Good morning Austin:
Big day today.
At 10 this morning we will hear the annual revenue estimate by the Texas comptroller of public accounts, who, as of this month, is Glenn Hegar.
Here is how the Comptroller’s Office describes this responsibility:
The Comptroller’s Biennial Revenue Estimate (BRE), required by the Texas Constitution since 1942 and produced before each regular legislative session, tells the Legislature the amount of funds that should be available for spending in the next two-year budget period.
The Texas Government Code also requires the Comptroller to prepare another estimate, generally called the Certification Revenue Estimate (CRE), after each regular legislative session. The CRE uses the BRE as its starting point and incorporates the fiscal impact of that year’s legislation.
Got to feel for Glenn Hegar. Sworn into office on Jan. 2 and ten days later he’s got to do the most significant thing he’s going to do his whole term in office, the thing that more than anything else he does, will determine how his tenure in office will be judged.
Consider the fate of his predecessor Susan Combs.
Texas Monthly put Combs on its list of Worst Legislators 2013, even though she wasn’t even in the Legislature, based on the inaccuracy of her 2011 revenue forecast, which led to deep education cuts that, in retrospect, with a more accurate forecast, might have been avoided.
Texas Monthly wrote:
Here’s why: the comptroller’s job is to monitor the state’s revenue streams and tell legislators how much they’ll have to spend every biennium. And because the state has a pay-as-you-go requirement, the comptroller’s revenue estimate is an actual restriction; lawmakers can’t spend more money than she says they can. Last time around, Combs predicted we’d have $73.4 billion to spend in the 2012–2013 biennium. But in January of this year, she announced that the state could expect to finish the biennium with an $8.8 billion “ending balance” (that’s accountant-speak for “surplus”).
We’re sympathetic to the fact that the economy has been volatile for the past few years, which makes the comptroller’s job trickier than usual. But if you take a closer look at this year’s estimate, the latest numbers show that the state had $90.2 billion available in general revenue–related funds during the 2012–2013 biennium. That’s a lot more than the $73.4 billion Combs allowed. About 23 percent more, in fact.
In other words, that $8.8 billion suggests truly excessive caution—or, to be cynical, truly excessive partisanship. Let’s not forget that at the same time that Combs was making such a conservative prediction about the budget, she (along with other statewide Republicans) was all too eager to talk about the “Texas miracle” of economic growth and job creation.
Now it’s Hegar’s turn, and as Aman Batheja and Jessica Hamel wrote in the Texas Tribune in September:
The responsibility has become a political minefield, particularly after Comptroller Susan Combs’ estimate ahead of the 2011 session drew criticism for underestimating tax revenue by several billion dollars. Combs’ office recently researched the accuracy of revenue estimates going back 40 years and found that, by one measure, other comptrollers’ estimates have landed farther from the actual number.
The minefield this year is even more treacherous because of the precipitous recent decline in oil prices, which, in the past, has proved to be the state’s Achilles’ heel.
Here from the Comptroller’s Office’s retrospective examination of past revenue estimates:
In the past 40 years, almost every instance of overestimated tax collections occurred as a result of recession and/or precipitous declines in energy prices. Underestimates were associated almost exclusively with soaring energy prices, new technologies in the oil and natural gas industry, and/or boom periods in the economy featuring rapid employment growth and expansion in the housing market
While the Texas economy has diversified significantly, the oil and natural gas industry still has an outsized impact on the state.
But, as the Statesman’s Kiah Collier reported, on the day Hegar was sworn in:
Texas’ new comptroller on Friday all but dismissed worries that falling oil prices will drag down the state’s economy in the near future.
In his first remarks after being sworn into office, former state Sen. Glenn Hegar emphasized the benefits that low fuel prices bestow on consumers and noted that sales tax receipts — which make up a much larger portion of state tax collections than those that come directly from oil production — have remained healthy even as the dollar-per-barrel has plummeted to a five-year low.
“Lower fuel costs should reduce the price of importing goods, which is great for consumers and, ultimately, our economy,” Hegar said, standing on the dais in the Senate chamber at the Capitol. “In fact, the average taxpayer will see the equivalent of a 2 percent pay raise as a result of low fuel prices.”
(note: PolitiFact Texas checked this and found it to be “mostly true.”)
Afterward, Hegar said that will act as “a counterbalance … for the economy.”
“I think the outlook for the Texas economy is strong,” he told reporters. “Obviously from one side of it, the budget gets hit a little bit with lower oil prices, but also it’s a stimulus for the economy.”
On Friday, he declined to reveal what oil price that estimate will be based upon, but he said prices have “stabilized.”
“No one has a crystal ball — if you got one, can I have it?” he quipped.
