Texas Comptroller of Public Accounts

Texas Comptroller of Public Accounts, Glenn Hegar

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Comptroller Susan Combs’ Biennial Revenue Estimate
Reflects Today’s Economic Climate

LBJ State Office Building
Austin, Texas
Monday, January 12, 2009

Pursuant to my Constitutional duty under Article III, Section 49a, I am delivering my estimate for the fiscal 2010-11 available revenue to the Legislature and the Governor today. And let me begin with a brief overview.

For General Revenue-related funds available for certification for the coming biennium 2010-11 that number is $77.1 billion and that is over there on poster number one. And of note here is that the comparable number for the current biennium — 2008-09 — is $86.2 billion so this new estimate shows a difference, a downward difference of $9.1 billion which is down about 10.5 percent. And as you take a look at that chart, you can see the difference is primarily due to a beginning General Revenue balance, or surplus, that we have on hand this session, this time. The $7 billion decline in beginning balances — going from about $9 billion in September of 2007 to about $2 billion coming up— relates back to some monies being used to fund the 2008-09 budget and setting aside $3 billion to provide for future school property tax relief.

Now historically, the General Revenue balance — or “surplus” — DOES change. And it is NOT always in the billions. Now for example, at the start of the 4-05 biennium, that surplus figure was only $88 MILLION. The other point that I would like to make, back to that same poster, is that the revenue, which is expected to be collected in the upcoming biennium, is slightly less than the comparable number for this biennium which is due to a number of factors, most notably a slowing Texas economy which, in turn, if of course, driving reduced tax receipts. I give you one example, motor vehicle sales which have plunged both nationally and here in Texas. And that sales tax, normally is about a $3 billion revenue source per year, is expected to drop about 21.9 percent in fiscal 09 and, while it will come back somewhat in the coming biennium, we do not expect it to regain its former size before the end of the 2010-11 biennium.

And another factor influencing reduced 2010-11 revenues is the stock market. And the market’s decline has triggered a never-before-used Texas Constitutional provision which states that the Permanent School Fund may not make any distributions for school funding purposes until the fund value improves. The current biennium that we’re, we’ll see $1.4 billion transferred, but for 2010-11, we are expecting no transfers from the PSF and therefore any REPLACEMENT funding would have to come from either General Revenue or perhaps even the Rainy Day Fund.

So, the 2010-11 available revenue of $77.1 billion is derived from, as you can see, the $2.1 billion 08-09 ending “surplus” General Revenue “surplus” as well as $75 billion in revenues. And that number, $77.1, is the available revenue for the biennium. Now, of course, as you know, state revenue collections from all sources also include $91 billion in federal receipts.

Now what about the economy? When I spoke to you about the Biennial Revenue Estimate a couple of years ago, certainly the economy was an important factor. But now it has assumed even more importance. The U.S. economy, which was hitting on all cylinders during the early and middle years of this decade, entered into recession in December of 2007. And job losses thus far nationally are about 2.6 million jobs.

Texans might have side-stepped a slight or moderate downturn in the national economy, but the effects of what may be the worst national recession in many decades will be too large to avoid. The state is not immune to the economic forces wreaking havoc in other sections of the country.

And you can take a look at the second poster. Employment in Texas is expected to cool rapidly from its annual pace which used to add about 250,000 jobs per year, which we saw in 2008, to LOSING jobs. Texas employment is expected to have PEAKED in the fourth quarter of calendar year 2008, and then it’s going to DECLINE, we expect, until the third quarter of 2009. And a projected 111,000 nonfarm jobs are expected to be lost during this period. Now, we also believe that in the fourth quarter of calendar of 2009, it’s expected that we’ll start seeing job growth again, resuming.

Consumer confidence numbers — while down sharply from the levels seen even a year ago across the nation and in Texas — would seem to bear out the general view that Texas will lag the nation, yet Texans and residents of the Southwest generally are more optimistic today than the rest of the country, but going forward, their expectations six months in the future are a little bit gloomier. And of course, we all understand that people do worry about the future, and that is reflected in reduced spending — but we are, as a state, still innately more optimistic than the rest of the country.

Now several quick points back to employment is that Texas job growth has been gradually DECELERATING over the past six months or so. Where we used to add about 20,000 jobs per month, we have already slowed to below 10,000 per month. And as you can tell also by that chart, we track the U.S. employment but we lag it. And so for the 1981-1982 as well as the 2001 recession, we saw job losses but they were about six months behind the national numbers. But again we would expect in fiscal 2011, we would expect to revert to a pre-slowdown growth in employment of about 20,000 per month. And by the way, we led the nation for a very long time in job growth, and we expect to do that again.

The housing market, oil and gas prices and growth in consumer spending have been prime contributors in the past to tax collections and we see those slowing rather dramatically as well. The vibrant housing climate in Texas has turned down. And the really good news is that it hasn’t turned down as badly as some other states. The sales of EXISTING homes in Texas have declined by about 16.2 percent over the last year. And of course as sales cool, the MLS listings go up. New home starts have declined rather dramatically — down about 30 percent which is similar to U.S. trends. Unfortunately, prices for existing homes are also declining by about 5.4 percent, which is quite moderate compared to the 20–25 percent price drops that we are seeing in California and Florida. With new home prices though, which is interesting, although the starts are down, prices have remained firm.

