AUSTIN, Texas — Texas is in a stronger position to withstand a recession than most other states — including other oil producers — thanks to its $12.5 billion rainy day fund, Texas Comptroller Glenn Hegar told The Bond Buyer's Texas Public Finance Conference Wednesday.
Created in 1988 after a devastating oil bust wrecked Texas' real estate and banking industries, the fund, formally the Economic Stabilization Fund, is projected to grow from the current $12.5 billion to more than $15 billion by the end of the next budget cycle.
"One of the benefits we have over our sister oil states is we do not use oil and gas revenues to fund basic government," Hegar said. "When we saw the last downturn in oil prices, a lot of those other oil states saw a downgrade in their credit rating."
Indeed, Oklahoma Gov. Kevin Stitt in his State of the State address this month urged lawmakers to follow the Texas example and build up reserves from oil and gas to more than $1 billion by the next budget year.
"No one knows when the next recession will come, but we believe Texas will emerge stronger than most other states," Hegar said.
Hegar voiced frustration that the Texas Legislature has not authorized his office to place rainy day fund money in investments that would produce even modest returns. Other Texas funds such as the Permanent School Fund and the Permanent University Fund are actively managed to produce healthy returns.
"The money just sits there, not even earning enough interest to keep up with inflation," Hegar said. "It's like digging a hole and burying it on the Capitol grounds."
As the state official responsible for projecting revenue estimates for the next two years beginning Sept. 1, Hegar said the job is fraught with uncertainty. This year's biennial revenue estimate is the third since he took office.
"We always add a few clouds in the estimate," he said. "This one has caused me a little more pause than the other two combined."
As one of seven states that doesn’t tax income, sales tax represents 57% of all Texas tax collections, Hegar said.
In January, Texas sales tax collections of $2.8 billion grew 6% compared to the same month in 2017, establishing the 17thstraight monthly record. In 2018 monthly sales tax increases averaged 9.5%.
Total sales tax revenue for the three months ending in January 2019 was up 6.1% compared to the same period a year ago.
After a slump in oil prices, monthly oil production tax revenues in January were the lowest since December 2017, Hegar said. However, natural gas production taxes were up 24.3% from January 2018.
In January, Hegar told lawmakers that they could plan on an 8% increase in funds available for the two-year budget that must be passed by May 27 in the regular session.
The 2021 biennium begins Sept. 1 with a budget anticipated at $119.1 billion and a rainy day fund expected to reach $12.5 billion.
Over the next two years, Hegar expects oil production tax collections to grow 11.1% to $7.4 billion with natural gas tax collections rising 9.6% to $3.3 billion.
Sales tax revenues are projected to grow 9.5% to nearly $66.3 billion for the 2020-21 biennium. About $5 billion would be allocated to the state highway fund.
“For the 2020-21 biennium, we remain cautiously optimistic but recognize we’re unlikely to see continued revenue growth at the unusually strong rates we’ve seen in recent months,” Hegar said. “Oil prices have dropped sharply since October, financial markets have demonstrated increased volatility, interest rates have been rising and U.S. trade policy remains uncertain. Because of this heightened uncertainty, this revenue estimate is based on a projection of continued but slowing expansion of the Texas economy.”
Under property tax reform legislation in identical bills in the House and Senate, Hegar’s office would oversee property tax administration statewide. The legislation would reduce the so-called property tax rollback rate from the current 8% to 2.5%.
"We’re really doing it already," Hegar said. "It would just be a more formal structure."
Most taxing units are required to calculate the effective tax rate and the rollback tax rate. The effective tax rate is a calculated rate that would provide the taxing unit with about the same revenue it received the previous year. If property values rise, the effective tax rate goes down and vice versa.
The rollback tax rate an extra 8% increase for operations and sufficient funds to pay debts in the coming year. If a taxing unit adopts a tax rate higher than the rollback tax rate, voters in the jurisdiction can petition for an election to limit the tax increase.
Under proposed legislation, an election to rescind the tax increase would be automatic and not require a petition drive.
Hegar is also playing a part in school finance reform. While the Texas Education Agency typically characterizes school funding as coming 40% from the state and 60% from local sources, Hegar said in a recent report that the state’s share actually comes to about 36%.
“We believe an accurate depiction of the revenues that support the [school funding program] requires the inclusion of all local tax collections, regardless of whether or not they affect the state budget," Hegar’s report said. "Furthermore, recaptured property taxes are raised from a local tax and accordingly are best characterized as a local contribution.”
“Recapture” funds are those collected by a so-called “property wealthy” school district and transferred by the state to a “property poor” district. The system is also known commonly as “Robin Hood.”
Sherri Greenberg, a professor at the LBJ School of Public Affairs at the University of Texas, told the conference Tuesday that she was in the Texas Legislature when the Robin Hood system was devised as a short-term solution or that large, urban school districts serving economically disadvantaged students would have to surrender funds to other districts based on property values.
“We never thought it would be a long-term election,” she said. “But here we are.”
