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The Senate Committee on Natural Resources and Economic Development met on November 17, 2022, to take up discussion and hear testimony on economic development programs, hotel occupancy taxes, and the monitoring of SB 13. An agenda for the hearing can be found here.

This report is intended to give you an overview and highlight of 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.

 

Item 1: Opening Comments

  • Lucio and Sen. Seliger give comments on their experience in the senate before their retirements
  • Will take up last few agenda items from the interim

 

Item 2: Economic Development Programs

  • Better able to see types of agreements through data base and transparency; charges specifically on 380 and 381

 

Will Counihan, Texas Comptroller of Accounts’ Office

  • Database to identify universe of 380 and 381 agreements created; implementation gone well with no issues and good compliance most likely due to the non-compliance penalties in bill
  • 352 entities have just over 3,500 agreements; some entities have 40 plus agreements
  • Recommendation to add a requirement for additional information to be reported that would allow public to compare cities or counties; useful to have agreement posted but no way to compare PDFs currently
  • Zaffirini- How useful has data been?
    • Very, almost 21,000 searches by the public; don’t know what searches are being done for but significant traffic on site
  • Zaffirini- How much variation in agreements?
    • 95% of it is sales tax
  • Zaffirini- Should this issue be addressed by template or omnibus bill?
    • Template; always good to give people something to go by instead of leaving it up to agency decision
  • Zaffirini- Have you given any thought to writing a template that would be so tightly written that it couldn’t be amended significantly by the other chamber?
    • Haven’t given thought to it but will come back to you
  • Seliger- Which one of these things isn’t publicly disclosed? Some of these should be basic transparency
    • In Lege there was list of items required, but PDF document formats are different so we can’t actually pull data out of two pdfs then compare without significantly increasing man hours
    • Asking for things to allow for agreement components including taxes abated
  • Seliger- What is currently not being given?
    • Total monetary amount; names of agreements are vague and you wouldn’t know what the agreement was for if you just read the name; company names should be listed in agreement names; expiration of terms of agreement aren’t listed in database
  • Birdwell- What does the comptroller’s office think of the definition of what’s useful in regard to Sen. Zaffrini’s question; seems like you are saying these things should be open information
    • Want data to be something people are using to make decisions; want public to know what types of agreements and taxes are in their municipalities; can achieve this by adding a few extra things aforementioned
  • Birdwell- What would be a recommended set of data?
    • Term dates and dollar amounts would be beneficial to have in database tool; names are difficult for citizens to pinpoint particular agreements they are looking for; should be in company x in city y format
    • Guidance on types of agreements these can be would be helpful
  • Birdwell- Bettencourt looking at filing bill putting terms on longevity and types of agreements; any view on right longevity of these?
    • Don’t have a view on longevity; no requirements around length right now, up to city and company
  • Birdwell- Any cross-referencing of 312s to 380s and 381s?
    • Not something we are required to do right now
  • Birdwell- Way I read this is that they might make 312s irrelevant; seeing any supplanting of 312s?
    • Cities shifting from 312s, but just anecdotal right now; questions of why they are moving to less established guideline agreement
  • Hancock- Any tracking on how long assets last compared to how long contract lasts?
    • No
  • Hancock- Would be good to know how many roll off
    • 380 and 381 are different agreements; existing company makes agreement with city to abate sales tax; regarding tracking haven’t done that since they are local agreements
  • Birdwell- Having people with initial period of 10 years that keep adding additional 10 years; having a hard fast demarcation line would be useful
  • Lucio- Do we have ability to see agreements that have been established by certain districts?
    • Could do that but haven’t done yet, currently sorted by city, county, and company

 

Dale Craymer, Texas Taxpayers and Research Association

  • Agreements give flexibility for economic programs; suggest that there be searchable database for inside the documents; 312 provision set of guidelines for jurisdictions adopting 380s and 381s may be helpful
  • No provision for 30-day notice in 380s and 381s; some view 30-day layout as being too long; should follow a 5 day filing instead of 30 days
  • Use of these agreements to go beyond time limit of 312; need to compare the agreements to what competition is doing; have lost agreements to other states
  • Misconception that people choose these because of looser requirements, not always the case; companies required to pay tax then prove they are meeting standards of agreements before getting the tax refund; not always preferred because of these tight standards

 

Rick Bailey, County Judge and Commissioner Association

  • Only ever done 312s in Johnson County; economic development is essential to success of projects; 312 and 381 provide flexible tools for tax abatements; limitation on current flexibility would diminish ability to compete for these projects
  • Want transparency; benefits of abatements done in a study and shows that in Johnson County the positives from 380s and 381s will be sustainable; Louis Vuitton brought $82 M into county

