Tag Archives: Economic Stabilization Fund (ESF)

Texas projected to face $4.6 billion deficit by the end of the current biennium

Texas Comptroller Glenn Hegar, the elected official charged with overseeing the state’s finances, now expects Texas will face a $4.6 billion deficit by the end of the current two-year budget cycle. The state had as recently as February been looking at a multi-billion dollar surplus heading into next session.

One of the comptroller’s primary jobs is releasing state revenue estimates, which project how much tax revenue the state is expected to collect in relation to how much it is budgeted to spend. These estimates are revised periodically, particularly in the event of a drastic change in economic circumstances. The economic downturn caused by the simultaneous events of the COVID-19 pandemic and the oil price war certainly marked a drastic change.

Certification Revenue Estimate 2020-21 Info-graphic from the Texas Comptroller

The comptroller told legislators back in April that the economic double-whammy had sent Texas officially into a recession. On Monday, Hegar testified before the Legislative Budget Board (LBB) and shared a revised revenue estimate that offered sobering numbers. The state is projected to end fiscal year (FY) 2021 with a budget shortfall of $4.6 billion — a $7.5 billion reversal from the $2.9 billion surplus his office projected in the certified revenue estimate (CRE) released in October 2019. The state is now expected to have $110.2 billion in available general revenue for the 2020-2021 budget biennium, representing an $11.6 billion decline from $121.8 projected in the 2019 CRE.

A mathematically-minded observer may note that the numbers do not exactly match up. Hegar explained that while revenue collections dropped by $11.6 billion, the budget fell by only $7.5 billion as a result of a handful of factors that reduced the amount of money the state was expecting to spend. Among them, Texas received $1.2 billion of federal CARES Act funding for public education that it used to offset state spending. Changes in the assumptions regarding the state share and the local share of public education funding resulted in $1.7 billion in unanticipated local funding. The state also received an additional $700 million in recapture (or “Robin Hood”) payments that it had not anticipated.

Source: Texas Comptroller

Sen. Finance Committee Chair state Sen. Jane Nelson (R-Flower Mound) asked Hegar in Monday’s LBB hearing whether legislators should expect to tighten their belts during the next legislative session. Hegar was reticent to prognosticate beyond the current budget cycle. However, he was quick to point out that he had pushed early on for agencies to reduce their spending ahead of next session. State leaders have since instructed state agencies to reduce spending by 5% across the board. Hegar noted that instruction is not factored into this projection. Any savings will however reduce the need for supplemental spending in the next legislative session, reducing the overall pressure on the next biennium’s budget.

In response to a question posed by Senate Education Committee Chair Larry Taylor (R-Friendswood), Hegar indicated that the state will be able to ensure schools receive the additional funding promised this budget cycle as a result of the school finance bill House Bill (HB) 3. Yet Hegar suggested there is tremendous uncertainty as to what the state will be able to provide in the upcoming 2022-23 budget cycle.

Lt. Gov. Dan Patrick (R-Texas) said Monday that school districts across the state have roughly $14 billion in fund balances, which represents each district’s cash reserves. Patrick suggested that the state could tap those fund balances to offset the budget deficit. Patrick separately acknowledged that teachers are now included in the list of “frontline” workers in the COVID-19 pandemic.

Texas Tribune Executive Editor Ross Ramsey (left) interviews Texas Comptroller Glenn Hegar (R-Texas).

The revised estimate released this week does not take into account agency budget cuts, whether schools reopen for in-person versus remote instruction, or any future federal relief money. Hegar explained Wednesday in an interview with Texas Tribune Executive Editor Ross Ramsey that the estimate does not factor in any additional federal relief money until a bill is passed by Congress and signed by the president. Hegar also told Ramsey that the estimate was based upon the assumptions that the economic recovery is already underway, that there will not be an additional spike in COVID-19 cases in the fall that would spark another shutdown, and that GDP may return to normal by the end of 2021.

Hegar said that the state saw a less drastic decline in sales tax revenue than he had previously feared. The state also took in $950 million more in taxes from online purchases as a result of legislation passed during the last legislative session that expanded the sales tax.

Source: Texas Comptroller.

The economic stabilization fund (ESF), commonly referred to as the “rainy day fund,” is projected to end FY 2021 with a balance of $8.8 billion. This fund is fed by taxes collected from oil and gas operations, which have been hit hard by the combination of lower oil prices and a reduction in production following the precipitous drop in demand caused by the economic impacts of the pandemic. The ESF was designed as a safety feature to enable legislators to dip into the fund to during lean years, smoothing out the fluctuations in available tax revenue caused by volatility in the oil and gas market and enabling the state to maintain critical government services.

