DALLAS — Texas Comptroller Glenn Hegar asked Gov. Greg Abbott and state legislative leaders to keep the state's credit triple-A credit ratings in mind as they consider cutting taxes by nearly $5 billion.
"I want to emphasize that in addition to tax cuts, it is also important to consider the long-term challenges affecting the state's balance sheet and credit ratings," Hegar wrote in a
"Bear in mind that the state currently enjoys the highest credit ratings from the major rating agencies, which translates into lower borrowing rates for state issued obligations and less costs to taxpayers."
Hegar cited six issues that he calls "vital to the maintenance of that rating." The issues are infrastructure, pension funding, long-term debt, other post-employment benefits, the Texas Guaranteed Tuition Plan, and deferred maintenance.
"Although these issues are long-term in nature and extend beyond the upcoming two-year budget horizon, they must be addressed to ensure the state's continued good financial health and condition," Hegar said.
The state's rapid population growth creates major stress on infrastructure, particularly for transportation, Hegar said. The Texas Department of Transportation says that it needs an additional $5 billion in revenue per fiscal year to maintain roads and bridges.
Under the budget Abbott proposed, TxDOT would receive nearly $4 billion.
The House and Senate have provided different formulas for increasing transportation funding by $3.6 billion. The Senate version dedicates a share of the sales taxes on motor vehicles, while the House's version dedicates a share from general sales taxes. Those two versions must be resolved in conference committee.
On the issue of pension funding, Hegar cited credit downgrades in Illinois, Pennsylvania and New Jersey that were attributed in part to growing pension obligations. The Texas Employees Retirement System has a net pension liability of $14.46 billion, Hegar said.
"Both Standard & Poor's and Moody's have noted that a continued history of funding below the actuarially determined annual required contribution is a risk factor for the state," his letter said.
Other post-employment benefits such as retiree health care are estimated at about $78 million in the current fiscal year.
While the full value of the obligations do not have to be recognized on the state's balance sheet, "the long-term fiscal implications of these plans cannot be understated," Hegar wrote. "Absent legislative action, TRS [Teachers Retirement System] expects its health insurance program to run out of money as early as fiscal 2016."
Although Texas' debt is well below its constitutional cap, it has risen 115.6% over the past decade, from $7 billion to $15.09 billion, Hegar said. General obligation debt per capita has increased nearly 80% during that time, he wrote.
"Included in these numbers is debt payable from the general revenue fund, which impacts the biennial budget and has grown 53.8% over the past 10 years from $3.14 billion to $4.83 billion," Hegar wrote.
The Texas Guaranteed Tuition Plan, also known as the Texas Tomorrow Fund has a constitutional funding guarantee, he said.
"The fund is expected to experience shortfalls as early as fiscal 2019, which will result in a constitutional general revenue draw," Hegar said. "As of Aug. 31, 2014, the unfunded liability was $568 million, and it will continue to grow until addressed by the Legislature."
Hegar said recent estimates of deferred maintenance costs are as high as $1.5 billion
"Continued deferred maintenance of state facilities reduces the valuation of those assets over time and will impact future budgets with increased costs for repairs," he wrote.
In response to Hegar's letter, Patrick said he shared the Comptroller's concerns and recognized the importance of maintaining the state's credit rating.
"However, I'm also greatly concerned about the burden of high property and business taxes on Texans," Patrick said in the prepared statement. "We have the money to lower taxes and address the needs of a growing state. We must do both."
Patrick has vowed to stand his ground in defending $4.6 billion of tax reductions that include a $2.2 billion cut in property taxes and $2 billion in business franchise tax cuts passed in the Senate. The House's version that reduces taxes by $4.9 billion, including a franchise business tax cut and what would be the first cut in sales taxes in the state's history.
House Democrats have countered that the Senate's tax relief does not actually cut state taxes but provides exemptions from local property taxes.
Under House Bill 31, unanimously approved in the Texas House April 28, the state sales tax rate would fall to 5.95% from the current 6.25%. With no income tax, Texas is heavily dependent on sales tax revenue.
Hegar, who reports monthly sales tax receipts, noted that April's increase of 1.1% was the 61st consecutive monthly rise over the same month the previous year. However, it was the smallest increase in percentage terms in years. A reduced sales tax rate would tend to reduce revenue if the rate of economic growth continues to slow.
On the pension front, Moody's warned in January that unfunded liability posed a negative credit risk.
Among several bills under consideration in the Legislature, House Bill 9 would increase the employee contribution to the Employee Retirement System to 9.5% from the current 6.9%. The increase would be offset by a 2.5% pay raise.
The House Bill 1 budget bill also would increase the state's contribution to the pension fund to 10%.
"This would demonstrate a joint commitment by the state and employees to shore up the retirement system," according to a legislative staff analysis of the bill. The bill also would continue a provision adopted by the 83rd Legislature in 2013 requiring employee contributions to be reduced if state contributions were reduced in a future biennium.
The ERS shortfall largely is a result of lawmakers failing to appropriate adequate funds for 19 of the past 20 years, officials said.
Sen. Kevin Eltife's Senate Joint Resolution 68 would ask voter approval for a one-time $1.5 billion contribution from the rainy day fund to the ERS trust fund. That amount would pay down about 20% of the outstanding unfunded liability.
In its legislative appropriations request for 2016-17, ERS asked for about $350 million in general revenue above base funding to make the system sound.
"If this is not addressed one way or another, the debt is going to keep growing," ERS executive director Ann Bishop told senators in a committee hearing. "The bond houses do consider this a debt."