 

Carlton Schwab, Texas Economic Development Council (TEDC)

  • Economic development corporations generate more than $1 B in funding; positive impacts of local economic development efforts; extensive utilization of 380 agreements in counties; provides overview of the jobs and monetary investments of these agreements
  • Increasing transparency will not be opposed by TEDC because public dollars used for economic development; don’t support limiting local control of these agreements and will oppose such legislation

 

Bennett Sandlin, Texas Municipal League (TML)

  • 380 very simple; three key things to 380 are written contract, effective benchmarks for what is trying to be accomplished, and adequate clawbacks in agreements
  • TML will be supportive of any additional needed transparency; data is there in contracts just a question of crunching data, happy to help with this
  • Zaffirini- What expanded transparency requirements would you support Mr. Bailey?
    • Bailey- Before anything is approved there is a strenuous vetting process of the counties
    • Wouldn’t oppose more transparency, not ideal for some companies but will support them and help
  • Sen Zaffirini- What kind of changes would your association oppose?
    • Don’t have enough infrastructure in place without companies using abatements to expand growth; ability to draw in new businesses may be compromised if companies don’t use abatements because counties sometimes don’t have money to build infrastructure that these companies will create
    • Would be opposed to anything that takes away control from counties
  • Zaffirini- Should we approve 380 and 381 without term limits and comptroller approval?
    • Schwab- Incentive for cities to use 312 so if they depart from that the incentive for them may not necessarily be abatement
    • Under 380 pegging incentive to property tax amount and the taxes are paid as normal and then city gives a refund; may be less desirable for business and cities; not opposed to not having term limits for 380s
    • The new database is easy to use and a good tool; if we need more transparency, I think it’s in the agreements; hard work is the crunching of the numbers; would be open to cities self-reporting more
  • Seliger- Companies will overshoot numbers sometimes, but think its important to have the performance that has been agreed upon
  • Hancock- Request that we work together to come up with end product that’s acceptable to constituency and companies
  • Craymer – Texas is not a low tax state
  • Hancock – Paying tax on so many things that becomes a huge number
    • Craymer – Have ten states that don’t tax business personal property at all, have a distortion in tax
  • Hancock – Have high tax on inventory/assets, sometimes those are higher taxes than the tax on the building
    • Craymer – Not about the size of the package but bottom line
  • Birdwell – 312 was only for property taxes, not fees or sale taxes and 381 is any revenue which could include property taxes but it’s mostly sales taxes and some fees
  • Birdwell – Bi-furcation needs to be kept in mind, state does not fund local like they do for school districts (ie 313); asked Dale about 30 day and thinks tax abatement is more complicated
    • Craymer – a 380/381 could be a straight abatement or could have other features and it could be more complex
  • Birdwell – There is a discomfort with these getting out of control, 312 have a 10 year time limit and wonders if that is the time limit for a 380/381
  • Birdwell – whatever property tax relief is done will be anchored in M&O portion of school districts
    • Craymer – These incentive programs are controversial, anything that can be done with transparency and that builds public trust is a good thing but concern is building in so much transparency that more bureaucracy is built in

 

Item 3: Hotel Occupancy Taxes

William Counihan, Texas Comptroller Data Analyst & Lara Abi Habib, Texas Comptroller 

  • Would be challenging to kick out an average rate, when asked about rates they direct back to legal council
  • Have 568 cities and 39 counties in their database
  • No real penalty for lack of information
  • Handouts provided include various recommendations to address holes in the system
  • There are 7 different types of hotel projects, all have city owned convention center and hotel within a 1k or connected
  • Habib reviews the various programs and projects eligible for rebates, can also include restaurants, shops and parking facilities
  • City of Arlington exception is a 30 year rebate and can have a state mixed beverage tax unlike the other projects (others are 10 year rebate and no state mixed beverage taxes)
    • Kemah project is different from all others
  • Birdwell – Asked Counihan about short reporting period, and collection numbers
    • Doesn’t know if there are counties not collecting or not reporting it
  • Birdwell – Real question they get is in bills that come through that want to grant an exception in hotel occupancy tax; not just trying to get a handle on reporting but also in exceptions
  • Birdwell – If each exception is granted then over time hotel occupancy tax could be used on anything and concern is this could get out of hand
  • Lucio – Wouldn’t want to limit what cities can do for economic development projects to draw tourism
  • Hancock – Intent was to attract people outside of Texas to come and spend their money, concerned shifting tax dollars to preferred areas
  • Birdwell – Is there a way to analyze and for Comptroller to tell us the benefit to the state
    • Counihan – Can review to see what is available
  • Hancock – Could you look at historical data to see if out of state money is being driven in state, want to know out of state revenue these projects are projected to bring in
  • Counihan – Many of these events are not reporting to the Comptroller if its in state or out of state
    • Hancock – Credit card or something in how they pay should show if they are out of state
  • Birdwell – Would need to draft legislation that says x percent need to be out of state
  • Hancock – If it’s not economic benefit, then why would state provide this economic development tool
  • Birdwell – Dollars do pass through the state to be returned to municipality?
    • Habib- a rebate is put in to the state
  • Birdwell – Is any of it related to the operation of the convention center?
    • Habib- Not connected
  • Birdwell – Do you do any analysis annually or bi-annually, return on investment analysis?
    • Counihan – Not aware of that being done and would need legislative authority to do so
  • Birdwell – Points out major events fund and similarities with questions he is asking
  • Birdwell- Want to make sure state is receiving benefit beyond the escrow
    • Counihan- Example you gave could be a template for us
  • Birdwell- Struggling to make sure it’s not just the state building hotels and conventions that taxpayers are paying for