And I think this is a really interesting chart. It’s about foreclosures and if you take a look back starting really all the way up to about the start of 2007, California, Florida and Texas all had about the same number of monthly foreclosures in the 10,000 home per month range. Then look at California. California at one point was up at a 100,000 homes being foreclosed per month, and ours has remained steady. To sort of give you that in a kind of a little different number, in Texas, only one out of 1,176 homes or households have faced a new foreclosure action. But contrast this to California, one out of 218; Florida, one out of 173; and then the very difficult situation in Nevada where one out of 76 Nevada households faces a foreclosure action. And so the great news for Texas is that most people do have the confidence that they will be able to keep their homes, and that’s of course, hugely important to them.

Oil and gas and that’s obviously important to the state. The oil and gas prices have been on a steady march upward since the early 2000s and then they spiked upwards as we all remember in the summer of 2008. It briefly reached $147 per barrel before taking a pretty steep price. By the way just for your information, taxable is not the same as market. And taxable oil is about 90 percent of market and taxable gas is about 85 percent. But the point is the trends are still the same. And oil is now trading at about $40-per-barrel range, which is where it was about four years ago. Now we expect to see oil prices actually in the mid-$30s this spring and summer and then rising back to the $40 range by the year’s end.

Now as a kind of an additional qualifier, unrest around the world and unique events — such as hurricanes in the Gulf — can and do move prices and so what I’m really giving you here is the overall trend in prices. We do expect that prices in the next year will move slowly upward as national and global economies begin to recover and the same thing will be true for natural gas.

Now let me talk about one of the state’s larger revenue sources, which is the sales tax. Sales tax for the biennium coming up 2010-2011, we expect total sales tax collections to be about $44.4 billion, which will be about 65 percent of all tax revenue and 58 percent of total GR and these percentages are up slightly. The percentage rate has been up. It used to be about 61 percent and now it’s up to about 65 percent. And the fiscal 2010 rate of growth is going to be about 0.5 percent, accelerating to about 4.2 percent in 2011 as the economy swings into full recovery. And of course, both of these rates are down considerably. You will remember that in fiscal 06, it was a 12 percent biennium over biennium growth, sorry year over year and in 2007 it was 10.9 and fiscal 8 was 6.6. Those were very robust numbers. And as I mentioned earlier, the same factors that drove the high growth rates of the past two years are the same ones expected to cool off — and all of those areas impact sales tax.

Within retail trade, there is a great deal of variation, and this is where the average Texan is experiencing some differences in their daily lives. General merchandise stores, such as department and discount stores, those have some interesting numbers. This sector had excellent fiscal years in 06 and 07. And then tax collections from general merchandise have held up, compared to specialty stores. So in fiscal 09, year-to-date, this sector’s tax collections are up 5 percent over last year which we suspect is an indication that consumers have moved — at least for now — from some specialty retailers toward these general merchandise stores.

Franchise Tax. Franchise tax is another important source of funding for the state’s revenues. And the first complete cycle has been completed for the revised franchise — or margin — tax. And the fiscal 08 collections — which is the first year of collecting it — were $4.5 billion, which was well short of the expected $5.9 billion, but there will be some refunds and after refunds — for this first cycle — we expect it to actual be about $4.3 billion. Going forward, we would say probably for both fiscal 9 and fiscal 10 to be about $4.4 billion both years. Then in fiscal 11, the tax, we expect to increase to about $4.5 billion. So, for the 10-11 biennium, the tax will generate about $8.9 billion — to be split between two state funds. General Revenue will retain about 60 percent of the net proceeds, and the Property Tax Relief Fund gets the rest.

Final sort of oil and gas topic is on severance tax revenues. Natural gas production tax is expected to bring in about $3.3 billion over the upcoming biennium which is much lower than the present biennium, because the present biennium we expect to have about $4.5 billion obviously higher prices are responsible for that.

Oil production taxes will generate about $1.2 billion in the 10-11 biennium, compared to about $2.2 billion for the current biennium. And together, in 10 and 11, we expect the severance taxes will raise about $4.5 billion. Now as you all know, there is an obligation to reserve some funds for the Rainy Day Fund. We expect about $1.7 billion will be reserved for the transfer to that fund. We expect that fund to contain, at the end of the 08-09 biennium, which ends August 31, 2009, an estimated $6.7 billion. Which is the largest, by far, balance ever contained in the fund at the end of a budget period.

But let me sort of talk, just a second about the fund. It came into being about 20 years ago, and it followed an economic downturn in the state. And its primary method of funding is a required transfer of three-quarters of the oil and gas tax revenue ABOVE what was collected in 1987, and that fund is the Rainy Day Fund. So, in a general sense and disregarding variations in well output, the higher that oil and gas prices are, the more dollars go into the Rainy Day Fund. Now of course, there will be some additions to the fund, over the 2010-11 biennium, will be two more transfers. And all told, the Fund would have approximately $9.1 billion in its balance at the end of the 2010-11 biennium, absent any appropriations that might be made by the 81st Legislature, which, as you also know, for spending requires a two-thirds vote. Just by way of history, from 1990 through 2008, money has been appropriated out of the fund in excess of $100 million only six times. And I want to stress that the Rainy Day Fund, going forward, is probably not a reliable source of additional funding for the state’s needs.

The outlook I am releasing today, for both state revenue and the economic picture, is decidedly cautious. Fiscal 09, and the first part of 2010 especially, are likely to underperform what we have become used to.

We do have the large Rainy Day Fund balance available as resource for the coming biennium. But oil and gas prices are volatile, and as you can take a look at the four biennium, preceding the one we’re in, it has not been a very filled up fund and it has not always been as large as it has been. Take a look at 2000 to 2001. You’re talking about very low numbers and going forward.

I would urge lawmakers to continue their historic practice of careful budget deliberations, with special consideration toward making sure that the decisions of today will fit within our means of funding them tomorrow.

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