Tue December 30, 2014 10:39 pm By Paul Burka

That didn’t take long. Jeb Bush is the “clear Republican frontrunner for president,” according to a new CNN/ORC poll. Bush received 23% of Republicans surveyed in the nationwide poll, ten points ahead of his nearest competitor, New Jersey governor Chris Christie, who tallied 13%. Physician Ben Carson ran third, with 7%, and Rand Paul and former Arkansas governor Mike Huckabee tied for fourth with 6%.

As I’ve written before, Jeb is going to be hard to beat. He is backed by the prodigious clout of the Bush family and their nationwide fundraising ability. No one else on the GOP wannabe list is very attractive, especially since Christie’s popularity has waned in recent months. It’s hard to envision anyone else matching Jeb’s positives as a candidate.

Mon December 29, 2014 8:29 am By Paul Burka

It appears that Governor-elect Abbott is considering some form of Medicaid expansion. If this is indeed the case, it is incredibly good news for Texas. Rick Perry’s rejection of Medicaid expansion was petulant and extremely damaging to the state.

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Mon December 22, 2014 4:12 pm By Erica Grieder

In 2014, the United States became the world’s largest producer of oil, and Texas, of course, is the single biggest oil-producing state in the country. Over the past three years, production has nearly doubled to more than three million barrels a day, a volume not seen in this state since the late 1970s.

All of which raises the question: how screwed is Texas right now? Since October, oil prices have dropped by half. As Aman Batheja and Jim Malewitz explain over at the Texas Tribune, that has a lot of people nervous. Some are reporting painful flashbacks to the 1980s, when a collapse in oil prices sent Texas plunging into a lonely and seemingly punitive recession. 

Here’s my take: Don’t worry. Or at least, don’t worry about a recession. Oil prices have measurable effects on the state’s revenue streams, its employment numbers, and its overall output. But in all three of those areas, Texas is less vulnerable than it once was and less vulnerable than one might think.

My main concern, at this point, is that politics (like energy markets) are affected by beliefs and expectations as much as events. With the 84th regular session set to begin in a few weeks, the last thing we need is panic in the ranks. Conversely, if the price drop prompts thoughtful reflection, that would be good. So here’s the case for calm.

Revenue:  In Texas, the oil production tax is set at 4.6% of market value, and a quarter of those taxes flow into the general fund. Put differently, oil taxes generally bring in several billion dollars a year. That’s not pocket change, but neither is it a huge driver of the budget. In FY 2013, for example, which was a good year for the industry, the state’s oil production tax brought in about $3bn—about 3% of Texas’s overall revenues collected that year [Correction: As detailed at the link, the oil production tax accounted for about 3% of revenues collected that year, not 3% of tax collections, as I initially stated. Thanks to commenter Jackson for the catch.]. Sales tax receipts, by contrast, added up to about $26bn, or more than half of all tax collections.  

Meanwhile, a drop in oil prices means a drop in the price of energy, and cheap energy tends to goose consumer spending. That’s why Fitch Ratings, in a December 15th analysis, was relatively sanguine about Texas’s budgetary prospects (behind a paywall, but take my word for it): “States that host large oil production operations but derive a modest share of revenue from oil production, like California, Colorado, and Texas, benefit from significant economic diversity and losses in oil revenue will likely be offset by boosts in consumer-driven tax revenue.” Per the Legislative Budget Board’s most recent estimates, that’s what’s happened to Texas’s revenue streams thus far: the drop in oil receipts has been more than offset by sales tax growth.

As for the rest of the oil production tax revenues—the other three-quarters—those flow into the Rainy Day Fund. That’s bad news insofar as everyone who’s proposed new spending lately has proposed that the state find the requisite funding in the Rainy Day Fund. But it’s not catastrophic; a joint select committee recently agreed to keep at least $7bn in the piggy bank, so they weren’t planning to make many withdrawals anyway.

(Worth highlighting in this context is that in November voters overwhelmingly approved Proposition 1, a measure that will divide future severance taxes between the Rainy Day Fund and the State Highway Fund. In other words, road funding is more vulnerable to swings in oil production taxes than it was before. On the other hand, Prop 1 was never presented as anything more than a partial solution to the state’s pressing road funding needs, and transportation funding was already tipped as a major priority for the session; the drop in oil production taxes may help focus the Lege’s attention on it.)

Employment: The drop in oil prices could mean layoffs in the energy industry. And in theory, mass layoffs in one industry can have ripple effects across the state. The mitigating factor is that oil and gas production is capital-intensive rather than labor-intensive. Texas has about 12.4 million jobs. Per the Dallas Fed, about 200,000 of those jobs, or 2% of the total, are in oil and gas production, extraction, and support services. In the 1970s and 1980s, the oil industry had a much bigger footprint on Texas. A 10% increase in the price of oil translated to a 1% increase in total employment—and between 1981 and 1987, industry employment was halved; the state lost some 212,000 jobs. Today we don’t have that many oil and gas jobs to lose.

In addition, industry employment is tied to production levels rather than prices, meaning that the employment effects of a drop in oil prices will appear on a delay (if at all). The last time oil prices dropped was in late 2008, but per the BLS, industry employment in oil and gas extraction continued to grow. Not until late 2009, when prices were rebounding, did employment levels drop a bit.

Output: In terms of both revenue and employment, then, Texas is more well-positioned to power through an oil bust than it was in the 1980s. Output is where we’re more vulnerable. Oil and gas extraction, again according to the Dallas Fed, drives about 11% of the state’s total economic output. If oil production falters, that could lead to losses in sectors like manufacturing, transportation, and construction.

