Day Two Opening Keynote

Transcription:

Lynne Funk (00:09):

All right. Good morning everyone. Welcome to day two of the Bond Buyers Texas Public Finance Conference. I'm Lynne Funk with a Bond Buyer and we are delighted to have you all here. We have a really excellent day ahead, a very full day. I know that the headlines might be pulling some eyeballs away, but I hope you can stay in the room and see what's happening here in Texas. I'm delighted to welcome to the stage Don Gonzales, who is Senior Managing Director and Manager of the San Antonio office of Estrada Hinojosa. He also serves on its board of directors. Don is going to be introducing our keynote speaker. So Don, welcome.

Donald J. Gonzales (00:59):

Good morning everyone, and welcome to day two of the Bond Buyer. We are very fortunate to have Glenn Hegar this morning. He's the 36 Texas Controller of public accounts since November of 2014. He's been reelected in 2018. In 2022, he serves as the Texas Chief Financial Officer, state Treasurer check writer, which I'm sure gets his hand pretty or wrist pretty tired every week or two weeks. Tax collector, procurement officer and revenue estimator. I worked at the controller's office about 35 years ago under John Sharp and of all those, the thing that I remember the most was the revenue estimation and how close they've got to hit the target for the budget to be able to be set and adopted by the legislature. I'm sure that continues to be an ongoing issue. Since taking office, he's reorganized the agency for quicker and more effective decision-making and reduced its administrative footprint by working with the legislature to eliminate inefficient programs and transfer others that didn't fit core missions.

(02:07):

He actually has also been involved with helping the legislature repeal eight taxes, six of which he was having to administer through the controller's office as CFO of the world's eighth largest economy. He continues to monitor the financial health of Texas and advocates for its conservative financial management. He's worked hard to bring public and legislative attention to long-term financial obligations facing the state, and obviously this is all very important to us in order to maintain the AAA rating that Texas enjoys. He's been involved with shoring up the deficit and the Texas guaranteed tuition plan. He's been involved with maintaining the financial reserves and the Texas Rainy Day fund. He's been involved with administering the Precious Metals Depository and the Texas Billion Depository, which now I believe has not only gold but art and other top tier security, which is I'm sure been a great benefit for all of us to be able to have gold, especially in these times.

(03:14):

The Texas Broadband Development Office, which was created by the legislature also falls under him and it seems like anytime there's something new or big that the legislature wants done, they give it to the person that's best suited to be able to handle that. And clearly you've been handed quite a bit and continue to do a great job, so we thank you for all of that. The latest is biennial revenue estimate for the forecast for the legislature, and I guess what's estimated is about $3 billion to establish financing programs for new water, new water supply projects, a billion and a half for broadband infrastructure, and then administering grants that provide additional resources for sheriffs constables and prosecutors in rural Texas.

(04:02):

Obviously, he's got a background that's beyond the comp controller's office previously served in the Texas House of Representatives and as a state senator and has a wide range of issues that he commonly has to follow, obviously dealing with tax reform and government transparency. He's a graduate of Texas A&M. Let's try that one more time. He was a graduate of Texas A&M. That's still a little weak. Alright, forgive us for that. They're not Asian. Also a graduated of St. Mary's University and has his master's of law from University of Arkansas. He's a sixth generation Texan having grown up on farming land that his family has continued to do since the mid 18 hundreds and has fantastic core values of hard work, honesty and integrity. The same values that he and his wife Dara worked to instill rather in their three teenage children, Claire, Julia, and Jonah, but his most important title throughout all these years that many of us in this room enjoy is being called dad. So thank you for all your work controller Hegar and welcome to the stage.

