Uncertain Fortunes: Texas Politics, Economics and Perspectives for Where We Work. A quick show of hands:

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1 Uncertain Fortunes: Texas Politics, Economics and Perspectives for 2017 Adam Jones, Senior Consultant DFW Public Sector CPE Day August 25th, 2016 Where We Work A quick show of hands: City or County? School District? Higher Education? Regional Authority or Special District? Non profit? 1 1

2 Uncertain Fortunes: The Agenda A Modest Premise Texas Politics: Solidity and uncertainty The Texas Economy: The rest of the country catches up Texas Government Finance: Where did all that money go? What s on your mind? 2 I. A Modest Premise 3 2

3 Today s modest premise Texans have lived and worked in a very different economy over the past five years than the rest of the people in the United States. Texas grew out of the 2008 recession much faster than the U.S. as a whole and never looked back. 4 Today s modest premise Texans have lived and worked in a very different economy over the past five years than the rest of the people in the United States. Texas grew out of the 2008 recession much faster than the U.S. as a whole and never looked back until now. 5 3

4 Today s first chart! 6 A regional look 7 4

5 8 Reversal of fortune? 9 5

6 Reversal of fortune? 10 II. Texas Politics 11 6

7 Texas Politics Texas politics has become an interesting mix of solidity and uncertainty. After major upheaval in 2014 almost every statewide office changed hands the new officeholders are all now well established. 12 Texas Politics And they are all Republicans. 13 7

8 Texas Politics Texas has not elected a Democrat to statewide office since this man, in We then named the state history museum after him. * Technically, we also elected Dan Morales, Gary Mauro and John Sharp in Texas Politics Generally, Texas has subscribed to a philosophy of low tax/low regulation/pro business government. And Texans seem to like it that way. 15 8

9 Texas Model of Government Generally speaking, the way state government runs in Texas serves as a good model for other states to follow. 16 Texas as Red State Texas may not be as Republican as you think it is. Five of six major metro counties voted for Obama in 2012 and all five major cities have elected Democrats as mayor. 17 9

10 Texas Issues 18 Texas Issues 19 10

11 The Electorate Texas Politics Project Crosstabs: 48% Republican 39% Democrat 13% Independent 43% Conservative 38% Moderate 18% Liberal Elected leadership in Texas is more conservative than the Texas population as a whole. A 2014 Gallup poll ranked Texas as the 18 th most Republican state in the country. Nationwide, Republicans have a base of roughly 41%. 20 Presidential Politics In the same poll in June 2012: Romney 50% Obama 42% Undecided 8% *Romney won Texas with a 57.2 to 41.4 margin

12 Fresh Data PPP was in the field from August with some very interesting results Donald J Trump 44% Hillary Clinton 38% Gary Johnson 6% Jill Stein 2% Undecided 10% 22 One thing we do agree on 23 12

13 Direction of Texas 24 Voting with your wallet? 25 13

14 III. The Texas Economy 26 Texas Economy Despite some reports to the contrary, the Texas economy is not declining. However, it has slowed and the rest of the country is catching up

15 Real GDP 28 Real Personal Income 29 15

16 Employment Growth 30 Unemployment Rate Texas has a string of 115 consecutive months of being at or below the U.S unemployment rate. That streak is now in jeopardy

17 Construction Employment 32 Housing 33 17

18 Consumer Confidence June 2016 January 2016 June 2015 January 2015 June 2014 January 2014 June 2012 TEXAS United States The Conference Board started publishing Texas consumer confidence separately in June SOURCE: Comptroller of Public Accounts/The Conference Board 34 The Root of the Problem 35 18

19 The Texas Economy West Texas Intermediate Crude (WTI) Benchmark, November 2010 = $84.25 For almost 47 straight months*, until October 2014, the price of WTI never fell below $84.25, hitting a high of $ in April On August 3 rd, 2015 it dropped below $45. Despite some brief rallies, it has largely stayed there. *The one exception was a single month, June 2012 when it temporarily fell to $ USEIA 36 The Texas Economy 37 19

20 The Texas Economy Texas Active Drilling Rigs August 1, 2014 = 904 August 1, 2015 = 375 June 1, 2016 = 185 Baker Hughes 38 Energy Jobs 39 20

21 Houston Jobs 40 Houston Jobs The Texas economy has three very large metropolitan jobcreating engines. One of them has, for the moment, stopped

