Just like that: Comptroller Glenn Hegar says Texas’ $3B surplus became a nearly $5B shortfall

AUSTIN — Comptroller Glenn Hegar on Monday said an economic slowdown caused by the coronavirus and an oil slump is erasing a $2.9 billion surplus expected for the state’s current two-year budget cycle, producing instead a $4.6 billion revenue shortfall.

“It’s such a big number, there’s a pretty big gap there,” Hegar said of his revised estimate that there will just be $110.19 billion of general-purpose state revenue.

In October, he’d predicted Texas would take in $121.76 billion of such discretionary state dollars in the cycle that ends in August 2021.

The shortfall would’ve been worse had it not been for developments such as federal coronavirus aid and higher property values that slightly eased the state’s obligation to pay for schools, as well as strong sales tax collections on e-commerce, he said.

In an interview before he released the lower “certification revenue estimate,” Hegar said Texas’ economy during this fiscal year, despite a national recession, outperformed the U.S. economy.

The state’s real gross domestic product in fiscal 2020 is expected to shrink by only 3.8%, compared with a U.S. decline of 5.3%, he said. But Texas’ real gross domestic product next year will shrink by 0.6%, while the U.S. economy grows by 0.8%, he said.

For fiscal 2021, Hegar said economic forecasting services and his office’s revenue estimating team foresee the U.S. “recovering to a greater degree than Texas, in part because of the double headwinds of not just dealing with the pandemic but also a decrease in oil and gas prices and production in Texas.”

Hegar released the lowered revenue estimate as he and the state’s “Big 3” — Gov. Greg Abbott, Lt. Gov. Dan Patrick and Speaker Dennis Bonnen — prepared to conduct a pro forma meeting Monday as the state’s Cash Management Committee.

It approves short-term borrowing Texas does on Wall Street every year to overcome a cash-flow problem: The initial state school payments at that start of a fiscal — and academic — year are huge. The state issues Tax and Revenue Anticipation Notes, or TRANS.

Later Monday morning, Hegar was scheduled to brief the Legislative Budget Board, a group of 10 key legislators, about the state’s economic condition.

Around the time the Legislature reconvenes in January, Hegar will have to estimate how much revenue the state will have in the 2022-2023 budget cycle. If he assumes a slow recovery from this year’s sudden economic contraction, he might have to project a revenue shortfall. That could force lawmakers to cut spending, raise taxes or both.

In 2003, lawmakers passed spending cuts to erase a $10 billion shortfall, caused by a burst of the dot.com economic bubble and the Sept. 11, 2001, terror attacks.

In 2011, during the Great Recession, they closed a $27 billion shortfall. The pain of the financial collapse was masked in their 2009 session by federal stimulus money, which went away.

Looking to the next couple of years, Hegar said declining oil prices and production already have dialed back estimates of state severance tax collections so drastically that there will be $1.5 billion less each for two accounts that thrive off energy production: the State Highway Fund and the Economic Stabilization Fund, or rainy day fund.

Still, this fall, he will transfer $1.1 billion of energy-production tax money to each, he said.

After adjusting for spending approved by the Legislature last year and investment and interest earnings, Hegar’s revised estimate projects the rainy day fund will have a balance of $8.79 billion when the current budget cycle ends on Aug. 31, 2021.

The general fund, which covers the state’s tab for schools, colleges, health care and prisons, faces trouble. But just how much is unclear, Hegar said.

“We’re assuming the state will effectively manage the outbreak and that infection rates won’t overwhelm our health care system,” Hegar said in a written statement.

“This estimate also assumes that restrictions on businesses and individuals will be lifted before the end of this calendar year and that economic activity will strengthen but not return to pre-pandemic levels by the end of this biennium.”

In the interview, Hegar said he makes many guesses in every revenue estimate.

“But this one is clouded with much more uncertainty,” he said. “There’s a tremendous amount of assumptions being made — not just, obviously, about how government, individuals and businesses are going to behave here in Texas but literally in the nation and the world. And again, I keep re-emphasizing worldwide because … we’re 19% of all the U.S. exports — we’re very tied to the international markets. And disruptions that are occurring in other parts of the world can obviously have supply chain issues here in Texas.” He cited manufacturing supply chains as an example.

Hegar slashed by 9.5%, or by $11.6 billion, his earlier forecast of how much general-purpose revenue would be available in the 2020-2021 cycle. The discretionary money comes from state taxes, fees and investment income.

His projection of a $4.6 billion shortfall doesn’t account for possible cuts of up to 5% in state agencies’ spending that the budget board is beginning to consider.

Nor does the figure assume any additional federal help, though Congress and President Donald Trump are discussing additional coronavirus assistance to states and local governments, as well as to laid-off workers.

The $11.6 billion decrease in general revenue rumbles through the state’s intricate budget machinery and becomes a $4.6 billion shortfall after these offsets to the general fund:

·       $2.9 billion, as the end balance or “surplus” he’d projected earlier disappears

·       $1.2 billion of federal coronavirus aid to schools, which state GOP leaders have subbed in for general revenue in meeting the state’s school obligations

·       $1.7 billion in higher local school property-tax collections, which also reduces how much general revenue the state must put up for schools

·       $950 million from higher-than-expected collections of state sales tax on online purchases, which have soared during COVID-19 stay-at-home orders

·       $550 million, after a $700 million increase in “Robin Hood” payments by schools further trims the state’s IOU, while state obligations to pay for 2006 property tax cuts grow by $150 million.