 

Erika Boyd, Texas Travel Alliance (TTA)

  • Whether creation of a standard hotel occupancy tax is feasible we welcome the standardization; believe hotel occupancy tax should promote Texas as destination for tourism; $76 B spent in Texas in 2021 by visitors
  • TTA supports Lege efforts and will work with Lege on standardization

 

Justin Bragiel, Texas Hotel and Lodging Association

  • Provided reports on both items over the summer, updated study from 2020 on effectiveness of QHP; hotel rebate incentive recouped for state after the 10-year period; state investing in asset that state will recoup for years to come
  • Property taxes paid by hotels that are economic drivers
  • In agreement on transparency for economic data being generated
  • Hotel tax bill template given to make sure any new proposed use of local tax revenue will directly enhance tourism and the hotel industry; work with communities to make sure there is a return on investment; want to make sure ROI standards in place and reporting occurring
  • Zaffirini- Sometime local govt. asks for exemptions and argue its promoting tourism; how would you answer this?
    • Anything that typically makes a community nice to live makes it a nice place to visit; want to make sure there is a direct connection between money spent and hotel and tourism use
    • Boyd- Other avenues to pay for things that are not directly attributable to hotels and tourism
  • Zaffirini- Recommendations?
    • Wording should be clearly delineated on what it is used for and a return on investment measure for that use; retain tourism marketing to make sure there are tourism gains in community; limit hard percentage limitations on use, sunset as well, and documentation
  • Zaffirini- Has data collected been helpful for your associations?
    • Could use economic incentive for local hotel tax revenue to comply with reporting; maybe some counties don’t know they should be reporting this data; working on draft legislation and would like feedback; past legislation didn’t encompass all aspects of hotel spending
  • Birdwell- Convention center has to be on city property in hotel and convention center project?
    • Yes, in all but two municipalities the hotels are on their land; most counties own the hotel building but different scenarios with long term leases on land to city
  • Birdwell- Is it a function of govt. to operate hotels when the hotel industry does this a lot better?
    • Sometimes it is a function of government; from a revenue generation standpoint some hotels have bene very lucrative to cities; don’t know if govt. should be in this business though
  • Birdwell- Want to make sure govt. is not competing with the private sectors; what do hoteliers think? Any imminent domain used by cities to make hotels and convention centers?
    • On the latter, I’m not aware of that happening; hotel industry typically is fine with government being involved as long as everyone in industry has chance to bid; surrounding hotels benefit from compression in market
  • Birdwell- Does the city own the hotel and you bid to operate on it?
    • Yes, have big portion of industry in managing the hotel business
  • Birdwell- Is state forgoing hotel occupancy tax but it is putting what it thinks it would collect in ten years as a function of escrow?; any industry data for the percent of return on hotel occupancy tax that’s in-state and out-of-state?
    • office on economic development and tourism is monitoring that; regardless of in or out-of-state it’s still generating economic activity; benefit of going through committee hearing is that comptroller attaches fiscal note to each piece of legislation
  • Birdwell- LBB will send back fiscal note as zero?
    • My memory is that there won’t be a negative fiscal note if there’s a new city on the bill that wasn’t able to go through the whole process; benefit of having these bills start as standalone bills is being able to ask tough questions to developers
  • Birdwell- Mechanism to anchor the rebate to a clawback?
    • Challenge is the rebate is associated with debt service so if you put the clawback with a rebate may be difficulty if revenue impeded; this is a tool to enable construction where it wouldn’t be able to happen otherwise
  • Birdwell- What if you prorate hotel occupancy tax on non-convention days and on convention days you keep the whole thing?
    • Idea that city needs to come to legislature for approval of rebate of state revenue; worth looking at way to delineate type of economic activity
    • Boyd- On tracking and ROIs related to out of state visitors, tools employed to know why people are in destination and if it is for a convention; could provide data on in-state and out-of-state
    • Already have sense for projects operating and what they are getting from state during 10-year rebate and after that period what they are contributing
  • Seliger- Do you look at increase in occupied days on generation in tax itself when a hotel is built?
    • Typically, the destination marketing organization for the community does; also measure increase in terms of occupancy due to hotel market compression
    • New bill drafted to require all uses both county and municipal be reported and modest financial incentive to ensure no fiscal barrier to comply to report and to expand reporting time
    • Transparency critical and eager to pass bill to address comptroller’s concern
  • Hancock- Arts is an important part of economic development as well
    • Very important to attract companies