In both testimony and interviews this week, Hegar has emphasized the need for the community to come to terms with the reality of a protracted battle against COVID-19. Hegar highlighted citizens’ responsibility to wear masks and engage in safe practices designed to slow the disease’s spread and prevent another shutdown. On a positive note, Hegar noted the healthy ESF and potential savings from agency budget cuts are among the measures at the state’s disposal to help manage the budget shortfall.

“There’s plenty of tools in the toolbox to be able deal with it as this current revenue estimate projects,” said Hegar, while adding the caveat, “Every revenue estimate has clouds of uncertainty, yet this one has greater clouds of uncertainty than ever before.”

The comptroller discussed other potential sources of revenue and savings in Wednesday’s interview. Hegar contended that an income tax is unlikely to pass in Texas, where such a proposal would require a supermajority of the Texas legislature and a statewide vote. The comptroller was also skeptical of the idea of legalizing and taxing marijuana, which polling shows is supported by most Texans. Hegar instead pointed to budget measures taken during the 2011 legislative session, which saw large budget cuts (including $5.4 billion from public education) as a result of a projected budget shortfall. The comptroller also mentioned deferring public education payments and looking at funding for Medicaid.

When the 87th Texas Legislature convenes in January 2021, shoring up the current budget will be the first task legislators face. Their next task will be to set the budget for the 2022-2023 biennium, which Hegar warned is likely to be a much bigger issue — although it’s too early to forecast the scope of the challenge. That will be the focus of the comptroller’s biennial revenue estimate (BRE), which is usually released right before the new legislative session begins.

State comptroller says Texas is in a recession

In an interview Tuesday morning, April 7, 2020, with Texas Tribune Executive Editor Ross Ramsey, Texas Comptroller Glenn Hegar repeated a statement he had already made to legislators in private last month regarding the combined economic impact of the COVID-19 pandemic and plummeting oil prices.

“I know that we are unfortunately in a recession,” said Hegar, whose office oversees the state’s finances. “I just don’t know how deep or how wide it’s going to be.”

The comptroller’s certification revenue estimate in October 2019 projected that the state would end the current budget cycle with a balance of $2.9 billion in general revenue and $9.3 billion in the state’s economic stabilization fund (ESF), which is often referred to as the “rainy day fund.” Hegar said he plans to release a revised revenue estimate in July, which he predicts will be several billions dollars less. Many are questioning just how much of a toll the double-whammy of a pandemic and an oil price war will take on the state’s budget — especially after legislators significantly increased public education funding under House Bill (HB) 3 in 2019.

Hegar said Tuesday the state is expected to have enough cash flow to meet its obligations through the end of the current budget, which runs through August 31, 2021. While contributions to the ESF are expected to decrease as a result of declining oil and gas revenues, the comptroller’s office is still projecting a balance of $8.5 billion in the fund by the end of the current budget cycle.

Altogether, Hegar said he does not believe legislators will need to be called into a special session this year to shore up the current budget, but he added that the start of the next legislative session in January 2021 will be quickly upon us. Next session, legislators anticipate facing the daunting task of funding state priorities over the next budget cycle with significantly less money available.

The reason less money will be available has to do with how Texas government is funded. Since Texas does not have an income tax, sales and use taxes account for 57% of state revenue. Local governments are funded by a combination of sales and property taxes. When places like bars, restaurants, and stores make less money, they send in less sales tax revenue. Surging unemployment has the same effect on sales taxes by depressing consumer spending, as well as inhibiting people’s ability to keep up with their property taxes.

All this is happening at the same time the demand for government services such as unemployment, healthcare, and food assistance is increasing. The result is an unprecedented strain on government at every level, yet Hegar noted that state agencies should look for ways to cut spending.

The comptroller’s office is currently working off of sales tax revenue reports released in March detailing economic activity that happened in February, which was before social distancing was enforced. April sales tax numbers will provide a better look at the economic impact of business closures and downsizing, but that report won’t be available until the end of May. Hegar is waiting on those numbers to give a better estimate of the impact on the state budget in the planned revised revenue estimate this summer.

So what does this all mean for public education? It’s still unclear. Hegar noted Tuesday that  education and health and human services make up the two largest components of the state budget. Hegar noted that state leaders will likely begin discussing ways to cut agency spending during the current budget cycle, but he suggested that areas like the Foundation School Program (FSP) and Medicaid should be exempted from cuts this year. The FSP is the finance formula that flows funding for public education to local schools.

