the pension liability includes local liability in the numbers provided, where could she get ALL pension liability in state of Texas
  • Kolkhorst – thinks looming crisis in America is pension liability and will go visit the pension review board to get those details
  • Nichols – said in regards to debt obligation shouldn’t Hazelwood be on the lists?
    • Was not left off list for any reason and Hazelwood should be part of the discussion
  • Birdwell – Hazelwood is not an “expense” but it is driving tuition up for non-Hazelwood student and impact is not reflected in reports because it is not a direct expenditure
  • Nichols – it needs to be something looked at and put on the list as commitment to work with it

Linda Fernandez, Texas Comptroller of Public Accounts (Tomorrow Funds)

  • Gave overview of prepaid tuition plans in Texas 
  • There is an opportunity to save money by transferring unfunded liability over
  • Pay as you go approach is more expensive than if state when ahead and paid all cost of plan now
  • Universities get about $15 million a year less for their program participants
  • Nichols – in regards to list of which debts to pay off – wants to see obligations like this one on the list
  • West – where would Comptroller get funds if the fund runs out of money?
    • Out of first money coming into treasury not otherwise appropriated by the Constitution
  • Taylor – how long can you change beneficiary
    • This can go on for many many years and it can be longer than 2036 for payouts
    • Once students starts there is a 10 year from graduation once beneficiary is named
  • Bettencourt – why off
    • Actuarial projections were probably wrong
  • Kolkhorst – pay universities a weighted average and difference may be made up on backs of current students

Ken Welch, Teacher Retirement System

  • Gave background on system – serves over 1.4 billion Texans
  • Avg benefit just slightly over $2k a month
  • $8.9 billion put back into economy through pensions paid out by the system
  • Funding ratio – slightly above 80% , unfunded accrued liability is $33 billion
  • 60% of revenues come from investment earning over the life of the fund 
  • Schwertner – asked about rate of return – 8.84% and assuming going forward is 8% how does this compare to other products that assume a rate of return?
    • Most he thinks would assume a lower rate of return
    • Schwertner – thinks the rate is a bit generous and a bit concerning
  • Uresti – mention payoff in 2047, have looked at increasing payments
    • Will look at scenario and will get those numbers back to the committee
  • Bettencourt – hopes board reconsiders the rate of return, does not see 8% as a reasonable goal
  • Bettencourt – not a fan of defined benefit plans because of things like setting 8% goal
  • Kolkhorst – cost drivers were addressed a few sessions ago and thinks it is time to look more tweaks (retire/rehire), maybe defined contribution is the big gorilla – can TRS come to legislature with suggestions for tweaks to address fund
  • Schwertner – going back to concern on rate of return, does board have to use certain guidelines when assuming rate of return – as legislative body need to ensure board assumptions are in light of what legislature thinks
  • West – when did 8% of rate of return come into play?, but it has held pretty much held true to rate of return since it was put into place
    • Close to two decades   
  • Huffman – What happens if board moves rate of return to 6%?
    • Fairly dramatic shift, unfunded liability will be discounted back
    • Would have a much larger unfunded liability and would not have a funding period

Porter Wilson, Employee Retirement System

  • Provided quick update on the 3 programs ERS administers and overview
  • Actions of legislature in 2015 turned around fund which included increasing contribution rate of active members
  • Targeting fully funded by 2038
  • Nelson – If no unfunded liability payment would be 12.27% but because of unfunded liability payment needs to be around 19% for next 33 years
    • Will run numbers to see cost if paid off unfunded liability
  • Bettencourt – every year going into the hole is a real hole
    • Time to also examine all assumptions and return assumptions is one of them and new assumptions will be adopted in 2018 and the 8% is on table for consideration

Franchise Tax Charge
Karey Barton, Deputy Comptroller of Pubic Accounts

  • Gave brief overview of franchise tax
  • Handouts include list of litigations the state is currently in with businesses
  • Hiniojosa – every session keep chipping away at it
  • Kolkhorst – asked for clarification on litigations, as we reduce rate are we reducing liabilities in lawsuits
    • All are specific to franchise tax
    • Has number for a few of them – Cinema suit has broader expansive impact $9 billion in base reduction and refunds
    • We are reducing liabilities in base fund but would be same for refunding
  • Nichols – no one likes to pay but biggest complaint is in year when lose money but still have to pay tax, could remove tax if in the red but would it get closer to be defined as an income tax
    • The more changes the closer and closer it looks like an income tax and concern of lawsuit

Tom Currah, Comptroller of Public Accounts

  • In regards to Bettencourt’s earlier question on posting local information, don’t expect to have anything until this summer
  • Collected $4.66 billion in 2015 and under old franchise tax rules would have collected $2.87 billion and reminder goes to property tax relief fund (handouts to committee provide more clarity)
  • All of relief granted last session, will reduce amount going into the property tax relief fund
  • Will end up being a cost in general revenue for property tax relief fund
  • Bettencourt – closer get to $2.8 billion then property fund sort of disappears
  • Bettencourt – may look at decline in franchise tax versus increase in property tax appraisals
    • Ursula Parks said can get all the data sets for them to look at
  • Kolkhorst – tried to do buy down, compressed rate at least $1 but as they looked to reduce the franchise tax and maybe even go to zero business taxes in franchise taxes – anything in Comptroller office would show benefit of companies coming to Texas are investing more funds in Texas (Ursula Parks will be presenting on dynamic analysis in a bit)
  • Kolkhorst – Bettencourt is right we are living off high appraisals from our local school formulas     

