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Below is the HillCo client report from the August 12 Senate Finance Committee hearing.
 
The committee met to consider the following subjects: the budget process, Texas’ economy, constitutional spending limits, the Economic Stabilization Fund, methods of finance and border related issues impacting the state budget.
 
Chairman Jane Nelson noted that the Finance Committee will not be receiving interim charges this interim; instead the committee’s task is to learn
 
John Helleman, Chief Revenue Estimator, Comptroller’s Office

  • In early October, a report on Texas property values will be released by the comptroller
    • On March 1, an update will be coming out
  • Nelson asked if more money will be going to school districts from property taxes
    • Public school system is a partnership; state and local pay roughly half each; the more locals collect in property taxes takes burden off the state; during the recession property values went down slightly and have now rebounded, and are growing rapidly at this point
  • Sen. Judith Zaffirini noted the document on tax exemptions shows that the state exempts $43.9 billion it could be receiving; how have the exemptions changed over time
    • Over the last decade the number of exemptions hasn’t changed much; the last big changes were in the 1980s when many items were added to the sales tax base
    • Dollars exempted have gone up at the same pace that dollars collected has gone up; about the same rate as the growth of personal income
  • Sen. Dan Patrick asked what has been done with dollars, historically, when property taxes increase and the state burden is decreased
    • Generally, funding for schools stays where it is and money goes to other areas of the budget
    • Ursula Parks, with LBB responded that rising property values and other factors are used to determine what the cost for public schools will be; sometimes that growth pays for student growth; sometimes the local money is not enough and the state has to increase its share
  • Patrick asked if it is correct that the money has not gone back to taxpayers or to public schools
    • In 2007 the money did go back to taxpayers when property tax relief was passed
  • Texas has exited the past recession and is growing much faster than the US as a whole
  • In 2013 the Texas economy grew by 4.4 % and the US economy grew by 2%
  • The US has recently regained all jobs lost in the recession; Texas regained all jobs lost in the recession by the end of 2011
  • Texas employment is now over 11 million
  • Employment rates are growing around 3% per year; double the US rate of growth
  • The US rate of unemployment is about 1% higher than that of Texas
  • Zaffirini asked about the quality of jobs being gained in Texas; employment rates are rising but personal income is a more modest increase
    • They are not comparable charts; just used personal income to show another measurement that Texas is exceeding the US in
  • The size of the Texas economy is now in the trillions of dollars
    • 12th  largest economy in the world
  • Nelson asked about further reductions to the franchise tax; will the additional 2.5% reduction for 2015 be possible
    • Yes
  • Texas did not see home values plunge during the recession as they did in other markets; permits needed to construct homes are currently at 9.2% of the previous 12 months; sales of existing homes is up 7.5% from the previous 12 months; statewide, the level of homes available for purchase are at levels not seen since 1990
  • Class A office space is getting harder to find around the state; dollars per square foot is going up at the same time
  • For the past 3-3.5 years the price of oil and gas has been very steady; usually much more volatile
    • Since the recession, natural gas prices have not rebounded the way oil did
  • Non-farm employment is expected to continue growing at a rate of around 3% for each of the next two years
  • Texas population is expected to go over 27 million in the year 2015
  • The Economic Stabilization Fund (ESF) is expected to end FY 15 with a balance of $8.4 billion; that assumes voters will approve Prop 1 for transportation
  • Nelson asked when the next bond rating will be
    • For short term ratings Texas recently was given the top rating from all three bond rating houses
    • For long term ratings, Texas has traditionally had the top rating from Fitch and Moody’s and recently was upgraded by Standard & Poor’s to the top AAA rating
  • Sen. Royce West asked about Texas’ reserve levels
    • The state is in a strong position right now; even when spending is necessary, oil and gas income allows the state to reestablish reserve levels
  • Sen. Robert Nichols asked about deposits made to the ESF after the FY 15 estimate increasing the total
    • 90 days after August 31, 2015 there will be another deposit that has not been included in the FY 15 estimate
  • Sen. Donna Campbell asked how much debt the state is in
    • Not sure
  • West asked about a cap on the ESF each year
    • The cap is 10% of the amount that was deposited to GR in the previous biennial period

 
Ursula Parks, Director, Legislative Budget Board (LBB)