The state is also awaiting federal coronavirus aid recently passed by Congress, which will send billions of dollars to schools across the nation. Future federal aid packages are likely to have an additional impact on the state budget going into next session. There are already talks coming out of Washington about a fourth coronavirus stimulus bill that could provide as much as one trillion dollars in additional aid.

The one phrase Hegar repeated multiple times throughout this morning’s 45-minute interview was “managing expectations.” The comptroller was clear that the state is in the midst of a recession driven largely by the COVID-19 outbreak and aggravated by the oil price war. We still don’t know how many billions of dollars this will drain from the state’s budget going forward, but it will be significant. We’ll have a better look when the comptroller releases his revised estimate in July.

You can watch the full Texas Tribune interview with Texas Comptroller Glenn Hegar here.

From The Texas Tribune: Texas House approves 2020-21 budget plan, with extra $9 billion for school finance, property tax relief

By Edgar Walters, Cassandra Pollock and Alex Samuels, The Texas Tribune
March 27, 2019

Texas House Appropriations Chairman John Zerwas, R-Richmond, talks with House Speaker Dennis Bonnen on March 27, 2019, as the House took up the budget debate. Photo by Emree Weaver / The Texas Tribune

Texas House approves 2020-21 budget plan, with extra $9 billion for school finance, property tax relief” was first published by The Texas Tribune, a nonprofit, nonpartisan media organization that informs Texans — and engages with them — about public policy, politics, government and statewide issues.

Editor’s note: This story has been updated throughout.

In Dennis Bonnen’s first major test as speaker of the Texas House, the chamber he oversees resoundingly passed a $251 billion budget Wednesday after a long but largely civil debate — a departure from the dramatics that have typically defined such an affair.

Though lawmakers proposed more than 300 amendments to the spending plan, Bonnen, an Angleton Republican, and his chief budget writer, state Rep. John Zerwas, R-Richmond, finished the night with their budget plan largely intact. After 11 hours of relatively cordial discussion, lawmakers agreed to withdraw the vast majority of their amendments or move them to a wish list portion of the budget, where they are highly unlikely to become law.

The budget passed unanimously on the final vote. The legislation, House Bill 1, now heads to the Senate, whose Finance Committee was set to discuss its budget plan Thursday.

“I’m proud of where we are in the bill that we are sending to the Senate,” Zerwas said at the end of the marathon debate. “Each and every one of you should be incredibly proud of the work that you’ve put in here.”

The two-year spending plan’s highlight — a $9 billion boost in state funding for the public education portion of the budget — remained unchanged. Of that, $6 billion would go to school districts, and the remaining $3 billion would pay for property tax relief, contingent on lawmakers passing a school finance reform package.

The budget plan would spend $2 billion from the state’s savings account, commonly known as the rainy day fund, which holds more than $11 billion.

“I’m not here to compare it to previous sessions,” Bonnen told reporters after the House budget vote. “But I’m here to tell you we had a great tone and tenor tonight, and I’m very proud of the business that we did.”

Some of the more contentious budget proposals floated by lawmakers never reached the floor. An amendment from state Rep. Richard Peña Raymond, D-Laredo, for example, would have asked members to vote on the issue of across-the-board pay raises for public school teachers. Such a proposal has divided the Legislature this session, with Lt. Gov. Dan Patrick’s Senate in favor and much of the House opposed. Raymond withdrew his amendment Wednesday evening, saying he planned to bring up the issue again when the House debates its school finance bill.

Debate on HB1, the House state budget bill, continues into its 12th hour as State Rep. Chris Turner, D-Dallas, shows the strain of a long night. March 27, 2019.
Debate on HB1, the House state budget bill, continues into its 12th hour as State Rep. Chris Turner, D-Dallas, shows the strain of a long night. March 27, 2019. Photo by Bob Daemmrich for the Texas Tribune. 

 

A proposal from state Rep. Mayes Middleton, R-Wallisville, to prohibit disaster recovery dollars from benefiting noncitizens and “illegal aliens” was quietly withdrawn after sparking controversy earlier this week. Across the aisle, state Rep. Jessica González, D-Dallas, withdrew her amendment that would have required Gov. Greg Abbott’s office to prepare a report on domestic terrorist threats posed by white supremacists.

Bonnen worked behind the scenes in the days preceding the vote, House lawmakers said, in the hopes of avoiding the discord that has erupted during the chamber’s marathon budget debates in past sessions. On Tuesday, top lieutenants for Bonnen met for a handful of informal gatherings to offer concessions in exchange for lawmakers dropping some of their more controversial amendments, according to people familiar with the meetings.