 

Ann Graham, ED Texans for the Arts

  • Wants to pass a bill to expand on HOT transparency
  • Knows COVID hit the economy, want to know HOT funds promote tourism
  • In 2017 has successful passage of transparency and reporting bill
  • In new bill looking for sponsor, require all uses be reported and have a carrot not a stick to provide an incentive for compliance, expand reporting time
  • Transparency is critical and eager to pass a bill to help address concerns
  • Hancock – one important component of economic development is arts related
    • Arts were not originally a part, need a dynamic vibrant community to attract businesses

 

Item 4: Monitoring of SB 13

Mike Reissig; Texas Treasury Safekeeping Trust Company

  • Maintains number of divestment lists
  • Bill gives controller broad authority to determine boycott; statutory definition different than dictionary definition; means that under bill any large asset manager can boycott; may have no investment in fossil fuels and not be boycotting under statutory definition
  • Sent list of questions to 19 companies on annex 1 and investment managers and produced list in August of 2022; FAQs put out with this because of volume of questions
  • Contract requirement says company with 10 or more employees that provides services for government must put in writing that they do not boycott oil and gas
  • 19 companies sent follow up questions regarding policies on oil and gas financing and question of if they invest in oil and gas; list divided into annex 1 and annex 2; asked 138 investment managers to report back ESG funds and compared with our own research
  • 30 days after release of list, required to submit holdings for anyone on list; had one direct investment on an entity on annex 1 list which will expire in March of 2023
  • Everyone on list has 90 days to provide clarifying info on why they shouldn’t be on the list; can update list as frequently as quarterly, 180 days to get out of half investment, and 360 to get out fully
  • May add proxy voting issue to list to make sure owner of asset is expressed in board votes; been a big issue and trying to see if there’s a way to measure and add to methodology
  • Might add scope 3 emissions which are attributable to companies and activities upstream and downstream of them; may look at position that companies take on scope 3 when looking at financing
  • Seliger- Since comptroller will provide measures if an investment company chooses not to invest in any given class does that constitute a boycott?
    • Not the mere act of not investing; under statutory definition had to come up with multi-tiered definition of what a boycott is; no simple answer
    • Blanton- For investment funds, ask specifically if they have provisions in fund terms that restrict investment in oil and gas
  • Seliger- If answer to your question is no then there cannot be a boycott? Have to be careful when huge companies have large funds that don’t invest in oil and gas and if it is a boycott or investment decision
    • If you put in prospectus or promotional materials that you don’t purchase fossil fuels potentially you are boycotting under the definition that boycotting means taking any action that is contrary to the fossil fuel industry
  • Seliger- Need a definition that really means boycott because we don’t have one that strictly applies to oil and gas
    • Action of not investing in one thing or another just for investment purpose doesn’t include a boycott; also what actions you are taking otherwise to disadvantage fossil fuel industry
  • Seliger- Urging to be careful in definition; singled out oil and gas because of importance to Texas economy
  • Birdwell- Comptroller office had that the companies were given a verification opportunity and based upon the responses the final list was made; opportunity for defendant to provide information indicating that they were not boycotting?
    • Yes, that’s correct; main distinction is you cannot boycott while also not investing in oil and gas
  • Seliger- Question of whether net zero emissions is a correct measure; if you invest in oil and gas then you are not boycotting oil and gas
    • Boycotting because they went through our methodology to meet criteria that excludes fossil fuels; share frustration about how counterintuitive it is; not about whether you invest or not; about other things that disadvantage the fossil fuel industry
  • Seliger- Have to be careful about things that disadvantage the fossil fuel energy because technically the creation of Tesla damages the fossil fuel industry; don’t think it is defensible in court and profoundly flawed
  • Hancock- So if any investment firm recognizes what customers want even though vast majority of offerings may have oil and gas, they could fall on this list?
    • Some of their funds could fall under annex 2 which is just certain funds boycotting; annex 1 is a company boycotting
  • Hancock- Not preventing companies from addressing desires of customers and offering green products; why is it so easy to look at ESG ratings and what criteria do you have to meet to be in the upper tier?
    • Looking at ESG ratings under MSCI methodology that has section specifically looking at financing and board involvement
  • Birdwell- Have to ask companies? So, for companies that fall under annex 1 without any input from company would a letter returned that states they are not boycotting override any of that criteria?
    • No, very extensive questions not just a statement of not boycotting
  • Birdwell- Weight of response of company very heavy and could outweigh your analysis of the analytics? How did you make cutdown from 19 companies on Annex 1 to 10?
    • Correct; companies could contact us and meet with us as well; always available for discussion
  • Seliger- Any communications from companies denying that they boycott?
    • Yes, can share information with you; under open records