22 A Tale of Two Cities 42 The Texas Economy 2015 Forbes Fastest Growing American MSAs 1 st 2 nd 3 rd *Fort Worth was 8 th and San Antonio was 10th US Census Bureau 43 22

23 The New Forbes List rank 2015 Fastest Growing 2016 Fastest Growing 1 Houston Austin 2 Dallas San Francisco, CA 3 Austin Dallas 4 Raleigh, NC Seattle, WA 5 Seattle, WA Salt Lake City, UT 6 Denver, CO Ogden, UT 7 San Francisco, CA Orlando, FL 8 Fort Worth San Jose, CA 9 Charlotte, NC Raleigh, NC 10 San Antonio Cape Coral/Fort Myers, FL Moody s Analytics, estimated population growth for 2015 and 2016, year-over-year job growth for 2015, and 2015 gross metro product growth federal unemployment data, median annual pay for college-educated workers in each area, using data from Payscale.com. 44 The Texas Economy and 16. Allen 17. League City 18. College Station 19. Conroe 21. McKinney US Census Bureau 45 23

24 The Texas Economy The Dallas Fed expects job growth for the coming year to be around 1% but it is still growth! Texas, for perhaps the first time in its history, will weather an oil bust without a subsequent recession. But as people continue to move here and government continues to feel the effects of a soft economy there are some underlying problems for public sector services. 46 IV. Texas Government Finance 47 24

25 Where did all the money go? The State of Texas ended Fiscal Year 2015 with a huge budget surplus, billions in cash on hand and a favorable revenue estimate for the coming biennium. That was only 11 months ago. Today, not so much. 48 Texas Government Finance All Funds Biennial Budget $209.4 B Increase over % (Texas Real GDP: FY 13 = 4.3, FY 14 = 3.7, FY 15 = 3.0*) Amount Under Spending Limit Unspent General Revenue State aid to school districts Border Security $2.9 B $6.4 B $42.3 B $800 M * We know from a previous slide today that the middle two quarters of fiscal 2016 resulted in a 0.3% increase

26 Texas Government Finance The Economic Stabilization Fund Created in FY 1990 Did not exceed $1 billion until FY 07 Largest ending balance = $7.7B (FY 10) TODAY = $9.6 billion FY 2017 (est) = $11.1 billion* *but it may not make it 50 Texas Government Finance $6.4 B GR surplus $9.1 B ESF $15.5 Billion 51 26

27 Texas Government Finance Texas didn t even issue a tax revenue anticipation note last September. Wall Street: So, Texas, you need some money? Texas: Nah, we re good. 52 Texas Government Finance Texas actually adapted to the energy downturn during the last fiscal year and still ended $6.4B in the black. Revenue Source Fiscal 2014 Fiscal 2015 Change Sales Tax $27,274,123 $29,071,387 + $1,797,264 Motor Vehicle $4,173,050 $4,622,391 + $449,341 Oil Production $3,874,071 $2,763,386 $1,110,685 Comptroller of Public Accounts 53 27

28 Texas Government Finance Texas even gave some of it back; The 84 th Legislature approved a $3.8 billion tax relief package in two parts: Raised the school homestead exemption to $25,000 (from $15,000) Cut franchise tax rates 25% (1% rate reduced to 0.75%; 0.5% rate reduced to 0.375%) 54 Texas Government Finance The state predicted a strong revenue biennium for fiscal years Revenue Source Fiscal 2016/2017 % Change Sales Tax $ billion + 8.9% Motor Vehicle $ billion % Oil Production* $5.689 billion $14.3% * based on oil prices at $64/$69 Comptroller of Public Accounts: Biennial Revenue Estimate 55 28

29 Texas Government Finance Wait what was that footnote at the bottom??? Revenue Source Fiscal 2016/2017 % Change Sales Tax $ billion + 8.9% Motor Vehicle $ billion % Oil Production* $5.689 billion $14.3% * based on oil prices at $64/$69 Comptroller of Public Accounts: Biennial Revenue Estimate 56 Texas Government Finance Wait what was that footnote at the bottom??? Revenue Source Fiscal 2016/2017 % Change Sales Tax $ billion + 8.9% Motor Vehicle $ billion % * based on oil prices at $64/$69 Oil Production* $5.689 billion $14.3% Comptroller of Public Accounts: Biennial Revenue Estimate 57 29