  • Right now, LBB is starting to receive appropriations requests from agencies
  • LBB will be developing budget recommendations and recommendations for the GEER report through the end of 2013
  • LBB works with the Senate and Appropriations committees by answering questions and concerns, listening to what the committees want in their budgets, then developing those budgets
  • Zaffirini asked how individual requests from members are handled
    • Once the session starts, if a member of the committee delivers a question in writing, they will be provided with a response; the response will also be copied to the Lt. Governor and the chair of the committee
    • If a question is asked that has nothing to do with the budget, the Lt. Governor will be copied but not the chair
  • Zaffirini asked if non-Finance Committee members ask a question of the LBB
    • The system is the same for other senators; if the question is in regard to the budget bill, the Finance chair and Lt. Governor are copied; for non-budget related issues only the Lt. Governor is copied
  • The Texas constitution lays out 4 limits to state spending
    • Limit on debt
      • Debt cannot exceed 5% of the average of the last three budgets
      • Current ratio is just over 3%
      • Locally issued debt is not considered in this equation
      • As of the end of FY 13 Texas had just under $44 billion in outstanding debt; 89% of which is self-supporting debt
      • Campbell asked if there is a cap in statute for how much debt a local government can take on
        • There is no constitutional limitation
      • Nichols noted there is “off the book” debt at TxDOT that totals almost $2 billion and asked if the state would be responsible to pay for tuition revenue bonds
        • If that legislation is passed, it would be responsible for tuition revenue bonds
      • Sen. Kevin Eltife asked if the state debt has doubled over the last ten years
        • That sounds correct
      • Eltife noted the state should be on a pay as you go budget system
      • Patrick noted Texas is paying about 5% on its debt right now
    • Welfare spending limit
      • Approved by voters in 1945
      • Limits the amount of assistive grants provided to needy dependent children and their caretakers; mostly limits TANF and other cash assistance
      • Shall not exceed 1% of the state budget in any biennium
      • Last biennium would have been a $2 billion limit; $130 million was spent on these cash grants
      • Sen. Charles Schwertner asked how TANF grant amounts became the guidepost for welfare spending
        • That is set in the Human Resource Code
    • Pay as you go limit
      • Ensures the state does not spend more than it takes in
      • The only appropriations limited by this provision are generally general revenue (GR) appropriations
      • Certain accounts are not relevant to the pay as you go limit: ESF, State Highway Fund, Mobility Fund, Property Tax Relief Fund
    • Limit on growth of certain appropriations (spending limit)
      • Limits the rate of growth from one biennium to the next
      •  Must not exceed the rate of growth of the economy (personal income growth)
      • Nelson asked when revenue comes in above the estimate how that affects this limit
        • Supplemental appropriations made for the upcoming year will have to take into account the actual revenue that came in above the estimate; it is a moving target
  • Usually only one of the two main budget limitations (pay as you go and growth limit) drives budget issues; last session both limits came into play
  • The spending limit cares how revenue is generated, not necessarily the purpose for which it is appropriated or what account it goes into
  • The spending limit applies to state tax revenue not dedicated by the constitution
  • Lottery proceeds are not state tax revenue so they are exempt; the Available School Fund receives revenue from dedicated funds so it is exempt; ESF is also exempt
  • A source of revenue must be dedicated by the constitution to be exempt, not funds that are dedicated by statute
    • About 80% of dedicated general revenue (GRD) is subject to the spending limit
  • For adopting the rate of growth of the economy, the LBB determines which forecasting companies will be used
  • Nelson asked if the Comptroller estimate is the estimate traditionally adopted by the board