Glenn Hegar (05:32):

Thanks, Don. I appreciate that introduction. It's good to see everybody. Good to be with you this morning. I wish we were outside as the weather is absolutely fantastic and here in Austin and as most of Texas, that does not last very long. So today I wanted to talk about a few different things. First and foremost, I wanted to mention a few of the things that I have seen over the course of the last 10 years. So I've served in this role, in this capacity for 10 years. Last night my staff always before a speech such as this one, they'll send me some talking points, they send it to me. They've known for 10 years that Glen might actually open them. He may not open them. I usually glance at them. I have been working doing my current job, and if you don't know, not only is serving as controller of 3000 employees with three constitutional duties, and yes, one is running the treasury as Don mentioned, thankfully, we have electronic transfer, we don't, and we have an automated pen for all of those signatures on those treasury warrants.

(06:38):

I do make a point in some of my speeches, just the point of the size and scope of the state treasury is that if I set at my desk 40 hours a week and I did nothing other than sign checks to issue all 14 million payments on behalf of the state of Texas, and I didn't take off good Friday, Christmas, Thanksgiving, no days off whatsoever, all I did was sign checks 40 hours a week, 52 weeks out of the year, I would have to sign essentially 116 checks every 60 seconds, 40 hours a week, 52 weeks a year, and I could actually take off on Saturdays and Sundays. Now the point is I don't, and thank God I don't, but it's a massive operation. We're in legislative session. If you haven't been through a legislative session, I encourage you to do it someday. It is very challenging.

(07:25):

The other day I was in Bryan College Station working on my new job that I take over in July of one. My phone is blowing up all the time during meetings and I look at text messages. Normally staff will be like, okay, can we talk to you later today with a legislative session on the back end of a session with just a few weeks left? Those messages are more like, can we talk to you now? So there's a lot of things going on, and the point being is about nine 30 last night I realized, oh shit, I have a speech to bonfire tomorrow and I try to actually be factual in this speech. I give a lot of speeches and some of 'em it's like, it's not that important. There's nobody there that's going to take what you say, but in this group, the CFO, you kind of got to be factual.

(08:10):

You can't fudge the numbers, the data or any of those points. But last night as I was sitting there thinking about what did I want to talk about today and what I really want to talk about first and foremost is framing up the last 10 years, the last 10 years of where have we've been and where are we at today. As I was sitting there and I pulled out my notes, I was grabbed these glasses and I thought, well, it's not on my notes, but one of the first things is 10 years ago when I came and spoke to you, I didn't have to have readers. So that in itself for life for Glenn Hegar has changed. And so I pulled 'em out and I was like, oh my gosh. I mean, I write small notes. I can barely see it. It's kind of fuzzy.

(08:53):

Yesterday, one of my deputies came in and said, Hey, I got this. You're going to see the governor and I wanted you to have this. And they handed it to me and I was like, I can't read that. And they said, but I put it in big print. Yeah, well, I still need the cheaters, so I'm going to put my cheaters on so I make sure I see the numbers are accurate. If it was 10 years ago, the state of Texas 10 years ago, we had a population of 27 and a half million people. 10 years later, it's over 31 million. 10 years ago, the GDP of the state of Texas, I'd stand up here and I would brag to you that it was $1.6 billion, the 12th largest economy in the world. I've had to scratch that through those 10 years. We moved to number 11, we moved to number 10, we moved to number nine.

(09:34):

I got introduced about four months by somebody read the bio and they said, oh, he's the CFO of the world's ninth largest economy. And I had to walk up and I said, huh, you got last year's bio because now it's the eighth largest economy. And so that GDP has moved from 1.6 billion to 2.7 billion. We have a poverty rate that is still high, but it used to be 16% and now it's 13.8%. So we're moving that poverty rate down, and as I told you, the 12th largest economy to the eighth, we had an economic stabilization fund that when I got into this role, I would sit there at my desk and one time with staff and we were talking about how do we invest the economic stabilization fund? And they said, we keep it in the treasury pool. I said, no, no, no, no, not after it comes in, but what do we do with it after that?

