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Texas Comptroller Discusses Economic Impacts of COVID-19 at Virtual Brown Bag Lunch

As businesses adapt to these unprecedented times, so too is CompTIA adapting to keep our members up-to date on the latest policy issues affecting our industry.  In lieu of our traditional Decision Maker Dinners here in Texas, we teamed up with the Texas Association of Manufacturers (TAM) on Wednesday April 22 for our first Virtual Brown Bag Lunch featuring keynote speaker Texas Comptroller Glenn Hegar.  Eighty members from CompTIA and TAM joined the Zoom conference to hear his take on how COVID will impact state government and the budget.

The Good: The Legislature left a $2 billion surplus this budget cycle, the Economic Stabilization Fund (Rainy Day Fund) will have about $8.5 billion at the end of the year, and Texas will receive $11.2 billion from the federal government for COVID response.

The Bad: Oil traded at negative prices for the first time in history and sales tax revenue is projected to fall far short of previous estimates.

The Ugly:  We don’t know how bad the bad is yet.

According to Hegar, the Texas economy was humming in the first few months of the year with an increase of 50,000 jobs and sales tax revenue exceeding the previous years’ collection.  In fact, he was ready to upwardly revise his revenue forecast for the next year until the beginning of March when Saudi Arabia and Russia began flooding the market with oil.  That’s when he began managing expectations about the Texas economy, including a possible recession. 

When COVID arrived, it exacerbated the oil crisis, and the numbers really started to deteriorate those first few weeks of March. As of now it’s too soon to tell the magnitude of losses we’re about to face, but the numbers we do have paint a grim picture, and Hegar provided some sobering examples.  Last week our nation’s airports moved 90,000 passengers a day; a year ago they moved 2.2 million passengers a day.  And normally the movie box office brings in over $1 billion in April; so far one of the top grossing movies this month is an independent film that made $2,400.

Prior to COVID, the Comptroller predicted that the state’s current fiscal year would end with a surplus of over $2 billion along with approximately $8.5 in the Economic Stabilization Fund (Rainy Day Fund).  He will issue a revised revenue estimate in July, and again in December, and it’s all but certain those numbers will be lower than previous estimates.  Sales tax revenue is still rolling in from March which was only partially impacted by the pandemic in its last weeks.  We won’t begin to see the true economic impacts of COVID until June when retailers report April sales tax revenue and May tax reports start to roll in.  We are headed for a recession, but we don’t know how deep or wide yet.

Many have wondered if the Governor needs to call a special session to respond to our economic downtown, and even some legislators have asked Hegar if a special session is necessary.  He’s telling folks no for several reasons.  First, no one will agree on anything in just 30 days.  Second, it’s not safe to bring legislators into close quarters in the Capitol.  Third, the Governor and the Legislative Budget Board have the authority they need to address budget concerns, so cash flow is not a problem.  Any conversations about increasing taxes or modifying incentives are private for now.

Many taxpayers like restaurants impacted by the shutdown have asked the Comptroller if he could postpone tax due dates like he did under Harvey.  He’s reluctant to do so because, unlike Harvey, this emergency has impacted the entire state and every industry, making postponement much more difficult.  Instead he is encouraging businesses to call the Comptroller’s office to discuss options like payment plans.  So far 4,500 businesses are on a payment plan which is good news for local governments who rely on those revenues to operate.  He did postpone franchise tax remittance until July in accordance with the IRS.  Appraisal districts have asked if they can use 2019 appraisal values, but statute requires that homes are appraised on their value as of January 1, 2020, so he has no flexibility on that front.

Many in our industry are concerned about the fate of IT projects in the face of a tight budget session.  Hegar said that every agency is different, but he has already instituted cost saving measures in his office through hiring and pay freezes and is reevaluating planned IT projects.  Some will continue, but some most likely will not.  For example, the proposed rules on Internet sales tax collections has an IT project component that is currently in the request for bid phase, and it will be evaluated when the bids are in. It is an important project that can hopefully continue even though it might need to be scaled back. (On a side note, Speaker Dennis Bonnen has proposed asking agencies to begin cutting their budgets by 5% starting now, but so far the Governor has not issued any such directives.)

Texas will receive $11.2 billion under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act intended to help state and local governments navigate the impacts of COVID, but there are questions about how the money may be spent. Many states are asking if it can be spent on general “loss of revenue.” The money Texas receives will be split - with 55% state share and 45% local share.  The Comptroller is trying to figure out how to distribute the money to local governments since many have overlapping services.

And just as CompTIA is adapting, so is the Comptroller’s office.  Hegar’s employees are teleworking fulltime and were well prepared to do so because their IT team has been working for two years on setting up a telework system.  It’s easier for some departments than others.  For example, auditors are unable to conduct site visits.  For other agencies who weren’t prepared for telework, they’re scrambling to purchase computers and iPads and have to increase their bandwidth. The Workforce Commission has rapidly expanded its on-line capabilities out of necessity. Hegar believes this crisis will change our working behavior for a long time to come and claims his days of shaking hands are over.  After this, “normal” will look very different.

Fortunately, Texas is in a much better position than other states in many ways.  Fiscally, we have a projected surplus in the bank and a healthy Rainy Day Fund.  And while other states are writing budgets in the midst of uncertainty, our biennial budget cycle gives budget writers a bit of runway for economic data to roll in before making appropriations.  More relief has come to us in the form of an additional $1 billion for federal Medicaid match in the first two quarters of 2020. That has freed up $1 billion for other expenditures.  In terms of cash flow, the Comptroller expects to go out for $8 billion in revenue anticipation notes in August to disperse to school districts whose funding is front-loaded; this is the same amount he went out for last year.

As for how and when to open Texas back up for business, Hegar says one size does NOT fit all. Texas is very diverse with adjacent rural/urban areas, and right now there is a “swiss cheese” approach in areas bordering each other.  He would like a template of standardization with allowance for unique exceptions, and Hegar stressed that any reopening needs to be step-by-step. 

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