    • That has been the case in recent years
  • Schwertner asked if it is statutorily regulated that TANF is used as the measurement for the welfare limit
    • It is in the Human Resource Code
  • Nichols asked how closely population plus inflation growth tracks with the economic growth rate that is adopted
    • When trying to change the spending limit is important to determine what is trying to be controlled, spending as a whole, spending what is brought in the biennium before, etc.
  • When compared to other states, Texas has very conservative spending limitations; many states have only one where Texas has four
  • Patrick asked if in the past growth estimates have varied widely
    • Yes
  • Patrick asked how LBB decides which estimate is most reliable
    • It is completely up to the Board
  • Campbell asked if it would be appropriate to use past growth trends to determine the spending limit instead of future projections; seems speculative
    • Parks believes it is appropriate to use future projections for future spending
  • Rep. Chuy Hinojosa asked about projections for future revenue being off by a significant amount
    • That definitely affects the budget process; can make supplemental appropriations more likely
  • Hinojosa asked what it would take to change the spending limit to population plus inflation as opposed to personal income growth
    • It is set by statute
  • Sen. Eddie Lucio asked about the welfare spending limit; would like to know the total amount that is spent in each budget addressing the needs of the Texas poor; would like to know if the state is spending as much each biennium as that population is growing
  • Four main categories of revenue
    • GR
      • The largest part and most flexible of the state’s methods of finance
      • For 14-15: $95 billion
    • GRD
      • Separate accounts within the GR fund
      • About 200 accounts currently
      • Can be appropriated for the dedicated purpose or if unspent can be used to support certification of the budget
      • TERP has just under $1 billion unappropriated right now
      • Last biennium’s effort to reduce the reliance on GRD accounts saw the total in GRD accounts reduced by about $1.2 billion from what would have been in those accounts had nothing been done
    • Federal funds
      • Just under $70 billion appropriated in 14-15
    • Other funds
      • Generally state revenue that is not part of the other funds
      • Interagency contracts, State Highway Fund, Mobility Funds, Property Tax Relief Fund, ESF
      • Just under $30 billion appropriated for 14-15
      • The ESF can be used to add funds to GR when revenues come in short
  • Nelson asked about recommendations that have come through since HB 7 was passed last session; was intended to reduce reliance on GRD accounts
    • Looking at tools to evaluate available revenue in GRD accounts and to continue to reduce reliance on those accounts; it is important to determine why there are unappropriated balances in those accounts
  • Nelson asked about zero-based budgeting; would like some background on the concept; may want to start with a few agencies and expand or not do it at all
    • Zero-based budgeting is a system that says that for every single program and agency the state wants to fund, budget planning starts back at zero every budget cycle; Texas uses a hybrid budgeting process, there are some programs that use program based budgeting and some programs that are looked at in a more overarching view; some entitlement programs are funded with what is essentially a zero-based budgeting system; for education and health care, essentially, the budget committees look at what the need is going to be based on consumption in the previous biennium then determine how much is needed for the next biennium
    • Generally, the amount of information needed for zero-based budgeting makes it a little overwhelming; could start with a few agencies and move that way
  • Campbell asked if agencies or programs give back money they are appropriated that is unspent
    • Yes; funds can lapse back to the treasury
  • Campbell asked about fund balances in schools; what if a district anticipated enrollment higher than it actually came in
    • ISDs are paid based on estimates and there is a recovery process within entitlement funds; there is a different process for fund balances because they could be local funds