The result was one of the shortest budget debates in recent memory. Lawmakers gave preliminary approval to the two-year spending plan minutes after the clock struck midnight. Under former House Speaker Joe Straus, lawmakers in 2017 and 2015 went home well into the morning, after several explosive exchanges between Straus’ allies and the chamber’s hardline GOP membership.

“This budget night is unlike any other I have experienced in my time in the House — both in it’s shorter duration and civil tone,” said state Rep. Matt Krause, a Fort Worth Republican and Freedom Caucus member, in a text message after the debate concluded. “I think Speaker Bonnen deserves the bulk of the credit for creating an environment of civility and decorum. This is how the Texas House should operate when debating the big issues for the state of Texas.”

Rep. Matt Krause, R-Fort Worth, addresses the house floor during budget night at the State Capitol on March 27, 2019
Rep. Matt Krause, R-Fort Worth, addresses the house floor during budget night at the State Capitol on March 27, 2019. Photo by Miguel Gutierrez Jr./The Texas Tribune 

 

So while Bonnen’s first budget night as speaker was hardly free of controversy — an argument over the effectiveness of the state’s “Alternatives to Abortion” program, for example, derailed movement on amendments for nearly an hour — the occasional spats paled in comparison with those of years past. There were no discussions at the back microphone of lawmakers’ sexual histories, as happened in 2015, and no one had to physically restrain House members to prevent a fistfight over the fate of a feral hog abatement program, as happened in 2017.

Still, state Rep. Jonathan Stickland, R-Bedford, continued his long-running campaign against the feral hog program. And though the exchange ranked among the evening’s rowdiest, it was more than tame by last session’s standards.

State Rep. Drew Springer, R-Muenster, again opposed Stickland’s amendment to defund the program, which reimburses local initiatives to eradicate wild hogs. Stickland responded, “Members, although I respect the thoughtful words of Rep. Springer … let’s end this program right here, right now.”

Stickland’s amendment failed, with just four votes in favor.

In an earlier dustup just before 2 p.m., state Rep. Sarah Davis, R-West University Place, who led the House budget negotiations over health and human services programs, was seen in a heated exchange with state Rep. Jeff Leach, R-Plano.

A few minutes later, Leach proposed an amendment that would allow Texas to expand Medicaid coverage for women up to a year after they give birth. To cover some of the costs, Leach’s amendment recommended cutting $15 million from a program in Abbott’s office that reimburses film and video game makers who work in Texas.

Extending postpartum Medicaid coverage “is simply more important and should be a higher priority” than the film incentives program, Leach said.

Democrats gathered at the back microphone to oppose the motion, saying the funding should come from elsewhere.

“I appreciate that you’re trying to help women’s health,” said state Rep. Donna Howard, D-Austin, who said she supported the film incentives as a job-creation program. “If we found another source, would you create another amendment?”

“I’m not going to agree to hypotheticals,” Leach replied. The amendment subsequently passed without a recorded vote after putting Democrats in the awkward position of voicing opposition to a Medicaid coverage expansion they otherwise supported.

A more ambitious Medicaid coverage expansion, which would have provided publicly funded health insurance to low-income Texans under the Affordable Care Act, failed for a fourth legislative session. The Medicaid expansion amendment brought by state Rep. John Bucy III, D-Austin, was rejected with 66 votes in favor and 80 opposed.

Still, Democrats saw some wins Wednesday. For example, an amendment by state Rep. Michelle Beckley, D-Carrollton, that would require the Department of State Health Services to conduct a study on vaccination rates among children at licensed child care facilities was approved in a 79-67 vote. Another successful amendment by state Rep. Chris Turner, D-Grand Prairie, directs the state to come up with a transition plan for when a pot of federal health care safety-net funding, known as the 1115 waiver, dries up in 2021 and 2022.

Complicating budget negotiations was news of an updated property tax reform proposal, which was expected to be laid out in committee before the House convened but was instead postponed until after the budget debate. Debate over that updated proposal, which drew opposition from Democrats and hardline Republicans, carried over onto the floor as its author, state Rep. Dustin Burrows, R-Lubbock, met with committee members to discuss the high-priority legislation.

The debate on the HB 1 ended with a procedural move spearheaded by Turner and Burrows to wrap up the remaining amendments and send them to the wish list portion of the wish list portion of the budget. That section of the budget, known as Article XI, is considered a graveyard for most line items.

