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?  

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. 

Tue December 16, 2014 7:03 pm By Erica Grieder

As a feminist, someone who believes that men and women should be treated equally, I had no problem with the selection of Wendy Davis as Texas Monthly’s Bum Steer of the Year. As a journalist, I would have had qualms picking anyone else. The award recognizes the Texan who most spectacularly face-planted in public during the previous year.  As our then-editor Jake Silverstein noted in 2012, it’s not necessarily a title we relish bestowing. For every Dick Cheney, who was recognized for shooting his friend in the face, there’s a Rick Perry, who shot himself in the foot. Feelings aside, though, and politics aside, Davis was abundantly qualified for this year’s title: to ignore her would have been to ignore how genuinely bad her gubernatorial campaign turned out to be. It would have suggested, on our part, the soft bigotry of low expectations.

Inevitably, some readers disagree with our choice of Bum Steer, and we encourage them to do so. Nonetheless, I’d like to take a moment to address a critique written by Andrea Grimes of RHRealityCheck. In a post published yesterday, she calls the cover an “act of pure, derisive mockery,” part of “a long bipartisan tradition of deeply misogynistic mainstream portrayals of women who work in politics.” As evidence, Grimes cites the cover itself, which depicts Davis grimacing after having stepped in a cow patty, wearing the pink sneakers that carried her through her famous filibuster in June 2013; this is worse than a caricature, she argues, and harsher than previous Bum Steers covers, such as the one featuring a “remarkably smooth-skinned” Perry. She also offers a variety of unsubstantiated theories about our motives, but let’s set those aside—a glance at Texas Monthly’s masthead would offset any concerns about deep-seated sexism among our ranks. 

Some of Grimes’ points are debatable; as my colleague Andrea Valdez observes, the caricature of Perry makes him look kind of like a monkey. But what I wanted to highlight is Grimes’ argument that criticizing Davis is tantamount to “punching down” or picking on the underdog, because I’ve heard other partisans make similar arguments in the wake of this year’s general elections:

This year, Texas saw its most promising, most energizing Democratic candidate in years: a woman who gave thousands of Texans permission to finally talk about supporting abortion in public, who filibustered not only for reproductive rights but for education funding, who took a Harvard law degree while raising two daughters. And the most prominent periodical in the entire state, the magazine that purports to be a thought leader in the political conversation month after month, shoved her into a shit pile for it.

Is it any wonder Texas Democrats have trouble gaining ground in mainstream political conversations? When they are roundly mocked for making any attempt to try?

Grimes is right to say that Davis was the most promising Democratic candidate in years. She was promising as a state senator, having shown that she could win in a purple district and having earned favorable recognition for her work in the Legislature; in 2013, for example, Davis was named to Texas Monthly’s biennial Best List. Her filibuster, in 2013, left Democrats more energized than they had been in years, as we discussed at the time. It also made her famous and helped her raise a lot of money, which meant she had unusual momentum going into the campaign. No one thought it would be easy for a Democrat to win statewide in 2014. But Davis’s candidacy, at least for us, raised the question of whether the party could be considered competitive again.

In other words, Davis wasn’t named the Bum Steer because she lost. That would be ridiculous; there’s no dishonor in trying. Rather—and this is not remotely unclear, if you read the articleDavis was named Bum Steer because of how she lost. She lost badly: “In the end, she lost by more percentage points than Tony Sanchez did in 2002.” She lost fairly: “Infighting! Staff shake-ups! Tension with the press! Missteps over her own biography!” And she lost consequentially: “It’s not that the Democrats underperformed. It’s that the party that hasn’t won a statewide race since 1994 actually dug itself a deeper hole!”

I would put the case even more strongly than that. At the beginning of the campaign I thought that she had a chance to exceed expectations, like Ted Cruz in 2012. But Davis’s campaign wasn’t just ineffectual. It was deeply shallow. The most clear-cut example of that came in September, when Davis finally started talking about raising the minimum wage—a worthy issue, one that voters in five other states would approve in November, and one that Davis set aside a couple of days later in favor of promoting her memoir. In 2014, she even seemed to set aside the issue she had gone to bat for in 2013; on the anniversary of the filibuster she commemorated it as a fight against “insiders” rather than a stand for reproductive rights. Davis’s campaign was, also, unduly invidious. It was wrong of conservatives to deride her as “Abortion Barbie,” of course, as too many did—but it was also wrong of Davis’s actual campaign to insinuate that Greg Abbott is a rape apologist, which they did, repeatedly. 

Ultimately, Davis’s campaign was far less serious than her supporters would have hoped when she declared. The results were dispositive: she underperformed Bill White, the 2010 nominee, by a considerable margin; Democratic turnout dropped; and despite unrelenting arguments about a supposed war on women, Abbott won 55 percent of the women’s vote. (And yes, as some Democrats noted, he lost among Hispanic and African-American voters, but the “war on women” is theoretically directed against all women, and it’s not a good day for Democrats when they’re taking comfort in the fact that a Republican won only 45 percent of the Hispanic vote overall.) Beyond all this, Davis also cast an undeserved shadow on downballot Democrats like Leticia Van de Putte and Mike Collier, who campaigned with purpose and passion, and who would surely be named to Texas Monthly’s Champion Steers list, if we had one.

Some Democrats might take a more generous view of Davis’s campaign itself. Others, no doubt, would rather celebrate Davis’s strengths than dwell on her missteps. It’s taking things a step further, though, to assert that such missteps never occurred; to posit that Davis’s yawing defeat was largely due to the voter ID law; to posit that Davis, as a matter of social justice, should effectively be graded on a curve; or to angrily insist that any criticism of Davis, from any source, reflects misogyny or elitism. Such claims ignore reality. Such assertions of endemic victimhood helped land Davis on the Bum Steers cover, and deservedly so.

Thu December 11, 2014 1:41 pm By Erica Grieder

This morning we released the cover of our January issue, which features our Bum Steer of the YearThe issue itself, which will be hitting newsstands and mailboxes in the next few days, includes a number of additional dishonorees—a real herd of clowns. 

Have a look and let us know what you think of our pick. Already, several readers have written in with the rebuttal that we should have used the cover to call out the millions of Texans who didn’t vote.