30 Texas Government Finance Revenue Estimates vs Actuals (through Aug 1, 2016) Revenue Source Fiscal 2016/2017 % Change ESTIMATED % Change ACTUAL Sales Tax $ Revenue billion Source + 8.9% 2.27% Motor Vehicle Oil Production $ billion % % $5.689 billion 14.3% 56.40% 58 Texas Government Finance Current Revenues (through August 1, 2016) vs. Estimate Revenue Source Fiscal 2016 to date % Change CRE Fiscal Year Revenue Source Sales Tax $ billion 2.27 $ billion Motor Vehicle $4.165 billion $4.775 billion Oil Production $1.557 billion $1.845 billion 59 30

31 Texas Government Finance This is not the entire revenue picture, but the trends thus far could eat up a $6.4 billion surplus in a hurry. That impacts a number of local public services, including K 12 education and transportation. 60 Texas Government Finance Texas actually won a school finance case. For the seventh time since the late 1980s, we are called upon to assess the constitutionality of the Texas school finance system, a recondite scheme for which the word Byzantine seems generous. Justice Don Willett 61 31

32 School Finance The Supreme Court didn t award the state a win as much as it simply punted. There are a number of structural deficiencies still at play: Target revenue funded by a massive hold harmless provision set to expire in the biennium (the funding cliff). Target revenue, based in some cases on 2005 funding levels, creates arbitrary results and large gaps in funding among districts. Anachronistic and distortive elements, including the cost of education index and transportation allotment. Lack of meaningful discretion over operational funds as an increasing number of districts either reach the $1.17 property tax cap or fail to pass tax ratification elections. Almost $2 billion in recapture funds from property wealthy districts, many of which educate thousands of economically disadvantaged students. 62 School Finance The state can grow its way out of some of these problems $1.5 B above enrollment growth in Estimated property value increases of 4.6% and 6.2% The Austin Yield increases from $62 to $75 School Year Adjusted Allotment $ $ $ $ $ $ (est) $6394 [1] The adjusted allotment is the state basic allotment adjusted for regional, size and labor market (CEI) differences among school districts. It is used for this analysis because it has a more consistent statistical definition over time than the basic allotment

33 School Finance The great advantage of the state school finance system is that it works remarkably well (critics would say with brutal efficiency ) when property values rise. It ensures an equal partnership between state and local resources (critics describe this as balancing the state budget on the backs of local taxpayers. ) When property values fall it s another matter. 64 A perfect storm Here is an unfinished renovation in Runge ISD

34 A perfect storm About 1000 people live in Runge, in Karnes County, in the middle of the Eagle Ford Shale. Runge ISD 66 A perfect storm Runge ISD Here are Runge ISD s property values back to Runge ISD 2015 $562,000, $1,168,000, $519,000, $403,000, $100,000, $70,000, $79,000,

35 Closer to Home CPTD valuations (billions) YEAR Denton ISD Frisco ISD McKinney ISD Dallas ISD Demographics The Ten Largest School Districts in Texas 1 Houston 215,627 2 Dallas 158,604 3 Cypress Fairbanks 113,936 4 Northside 105,110 5 Fort Worth 87,080 6 Austin 83,648 7 Fort Bend 73,115 8 Katy 72,952 9 Aldine 70, North East 67,

36 Transportation How many of you will leave here and be in this today? 70 Transportation TxDOT annual hours of delay per mile 71 36

37 Transportation Before the 2013 legislative session, TxDOT estimated the state needed to invest $4 billion in annual maintenance and construction needs to maintain current congestion. The Legislature provided $200 million and although it took them three special sessions to do it a proposition for $1.2B out of severance taxes. The people of Texas voted yes. 72 Transportation For , the state highway fund will pick up another $2.4 billion and benefit from a number of legislative actions: Another constitutional amendment: Dedicates $2.5 B of general sales tax beginning in 2017 Dedicates 35% of growth beyond $5B in MVST beginning 2019 Ended $1.3B in SHF diversions Did NOT end state financed toll roads 73 37

38 Transportation In short, Texas is funding highways via constitutional amendment. TxDOT estimates a need of $60 billion over the next five to ten years to improve connectivity and traffic flow in our urban centers another $20 billion for statewide connections and border trade projects. Fiscal Notes, June/July 2016, Comptroller of Public Accounts 74 Transportation The Texas motor fuels tax is $.20/gallon and hasn t increased since Five of those 20 cents go to public education, not TxDOT. And this car did not exist in

39 Other Issues Border Security Does it make the rest of Texas less safe? Child Protective Services It s resources, not leadership The War on Cities Does the Legislature know what s good for you? Pre emption as policy 76 Questions/Answers 77 39