 

Porter Wilson, Employees Retirement System

  • Analyzed both direct and indirect holdings and produced letter to comptroller identifying those and produced correspondence to each of the companies on the list; held 8 of the 10 listed companies totaling just under $40 M
  • End of fiscal year ended up divesting of 8 companies so no direct holdings in any companies boycotting

 

Brian Guthrie, Teacher Retirement System

  • Direct holdings divested; working with managers for external holdings

 

Jay Singh, Teacher Retirement System

  • Mechanics similar to those mentioned by Reissig; notified each company on comptroller list and divested 100% of internally managed holdings, by December 31 of this year external managers will be divested
  • Seliger- Is yield from divesting comparable to investing in fund?
    • Yes, can offer that reassurance
  • Seliger- Any funds not invest in oil and gas?
    • Wilson- Hold financial companies that offered good return profiles other than those companies that were boycotting
  • Zaffirini- Heard 4 proxy votes cast that violated SB 13 directive; experienced any difficulty since then with ISS?
    • Wilson- No; new processes hopefully assure that will not happen again; actively managing that

 

Dave Hunter, Texas Municipal Retirement System

  • Followed same procedures as prescribed by SB 3; one investment manager and one direct holding divested that represented $1.9 M asset; notified 10 managers with indirect holdings; no direct holdings in any listed companies and only indirect investments

 

Anne McGeehan, Texas County and District Retirement System

  • Filed similar processes as other statewide systems; no direct holding; one indirect holding and filed notices; certification that new holdings don’t boycott oil and gas

 

Tiffany White, Texas Emergency Services Retirement System

  • No direct or indirect holdings in divestment list; doesn’t hold individual securities from BlackRock; no divestment action required

 

Mark Havens, General Land Office (GLO)

  • Limited to private equity investments in three classes with a specific exemption from divestment; 4 investments with BlackRock that are traditional oil and gas, all private equity; notified comptroller in effort of transparency
  • Biggest revenue generation is 13 M acres of state land with over $2 B in oil and gas royalties and revenue
  • Seliger- Invested in BlackRock funds that are primarily invested in oil and gas?
    • Correct, all four funds in oil and gas
  • Seliger- So wouldn’t that lead us to believe that BlackRock isn’t boycotting oil and gas?
    • Yes, sir

 

John McGeady, Texas Permanent School Fund (TPSF)

  • Staff is the TEA staff managing assets for SBOE; will assume fiduciary responsibility for assets in January; fully complying with all provisions with SB 13; 9 direct holdings and sent notices to those companies; staff analyzing holdings for potential impact on divestment including responses from companies
  • Goods and services contracts contain provision that those companies don’t boycott energy companies; will report as we go
  • Birdwell- Some doubt as to whether or not TPSF is subject to SB 13; has that been clarified?
    • In SB 13 PSF is explicitly referenced as under divestment provisions of bill; may be questions on contracting provision but have changed those as well
  • Birdwell- What makes what GLO is doing unique compared to other elements of BlackRock that aren’t private equities?
    • Someone funds are not entity BlackRock itself just different products of BlackRock; every office has availability to interpret bill
    • Jeff Gordon, GLO- Relied on wording the private equity holdings are exempt
    • Gordon – We take the list and identify direct and indirect; private equity is managed by Blackrock in oil and gas; exempt from divestment and not direct or indirect holdings; Blackrock is the private equity fund manager
  • Seliger- So bills intention worked with carve outs?
    • Havens- Yes because loss would be tremendous to state

 

Birdwell- Expect to have signed interim report to Lt. Govt. Office by Dec. 17th or 18th