Passing an amendment to the wish list is “just a way to get you off the main,” state Rep. Yvonne Davis, D-Dallas, said in protest earlier in the evening, shortly before one of her proposals was shot down.

State Rep. John Zerwas, R-Richmond (right), speaks with Rep. Dennis Paul, R-Houston (left), in the House Chamber on March 27, 2019, the day the House will take up HB1, the 2020-21 budget plan.
State Rep. John Zerwas, R-Richmond (right), speaks with Rep. Dennis Paul, R-Houston (left), in the House Chamber on March 27, 2019, the day the House will take up HB1, the 2020-21 budget plan. Photo by Emree Weaver / The Texas Tribune 

 

The two-year budget wasn’t the only spending plan advanced by the House on Wednesday.

Lawmakers also approved a $9 billion supplemental spending plan to pay for leftover expenses that aren’t covered in the state’s current two-year budget, mostly for Hurricane Harvey recovery and health and human services programs.

A $4.3 billion withdrawal from the state savings account covers the largest share of expenses in the supplemental bill. Another $2.7 billion comes from the state’s general revenue, and $2.3 billion are federal funds.

The legislation, Senate Bill 500, returns to the Senate, whose stopgap spending plan approved earlier this month carried a $6 billion price tag.

Lawmakers in 2017 underfunded Medicaid, the federal-state health insurance program for the poor and disabled, requiring a $4.4 billion infusion of state and federal funds. The Legislature must pass the stopgap funding bill before the end of May if the Texas Health and Human Services Commission is to be able to pay health care providers on time.

The supplemental bill also includes:

  • Nearly $2 billion to reimburse school districts, state agencies and universities for costs they took on after Hurricane Harvey
  • About $1.3 billion to shore up a system that pays out teacher pensions, contingent on the passage of a pension reform bill, which includes $658 million from the state savings account to provide a one-time “13th check” made out to retired teachers
  • Nearly $11 million for the Santa Fe Independent School District, which experienced a mass shooting last year that left 10 dead and 13 wounded
  • $2 million for state mental hospital improvements, which includes funding to plan the construction of new hospitals in the Panhandle and the Dallas area.

This article originally appeared in The Texas Tribune at https://www.texastribune.org/2019/03/27/texas-budget-house-2019/.

 

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Making better use of the state’s rainy day fund when it’s not raining

The Senate Finance Committee met today to take up a number of Senate interim charges. Among them, the committee took up the charge to examine options to increase investment earnings of the Economic Stabilization Fund in a manner that minimizes overall risk to the fund balance and to evaluate how the Economic Stabilization Fund constitutional limit is calculated; considering alternative methods to calculate the limit, and alternative uses for funds above the limit.

the Texas Economic Stabilization Fund, often referred to as the state’s rainy day fund, is a mechanism that diverts a part of the severance taxes the state collects on oil and gas production and sets those monies aside to fill budget shortfalls resulting from temporary economic downturns. The fund, which has been used many times since its inception, has in recent years grown to approximately $11 billion, larger than at anytime in its history.

During the last session lawmakers facing stiff budget constraints began to discuss how they could better utilize the rainy day fund, other than continuing to stuff cash into the state’s proverbial mattress. One idea floated by Texas Comptroller Glenn Hegar was to take a portion of the fund and invest it as an endowment such that the investment returns could be used to help pay for state priorities, like shoring up the state’s pension funds. Legislators were not comfortable acting on that idea without more time to vet it.

In today’s hearing Hegar reintroduced the idea of investing the whole of the rainy day fund in very liquid assets that would allow for a return that roughly matches the inflation rate and investing a portion of the fund, in excess of what legislators think they might need quick access to, in less liquid assets that would generate a higher return. The Comptroller’s office predicts that an investment of $3 billion, with additional biennial investments over a certain threshold, would within 10 years accumulate to a fund that generates $1 billion a year in usable revenue. In 20 years, that projection jumps to more than $2 billion a year. The idea was received fairly favorably.

One of the things the state has used the rainy day fund for in recent years is to justify credit rating firms’ assignment of a AAA (the highest) credit rating to the state. Having a AAA rating allows the state and school districts through the Permanent School Fund (PSF) bond guarantee program to pay the lowest possible rate on bond debt. It was pointed out in the hearing however, that the rainy day fund is only one factor those firms look at when assigning a score. Another, more heavily weighed factor is the health/unfunded liabilities of a state’s pension funds. Both TRS and ERS need improvement to ensure the state is able to keep its current rating. A downgraded rating could cost the state billions in additional interest over the life of the state’s and school dostricts’ many bonds.