Ursula Parks, LBB & Wayne Pulver, LBB

  • Walked through process of providing dynamic economic analysis
  • Point is to estimate the secondary or dynamic effects of a measure
  • To perform the analysis use a standard model – REMI
  • Important to think through of effect of having less revenue in regards to state budget
  • Bettencourt – assume can model energy sector as a subgroup, wants model to show energy business is flat on its back 

John Kennedy, Texas Taxpayers and Research Association

  • When passed franchise tax, there were a number of specific policy goals in mind and for most part it has been successful in those goals
  • Still some things very complex – only 124k actually pay franchise tax, tax relatively low but it helped offset high sales tax burden
  • Support continued reduction of the tax – with the comment that lowering property taxes is what gives the greatest economic benefit
  • Any tax to replace – minimize cost to comply, make administration easier and make it part of the general revenue fund
  • Nelson – have we ever considered the way funds would flow – first into property tax relief
    • Not that he is aware of but may reduce draw on GR
  • Kolkhorst – only a small percent of businesses in Texas pay the tax
    • Yes, only 1 in 25 businesses pay the tax

Vance Ginn, Texas Public Policy Foundation

  • Business don’t pay taxes, people do so really margin tax is reducing full potential of Texans across the state
  • Would like the simple and most broad tax so we can have the lowest rates
  • Calculations on franchise tax are cumbersome, cost of compliance can be more than tax liability itself
  • Recommend eliminating franchise tax entirely – or at least put on path towards elimination
  • Find increase in personal income and increase in private sector jobs if tax is eliminated
  • Nelson – thinks there will be a tight budget next session and will be looking at what they can do
  • Lowering property tax and holding it down is a key element, but if can get rid of margin taxes think about jobs moving to Texas

Eva DeLuna Castro, Center for Public Policy Priorities

  • Provides handout to committee to show math – all things that rely on franchise tax
  • Equate almost a 6% cut to many agencies, budget would be smaller

Will Newton, National Federation of Independent Business

  • Considers tax a failure
  • Been hard on business owners

Sales Tax Holiday Weekend  
Karey Barton & Tom Currah, Texas Comptroller

  • Gave history of sales tax holiday runs (back to school) around $80 million a year in forgone sales tax
  • Appliance tax holiday about $3.5-4 million
  • Two new ones on water conserving products $3.7 million this year and emergency supplies $1 million a year 
  • Gave brief overview of others proposed but not adopted

Ursula Parks and Wayne Pulver, LBB

  • Similar to work done on tax legislation in general
  • Nelson – look at sales tax holidays in other states impact Texas
    • Does not know off the top of her head but will look to see
  • Hancock – sales tax audits, how often does someone get fined because it is made more difficult to do job, if not specific
    • Barton – one in place the longest has the least complications, result of that first experience many of policies will now be applied to new holidays
    • Barton – they more specific they are the easiest it is for retailers to do
    • Barton – Emergency preparedness is very specific but water conservation sales tax holiday is more vague
  • Hancock – what about cost for implementation for small business, big boxes it may drive sales and does not think the cost of implementation for small businesses
    • Defer to retail association to discuss
  • Schwertner – offered a bill last session to try to address burden to smaller businesses

George Kelemen, Texas Retailers Association

  • Supportive and have great interest in the sales tax holidays
  • Specifically regarding the back to school holiday – especially in light of school start date
  • Would support consistency on dates, including the holiday and the actual start of school start dates
  • Nelson – in regards to consistency of timing?
    • If can find consistency of when schools go back and the date of the holiday
  • Would request add certain electronic items as list of eligible items

Brakeyshia Samms, Center for Public Policy Priorities

  • Reconsider sales tax holidays – conditional for certain revenue and outlook requirements
  • Do not truly benefit those with less financial means – usually those leaving from paycheck to paycheck do not have the ability to time purchases
  • Funds for holiday could be used for other purposes like providing autism treatment 

 
Public Testimony
Colleen Vera, Retired Texas Public School Teacher

  • Blogger who writes on government waste (Texas Trash Talk)
  • Mrs. K works as Harris County school administration and is a curriculum director, and now she represents the publisher she privately contracts with
  • Solution needs to be courageous legislation to completely overhaul system  

 
Texas Public Policy Foundation

  • Budget by program by LBB already provides great information and would like to see something in the format itself
  • Program based budget, put it online and real time tax payers will have idea of where their tax dollars are going
  • Nelson asked if they would be interested in seeing Hybrid of budget documents that promote more transparency
    • Yes

Jerome Greener, American for Prosperity  

  • Thanks committee for cutting franchise tax
  • Committed to reducing franchise tax – a better tax climate but eliminating the tax  

Will Newton, Texas Office of Independent Businesses (NFIB)

  • Same concept of sales tax holidays is being considered in Florida
  • This is a Texas specific tax relief proposal
  • Small businesses already used to tax holidays

Lisa Holbrook, Texas PTA

  • More than 70% of survey respondents said they use the holiday
  • Majority of respondents said more supplies would need to be provided to schools if the holiday were discontinued
  • Most vulnerable families indicated the sales tax holiday lets them purchase items needed
  • Holiday allows families to focus on shoes and clothing
  • Would like the holiday to be set for first weekend in August or last in July – having holiday on payday weekend would be very helpful