 

  • Nelson noted that she has asked Parks to discuss, the border security issue and related costs; thought it would be important to talk about how those issues could impact the state budget
  • $343.3 million was appropriated for border security in the 14-15 biennium budget bill
  • Estimated $18 million per month for the recent border surge initially
  • Other sources will need to be identified because the initial amount will not fund the entire operation; the initial money came from the Emergency Radio Infrastructure Fund, $38 million
  • There has been limited action on the federal front to address increased costs; federal reimbursement is still a possibility
  • Illegal aliens are not able to receive Medicaid so health care costs could increase because of the surge of immigration; have not realized those costs at this point
  • Looking at about 4,300 unaccompanied alien children between January and July; could be a full year foundation school program cost of around $75 million because of the increased student population
    • There is an interest at the federal level to reimburse school funding
  • Zaffirini asked if there is a formal process by which the state could request reimbursement from the federal government
    • Probably not a formal process; would be done informally
  • West asked what the Emergency Radio Infrastructure Fund is used for
    • The fund has a number of allowable uses including public safety; it is a pretty new fund; was created to make a revenue stream to support interoperability between different emergency service providers
  • West asked how much was in the fund
    • There is currently $34 million in the fund; additional deposits will create the additional $4 million needed to support the border surge
  • West asked how much is being spent per week
    • The estimate for both operations is between $17-18 million per month
  • Sen. Kelly Hancock asked about where the number of unaccompanied alien children comes from
    • The federal Health and Human Services Department updates that number every month
  • Campbell asked how the $75 million for public education was determined; seems high
    • 4,300 children are expected to have come between January and July; that number is expected to double during the 2015 school year; $75 million accounts for all the projected public education spending needed for the influx of immigrants
  • Sen. Joan Huffman asked about children that come with their parents; are those calculated in that number
    • Believe the number includes all children who come across the border illegally
  • Sen. Sylvia Garcia asked where money in the radio fund comes from
    • Court costs are the main driver of that fund
  • Garcia asked where the additional funds that the radio fund will not provide will come from
    • Still being determined; a disaster declaration by the governor could make some additional tools available under Rider 9; budget execution is another tool that could reallocate appropriated funds for other purposes
  • Garcia asked about the exit strategy
    • Defer to agencies involved with those operations
  • Garcia noted there are federal resources that will go to the local level directly to fund public education of immigrant students that will be placed in schools permanently
  • Sen. Brian Birdwell asked if the radio fund is the only identified fund the governor has used for the border surge
    • In addition, the governor’s office has dedicated criminal justice grants they have pledged to that effort
  • Birdwell asked how much is being spent so far
    • General John Nichols, Adjutant General of Texas replied that the National Guard should be able to make it nearly to the end of October with current funding; training in waves so that all troops aren’t being paid at the same time initially to conserve funds
  • Zaffirini asked how likely it is that Title 32 federal funds will be used for the purpose of the Texas border surge
    • Nichols replied that is very unlikely
  • Zaffirini asked what part of the border the troops will be deployed in
    • Deployed only in the Rio Grande Valley
  • Zaffirini asked what the troops will do
    • They will man numerous observation posts to monitor for people crossing; if they are spotted, DPS will be called to engage the border crossers
  • Campbell asked if other states are helping Texas with border security
    • Have had offers from 4-5 states; generally the supported state would pay for the assistance; would probably be too complicated at this time but once the model is used more, other states may be brought in
  • Hinojosa noted he is skeptical of National Guard successfulness; would rather give the money to DPS who has been in the Valley for a number of years; concerned that it is an ineffective use of the National Guard; those coming through are not generally armed and the cartel crossers who are armed have surveillance and will cross further west where the National Guard is not present
  • Zaffirini asked if there is criteria for what comprises a disaster declaration or an emergency declaration
    • The governor has broad latitude to declare a disaster but there are regulations in the Government Code; to declare an emergency it is less specific
  • Zaffirini asked if budget execution was considered for this circumstance
    • Not sure but the option is still definitely available
  • Hinojosa asked whether expenses incurred by municipalities for the border situation would be eligible for state reimbursement
    • There would be opportunity for additional state funds depending exactly what the municipalities are requesting; the governor’s office would make that determination

 
Mike Morrissey, Office of the Governor

  • The LBB correctly identified the three pathways for funding for the border initiatives
    • Budget execution
    • Disaster declaration
    • Emergency declaration
  • There are two pieces to the border surge
    • Activation of Operation Strong Safety with the DPS
    • Activation of the National Guard close to six weeks later
  • The governor determined that Operation Strong Safety could be funded for FY 15 mostly through budget efforts in 2015; that left about 10 weeks of a gap to find funding for
  • Budget execution would always be the ideal method if there is time to use that method; in this situation, time was the main constraint
  • Would be happy to discuss using the governor’s disaster funding to finance the operations but it is still a legislative fund; if funds are used out of that pot and the legislators do not approve, the fund could go away; always try to ensure the legislature knows where those funds are going and help to make those determinations
  • The disaster fund has as healthy balance but hurricane season is a threat
  • Hinojosa noted the use of the National Guard is more of a political decision; securing the border from Brownsville to El Paso is a very complicated task
  • Nelson noted the federal government is not doing their job securing the border; something has to be done; what is the long term strategy for getting the federal government to pay for this
    • Still working on that
  • Zaffirini asked if this problem has been going on so long why wasn’t there time for budget execution
    • Because Strong Safety began six weeks earlier, it was concluded that assistance was needed in short order
  • The general goal is to fund the operation through the end of the year then to allow the appropriators to decide how the situation should be handled going forward
  • Zaffirini noted since there is not a budget execution proposal at this time, the only option the legislators will have is whether or not to reimburse the Radio Infrastructure Fund
  • Zaffirini asked why another DPS surge was not requested
    • It was requested in June; after five weeks the information coming through was that more help was needed
  • Zaffirini asked if there is any idea of how many of the children coming across truly deserve asylum
    • Not sure about that; it is generally up to the federal government to make those types of determinations in the detention centers
  • Campbell noted she doesn’t believe this is a political decision; it is a protective decision to put services on the border to prevent the state from incurring further costs; hiring more DPS officers is permanent and this may not be a permanent problem; the National Guard is more appropriate for this situation
  • Huffman noted there are many members who support what the governor is doing