Hegar’s general optimism was echoed by Gov. Rick Perry in an appearance Friday at the annual legislative orientation of the Texas Public Policy Foundation:
Gov. Rick Perry said Friday that the plunge in oil prices will lead to some short-term “belt-tightening” in Texas and a “shakeout” in Midland-Odessa and parts of Houston, but would not knock the state from its perch as the nation’s “epicenter of job creation.”
He predicted the energy sector would probably right itself by the second half of the year.
Perry is depending on that.
Even a relatively short-lived downtown could undo the governor’s post-gubernatorial presidential ambitions.
As I wrote:
Perry’s political calling card would be the strength of the Texas economy and what has been called “the Texas miracle.”
“I can’t explain a miracle,” Perry said. “This is the ‘Texas model.’ ”
Miracle or model, a Texas economy hit hard by falling oil prices would undermine Perry’s political standing.
It’s not just Perry.
To listen to the the rhetoric of Texas Republicans, Texas is the New Jerusalem, its economic success of recent years proof of the rightness of their policies and the righteousness of their cause.
As everyone knows by now, there may be 50 states, but only two really matter – Texas and California – and they are locked in a long twilight struggle to determine which state knows best and to which the rest of America ought to pledge its troth. One offers the path to a bright and happy American future, and the other the road to hell.
At his TPPF appearance last week, Gov.-elect Greg Abbott presented his governorship as a crusade against creeping “Californianization.”
But then there is this huge drop in oil prices, and this piece in last week’s New Yorker by Vauhini Vara, under the headline, How California Bested Texas.
Vara, the former business editor of newyorker.com, who lives in San Francisco, writes:
These days, though, no one is talking about the lessons California should learn from Texas. California’s economy is improving, and its budget is finally balanced—partly because of budget cuts and a voter-approved tax hike in 2012, and partly because the stock-market boom has translated into more tax receipts from California’s wealthiest residents (the ones with those high income-tax rates). These changes happen to come as Texas, the nation’s biggest oil-producing state by far, is grappling with a collapse in oil prices, which has depressed the price of a barrel of West Texas Intermediate crude oil to under fifty dollars a barrel for the first time in more than five years. It will be several months before the government publishes figures on G.D.P. and business creation for the period coinciding with the drop in oil prices, but already there are signs of trouble. Michael Feroli, the chief U.S. economist at JPMorgan Chase, said in December, “We think Texas will, at least, have a rough 2015 ahead, and is at risk of slipping into a regional recession.” The Texas budget, too, could be hurt by lost oil and gas taxes.
(California Gov. Jerry) Brown, who was sworn in on Monday for a second consecutive term as governor of California (his fourth, including a stint from the late seventies to the early eighties), must have enjoyed a moment of schadenfreude if he happened to scan the Wall Street Journal on his way to the inauguration. In an article on how the oil slump could hurt Texas, Jon Hilsenrath and his colleagues wrote, “Some Texans sobered by memories of past energy busts are bracing for a fall. The argument among economists and business leaders isn’t whether the state will be hurt, but how badly.”
The concerns about Texas’s fortunes speak to a misperception of the state’s recent boom, and of California’s bust. Texas’s outperformance of California had a lot to do with factors beyond the control of politicians like Perry and Newsom—namely, the importance of real estate to California’s economy, and the importance of oil to Texas’s
Let’s pause here for some Twitter reaction to the piece.
Sandra Fluke? Sure. Why not?
On Tuesday, Kiah Collier wrote:
“As oil prices have plummeted and show no sign of recovery … lawmakers probably will have to pursue ‘small ball’ tax cuts rather than ‘grand slam home runs,’ said state Sen.-elect Paul Bettencourt, a Republican from Houston who is closely aligned with Lt. Gov.-elect Dan Patrick.”
Last week, Hegar downplayed the impact of falling oil prices, but Bettencourt and others say they are expecting him to deliver a very conservative estimate that probably assumes something closer to current oil prices than the last estimate.
“That’s his job,” said Bill Hammond, CEO the Texas Association of Business, which is advocating for new spending on roads and other items before lawmakers consider tax cuts. “If revenues come in higher, people will criticize him but, in our view, he’s doing his job.”
While Hammond agreed with Bettencourt that big ticket tax cuts likely will be more difficult, Hammond said the association’s concern is that the investments it wants could take a backseat to tax cuts.
“All of the elected officials have promised tax cuts so” there will be some “push comes to shove, because of the promises on tax reductions, regardless of the revenue levels,” he said.
And then this:
Patrick told the Associated Press on Monday that falling oil prices wouldn’t result in broken promises from Republicans of major tax relief.
“Let there be no doubt — there will be tax cuts,” Patrick said.
There will be tax cuts.
