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The Comptroller Issues a Wake-Up Call

No one should be surprised by Glenn Hegar’s latest revenue estimate, or glib about it.

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Yesterday Glenn Hegar, the comptroller—who I’ll be interviewing at the Texas Tribune Festival this weekend—released an updated forecast of state revenues for the 2016-17 fiscal years. The top-line news is that Texas will have $110.4 billion in revenues available the next two years. That represents a downward revision from the $113 billion available Hegar had projected, in January.

It’s not a consequential revision, in the short term, because the Lege passed a budget that includes just $106 billion for general-purpose spending. But it struck some observers as an ominous change due to the logical implication: the 85th Legislature, in 2017, shouldn’t count on coming back to a surplus and may, in fact, be looking at a tough budget picture. And for Bob Garrett, of the Dallas Morning News, the downward revision seems to have said something ominous about Hegar himself: “Revenue estimate accuracy—or lack thereof—bedeviled his Republican predecessor, former Comptroller Susan Combs.”

But Hegar isn’t Combs. Since January, when Hegar released his Biennial Revenue Estimate (BRE), he has struck me as a vast improvement over his predecessor, and I see nothing in this latest estimate—known as the Certification Revenue Estimate (CRE)—that changes my assessment. His most glaring error, supposedly, lies in the estimated oil prices: the BRE’s figures were based on the premise that oil would be in the $65-70 barrel range through the biennium, and the CRE revises that downward to about $50. But it’s revisionist and overly harsh to criticize Hegar for overestimating the oil prices. He was hardly alone; projections about oil prices were all over the place in January, as were projections about oil production levels, which are actually more relevant from a comptroller’s perspective. As I wrote back in December, oil prices actually have comparatively little impact on the state’s overall revenue collections. Hegar’s CRE illustrates that. As Garrett points out, Hegar’s projected price was revised downward 20 percent. But the drop in related tax collections available for general spending works out to about 1 percent of the state’s total funds available.*

Incidentally, there’s a little backstory to that post that might be interesting. Readers may remember that last winter, the national media was full of doomsday prophesies about Texas falling into recession. My back-of-the envelope math told me otherwise, but I figured it couldn’t hurt to ask David Dewhurst, the outgoing lieutenant governor, since he is an oil and gas executive with commanding grasp of Texas budget minutiae and no qualms about pointing out problems with my reasoning, and who happened to be holding a holiday reception for the capitol press corps that week. After giving me his analysis of supply, demand, geopolitics, infrastructure, the costs of production, financing mechanisms, and all the other relevant factors that affect the world liquid hydrocarbons market, Dewhurst told me that most forecasters were being overly optimistic about prices and overly pessimistic about production: he thought US production would remain high, but prices would continue to languish around $45-50 a barrel. And at the end of 2014, he noted, the comptroller’s assumptions were still based on oil at $82 a barrel, whereas forecasts from the Energy Information Administration and others were clearly trending to about $60 in January. But while a 30 percent price drop would have a measurable impact on Texas’s ending balances, it would be a manageable one relative to the overall budget and so, according to Dewhurst, all things considered, I was right. Ten months later, Dewhurst’s predictions about oil prices and production levels look uncanny. But he was, at the time, out of step with mainstream opinion and in explicit disagreement with forecasts from many authorities. But that’s an independent oilman’s prerogative. For a comptroller to take a contrarian view would be somewhat tendentious.

In any case, this line of inquiry risks missing the forest for the trees. The oil prices are lower than Hegar expected they would be in January, and the comptroller himself attributed the downward revision of the revenue estimate to the continuing weakness in the state’s energy sector. But as we’ve seen over the course of the year, the price of oil can be a misleading proxy for what’s happening in the industry, much less in the Texas economy, which is the 12th largest in the world and fairly well diversified. Hegar clearly appreciates this: In January, while laying out the BRE, he made a point of emphasizing that the volatility in energy markets made projections unusually tricky. He also said he would flag any revisions as soon as the data made it clear that they were necessary and has now released the CRE in October rather than December, as previous comptrollers have done.

Texans, in turn, should appreciate state officials who accept complexity rather than trying to reduce everything to sound bites and stump speeches. A certain degree of uncertainty is ineradicable in life, and Texas is a lot better off with a comptroller who is realistic about that than one who blusters her way through it. The 2011 BRE projected $72.2 billion available for general-purpose spending in 2012-13, and the CRE revised the estimate upward to $73.4 billion. Not until Combs issued the 2013 BRE did she quietly acknowledge the magnitude of the artificial shortfall her projections had created: if she had used a better crystal ball, the Lege would have had $90.2 billion in 2011, and no need to slash funding for public schools. The Certification Revenue Estimate is still just an estimate, based on projections about the future. The legislators who write the budget won’t know for sure whether any comptroller hit the mark until after the fact. But they can be confident that Hegar, at least, will communicate with them along the way.