Even here, though, I think it’s too soon to sound the alarms. In the 1970s, as the Dallas Fed puts it, Texas was “dependent” on oil and gas. Today we’re not. Back then, a 10% shift in oil prices moved state GDP by 1.9%. Between 1997 and 2010, a 10% increase in oil prices would yield a 0.3% increase in GDP. Next, as David F. Prindle puts it in his 1981 study of the Texas Railroad Commission, “the oil industry is not like other businesses”:

In most other trades, supply and demand come into relative balance more or less automatically. Manufacturers of shoes, for example, estimate how many of units of their product will sell in the coming year and adjust their output accordingly. If there is a greatly increased demand for shoes, established firms increase their output and new firms enter the market; when demand falls, output is cut back and inefficient firms may fail…This is how classical economic theory views the ideal market. People are forced to act rationally by the discipline of the market, and society benefits.

The theory, as he goes on to explain, doesn’t really apply to oil. The laws of supply and demand, for one thing, are distorted by considerations about things like geopolitics, infrastructure, financing and the physical properties of oil itself, such as the fact that it flows around underground. If the price of shoes falls in half, that might suggest that demand has halved, and shoemakers will respond accordingly (by making half as many shoes). Oil people don’t have analogous reasoning. Their production decisions are also shaped by finding costs and production costs, by price hedging agreements (such as futures contracts) and by long time horizons: a company may drill at a loss, for example, to hold onto an advantageous lease. 

Texas, too, has taken some precautions against oil drama. That’s why we have the Rainy Day Fund in the first place. It was established in the 1980s after the big bust, on the premise that oil money should be treated as a bonus, not the baseline. That decision, as discussed above, helps explain why Texas is now more well-positioned to weather drops in oil prices. And the reasoning that informed it may, in itself, be another reason for optimism. The 1980s oil bust left a legacy of dread. Things probably aren’t going to get that bad again.  But the spectre of the bad old days may spur some serious reflection in the Lege. At moments like this, can any legislator afford to clown around?  

(Flickr | Reto Fetz)

Mon December 22, 2014 4:11 pm By Paul Burka

The news that Speaker Joe Straus has become the Vice Chair of the Republican Legislative Campaign should be the final nail in the coffin of Michael Quinn Sullivan and Empower Texans. Of course I know it won’t. But it should end any speculation that Straus has any political worries whatsoever; indeed, the opposite is true: Straus now has the chance to become a national figure.

Thu December 18, 2014 1:06 pm By Erica Grieder

One of the enduring idiosyncracies of Texas politics is that behavior that would easily raise concerns over corruption in many states is legal, normal, and even encouraged, as when legislators argue that their concurrent business interests give them expertise rather than conflicts of interests. 

That’s worth keeping in mind when considering the roiling drama over at the Health and Human Services Commission. Last week Jack Stick, HHSC’s chief counsel, resigned after its head, Kyle Janek, canceled a $110m contract that Stick had awarded to 21CT, an Austin-based data analytics firm whose lobbyists include one of his former coworkers, without considering any competing bids. As the Houston Chronicle’s Brian Rosenthal explains, Stick got around the competitive bidding requirement by using the Cooperative Contract program, which is meant to minimize red tape for state agencies making minor purchases: 

State officials said Stick chose the process because he became so smitten with 21CT’s ability to identify patterns within combined data sets that he thought formal bidding would waste time.

That explanation appears far-fetched, however, according to experts who said most anti-fraud software is not radically different.

“Everybody has their own slightly special way of doing it, but it’s all basically the same bucket of chicken,” said Alan White, inspector general at the Wisconsin Department of Health Services and a spokesman for the National Association for Medicaid Program Integrity. “There are only so many pieces in the bucket, and how you get them is how you get them.”

21CT’s contract, which was for fighting Medicaid fraud, is apparently legal, although its size–$110 million dollars—is irregular. The Chronicle crunched the numbers, and found that over the past five years contracts awarded under the Cooperative Contracting program have had an average value of $3,493. Also legal but irregular was a 21CT contract, with the Department of Family Protective Services, which was worth $452,000. That one was also awarded without competitive bidding, after Stick recommended the company to DFPS officials. And it was cancelled on Wednesday, after the Texas Tribune started asking about it.  

It’s not hard to see why these contracts would be controversial, except that such contracts rarely are, in Texas. After a video camera company called WatchGuard was awarded a $10m contract with the Department of Public Safety in 2006, several of its competitors cried foul, arguing that the bid had been carefully written to exclude all companies other than WatchGuard, which happened to tout two incumbent legislators among its initial investors. That case elicited some criticism, but comparatively little backlash and no notable consequences; one of the legislators in question, Ken Paxton, is about to be sworn in as attorney general. In a different vein, awards from the Texas Enterprise Funds might be considered pseudo-contracts, insofar as the companies that receive them are meant to yield measurable economic returns, and there’s no direct competition for those awards, only an intermittently enforced application process

The Austin American-Statesman’s J. David McSwane’s account, though, points to a possible explanation. The owner of one of 21CT’s rivals says that when his company analyzed three years’ worth of data on Texas’s Medicaid spending, they found suggestions of rampant fraud, perhaps amounting to as much as a quarter of the roughly $28 billion the state spends on Medicaid each year. 21CT, not having had to compete for the contract, never produced that kind of analysis. And it has yet to produce any notable results: In October, an audit found that investigators in HHSC’s office of the inspector general were recovering so little money that had been fraudulently paid that they weren’t necessarily paying for themselves, to say nothing of any data analytics firms. Thus far, in other words, the controversy points to a Texas-specific understanding of corruption. Cronyism is probably fine. Inefficiency is intolerable.