There was something familiar about its sweep and cadence
There will be tax cuts.
There Will Be Blood – director Paul Thomas Anderson’s epic 2008 film, described by IMDB as, “A story of family, religion, hatred, oil and madness,” and starring Daniel Day-Lewis, who won his second of three Best Actor Oscars for the role (the first was for Christy Brown and My Left Foot and the last for Abraham Lincoln).
Daniel Day-Lewis was born to play the tall and rangy Dan Patrick. Patrick, like Lincoln, is six-foot-four inches tall, two inches taller than DDL, but if the man has proved anything as an actor, it is that he can stretch.
(This weekend I saw Anderson’s latest film, Inherent Vice, based on a 2009 novel by Thomas Pynchon that takes for its title a legal term that refers to “the tendency in physical objects to deteriorate because of the fundamental instability of the components of which they are made, as opposed to deterioration caused by external forces.” According to USLegal.com, “Examples of inherent vice include spontaneous combustion, rust etc.” Or, with its combustible mix of mainstream Republicans, tea partiers and Democrats, perhaps also the Texas House. Have to keep an eye on that.)
I called Mike Collier, the Democratic candidate for comptroller in 2014, on Sunday, to ask what he would do about the revenue estimate if he were Hegar.
Collier, who is now an energy financial consultant and is a former chief financial officer for Layline Petroleum, LLC, said he worried during the campaign, “what happens if I get elected and commodity prices fail, or fall. It’s not that I was smart enough to see it coming. Its’ just that I’ve been working in an around the oil business for a long, long time and I know that they’ll surprise you.”
His answer, now, as during the campaign, was for the state to convert to a system in which the comptroller updates the revenue estimate on a quarterly basis.
Here is some of what Mike Collier said:
We need to switch over to quarterly system because we have a very volatile revenue stream related to the oil business, so we should do what businesses do.
If you talk to senior executives at the oil companies, they have price outlooks, but they do no presume a certain commodity price over a long period of time. They do just the opposite – the presume it will be volatile and they make sure they can manage around that, and one of things they do, and you’ll hear them say only a fool will try to estimate prices, you just presume that they’re volatile, and what they do is update their forecast and their plans as they go. It’s very, very simple.
And Texas doesn’t do that, and really never has … The system we’re using was designed long before we were as large and complex as we are now… Now we’re very large and very complex and we really can’t afford to make mistakes, so we really ought to cut over to a quarterly revenue system just like we do in the oil business.
What this all boils down to is, if I were on friendly terms with Hegar, and he were to pick up the phone and call me – “Mike, what would you do?” I would say, “Glenn, you need to make history. Issue your estimate and tell everybody that you’re going to update your estimate every quarter.
Think about what that would for us … It would allow the Legislature to be much more savvy about how they make their budgets. For example, if Hegar were to be very pessimistic about oil prices through the end of the forecast period, 2017, the Legislature might be inclined to make reductions in places Texans might not want reductions – education, transportation and so forth. Or, to be as generous as I can be, they might be fearful of the tax cuts they’ve been promising because Hegar’s come up with a pessimistic forecast, whereas if you update every quarter, you could have another look at it in March, have another look at it in June. If there was still uncertainty, you would know that you would be getting a new forecast in September and in December, and you could do a contingency plan.
Now, nobody really knows how a quarterly forecast would work vis a vis the Legislature, which meet every other year, but that’s because we haven’t tried it. So this does not have to be a threat to Glenn Hegar, the fact that commodity prices are creating so much uncertainty. He could use this as an opportunity to make this a real feather in his cap by changing to a quarterly system.
Hegar did not seem to be sweating the revenue estimate at a panel discussion Thursday night at the TPPF conference that also included Patrick, and the new attorney general Ken Paxton, and new agriculture commissioner, Sid Miller.
When Grover Norquist, the president of Americans for Tax Reform, asked each of the men what kept them up at night, Hegar didn’t mention the forecast. Instead, he said, it was his concern about the state maintaining its Texas values of character, integrity, honesty and hard work. But then he added, that, truth be told, what really keeps him up at night is worrying about the day when boys come calling on his young daughters.
Patrick credited his sleeplessness to concerns about terrorists crossing the Texas-Mexico border.
Miller was, as ever, puckish.
“The thing that keeps me up at night is bad Mexican food,” he said. But, seriously folks, he said, when he’s got his grandchildren on his lap he worries about America’s long term future: “Will this be a socialist country? Will this be a Muslim country?”
When Paxton’s turn came, he offered Hegar, whose daughters are younger than his own, what he said was some sound advice.
When boys came to the house interested in dating one of his daughters, Paxton said he would pull the young man aside, look him in the eye, and say, “Don’t do anything to my daughter that you wouldn’t do to me.”