And one more thing that’s worth noting: Though Hegar waited on the official numbers before issuing the Certification Revenue Estimate, any adult who’s read a newspaper at any point in the past year could have anticipated this revision. Texas hasn’t fallen into recession, but it is seeing slower economic growth. We’ve lost jobs, on net, two months this year. In December, when I was explaining why Texans shouldn’t panic over oil prices, I suggested that the Lege should nonetheless see that this year’s session was no time for clowning around. That was overly optimistic, obviously. I’ve written about the Texas Senate’s spending cap scheme so often that it may strike some of the senators as a personal vendetta. But Hegar’s Certification Revenue Estimate underlines why it matters so much. In March, Dan Patrick described his reasoning as follows: “There is no support for exceeding the spending cap but that also means that when we leave, we will have approximately $4.5 to $5 billion in the state’s checking account.” If the House hadn’t intervened, the Lege would now be looking at a presumptive shortfall in 2017, rather than the possibility of one. That should be a serious wake-up call for anyone who needs one. And today’s news, that Patrick issued a batch of interim charges aimed at finding more tax cuts, is far more ominous than anything in the CRE.

 

*Correction: A previous version of this article stated “the drop in related tax collections available for general spending worked out to just more than $100 million.” As Bob Garrett pointed out on Twitter, that’s not correct. Hegar’s BRE projected that the state would collected $5.689 billion in oil production and regulation taxes over the course of the 2016-17 biennium, and the CRE revises the figure downward to $3.907 billion. However, as I explained in December, the bulk of these taxes will be diverted from the general revenue-related funds, and transferred to the Economic Stabilization Fund and the State Highway Fund, and so a decline in oil tax receipts does not translate into a commensurate decline in general revenue-related funds.

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  • I recommend more cuts to spending. Does Hegar’s employees really need 20 tax payer funded holidays to collect taxes?

    • Inquisitive66

      yes cut law enforcement, law creation salary, and enforcement bureaus, close state owned prisons and universities, stop public services like comptroller, and state government travel for any reason.
      this would be a good start

  • John Johnson

    Let’s see…the lower gas prices garner us a reported $700 or so, and the big “tax” break we got from our legislature about $150, on average. The lower crude prices aid the general population, but hurt the oil industry; the tax cuts aid the general population, but screw special needs children. I know which money I would prefer to give back.

    • Jed

      what tax cuts aid the general population?

      • John Johnson

        The property tax break Patrick, Nelson, et al have been bragging about.

        • Jed

          does that help even a plurality of texans?

          i don’t own property, but it’s helping my landlord make more money off me.

          • a smarter person would have axed for a rent adjustment.

          • John Johnson

            Good point. My position is that it is really insignificant and in reality damaging to the overall well being of the state and taking away from those who need it most.

          • dave in texas

            For the current iteration of the Lege, taking away from those who need it the most is a feature, not a bug.

          • John Johnson

            Yep. It would seem so. A few are seeing the error of their ways.

          • Jed

            too few.

          • The government took it away from me. Are you actually saying that is ok because I didn’t need it?
            Who makes those decisions of who gets to keep their property some bureaucrat?
            yep I can see the logic in this……

    • Why give up…just adjust if you trim too much. That is what Reagan did in the mid 80’s after the largest across the board tax cut in our history, Prez Reagan came back and made adjustments where he cut too deep. Dems falsely categorized the adjustments as tax increases.
      Cut cut cut then adjust that is how the smart managers do vs taxNspend socialism.

      • John Johnson

        That works for me. I don’t mind taxes; I don’t like our funding goofy stuff with this money. $4B for public service advertising? Hundreds of these rat holes are sucking in our money. Sen. Coburn listed many of them for all to see; his colleagues ignored them…Repub and Dem alike. Overall, we are represented by a sorry lot, yet everyone thinks there guy is great. We are stupid…not ignorant…stupid.

      • dave in texas

        I’d rather have the Democratic tax and spend than the Republican borrow and spend. If I thought it was worth the effort, I’d try and explain how that doesn’t even remotely resemble socialism, but since facts and accurate definitions never make any difference to you, I won’t bother.

        • I’m sure you would, ifn you could.
          I suspect every liberal has a different definition of socialism.
          Here’s all anyone needs to know. Capitalism and socialism are economic engines that drive the economy.
          Capitalism works and socialism has never worked.

          • dave in texas

            Nope. Liberals are satisfied with actual definition of socialism: government ownership of the means of production. Despite what right-wing extremists like you and your ilk seem to think, socialism does not mean ‘anything not in the Republican Party platform.’

          • You just said what I said but you didn’t understand it….

          • scottindallas

            .stupid John, first off, there’s 3 markets, not just free markets, free markets, professional/fiduciary markets and utility markets. Socializing utilities, regulation are key, as they aren’t free markets,. Socialism is superior in utilities, free markets in free markets. If you don’t know the difference, you shouldn’t comment

          • Texas passed Senate Bill 7 in 2002 deregulating utilities.
            Maybe you should be lecturing the state legislators.

  • “I’ve always been impressed with Erica Grieder’s grasp of the numbers,” David Dewhurst.
    I’m impressed Erica, not not by the posters posting here.

  • scottindallas

    Do you know that we spend $3900/ Texan per year? CA spends $3000. Let that sink in, what are we spending that money on?

  • Inquisitive66

    I think that the money the Lege takes in should be spent cautiously, however it should be spent on what it is supposed to. I would rather have money spend on good social programs (education, first responder, etc) than offered as a corporate tax break that lures a company here that will effectually be made a “tax free” entity during their lifetime here.
    The unhealthy fetish of privatizing everything (roads ,utilities, public lands) will come back to hurt our state economy and our citizens. There is absolutely nothing that has been privatized, in the past 30 years, that has caused the price of the service to decline or even remain stagnant, that has improved services.