(10:20):

We keep it in the treasury pool. And I thought, you're joking me. We have 6.7 billion sitting in overnight cash or you're really joking me. So we worked hard over subsequent sessions to get the legislature to give us the tools in the toolbox to invest the economic stabilization fund or the rainy day fund, our state savings account. That's six and a half billion dollars to treat it just like almost. We treat some of the other investors to try to be more prudent to keep the earnings on it, to make sure we keep the purchasing power up. Fast forward 10 years thanks to those tools in the toolbox as well as the oil and gas industry doing better over the years and production staying higher than it has been. And even though the markets of the volatility of prices, and we all know that of the last several days, the fact is production has been more consistent over the last few years.

(11:10):

And so now that economic stabilization fund instead of six and a half billion roughly has 24 billion, and we expect that in the next couple of years it'll have over 28 billion. We also, I think it's a remarkable number. I talk about our sales tax collections in Texas every month, and I talk about that because of all the range of revenues in the state. Treasury sales tax is the biggest piece of all the revenues that we have coming into the treasury in a month after month and sales tax revenues when I got in this job and a whole year was $29 billion. Fast forward 10 years and now it's $49 billion on a month to month, it would've been roughly two and a half a billion dollars almost in a single month. Now, every single month, it's almost $4 billion. I made that point to the legislature when I gave the revenue estimate.

(12:06):

In part, I did that because I wanted to make the point that even though in my revenue estimate now that we have today and we are staying consistent with right now, despite some of the things going on in the market point is a modest growth rate on $4 billion in sales collections a month is significantly higher than a modest growth rate on two and a half billion. Those are real dollars that are coming into the state treasury. 10 years ago, I was waiting to give a revenue estimate that morning, one of investment outfits that's in this room had lowered their revenue forecast for oil and gas oil prices WTI that morning I'm about to walk out to do the biggest thing that I do as the controller of public accounts. I'd only been on the job just a few days and I felt like the press was going to ask, well, you have this price in WTI, but just this morning there is a press release saying we think because the conditions in the market that literally it's going to be half of what you think it's going to be for the next two and a half years.

(13:15):

How are you going to respond to that? So I was trying to crunch some numbers and come up with some reasons and logic. And one of the things since then, and some of you've heard me say this, that I talk about how we look at all kinds of economic indicators in my office, obviously, as we are trying to figure out what is the trajectory that we think the revenues in the state of Texas is going to be starting in nine months and ending two years later as we give that forecast to the legislature and updated as we go through the next two years in that budget. And one of the data points that I love to cite more than any other data point that I cite all the time is what is WTI price going to be in the EC futures starting next year? What is the 12 month outlook?

(13:59):

And some of you've heard me say this, I usually give it in speeches because people ask me all the time, they always ask me, what is the price of oil, Glenn, what is the price of oil that you have? And one of the points that I tell the legislature, I came up with a chart that I provide them of the last 30 years in revenues into the state treasury. There's a column on sales taxes. There's a column on oil and gas revenues, and there's a column on motor vehicle sales and revenues and total tax collections. And I make the point that up and down that chart, if you look on sales tax collections, we have averaged in the last 30 years about 5.4% increase on year average after average. Now, I think if memory serves, there's five years in 30 years where we've had a double digit increase in sales tax collections in those 30 years, five times.

(14:45):

But the point is it has typically been somewhere around that average where oil and gas severance tax collections in that 30 years, you look up and down that chart and it's about 8.7% on average every year for the last 30 years. But up until last year's in fiscal revenues, I would challenge the legislature look up and down that chart and tell me how many single digit increases have we had in oil and gas severance tax collections in the last 30 years. It was a trick question because you know how many there were zero. It wasn't until last year we actually had a single digit one time either increase or decrease. And the point being is the volatility in the oil and gas market has been tremendous over those years. So I like to then come back to that data point that I like to cite is what is DWTI? NYMEX futures 95% certainty. I don't know about you, but for me, 95 is a good number. I'd like 98% certainty, but I'll take 95, 95% certainty. As you all know at WTI right now in December of next year, if I remember correctly, and it's going to change this week, but as it was last week was somewhere between $34 a barrel and $117 a barrel.

(16:03):

The point being is thankfully when I got in this role, unfortunately in that year, there was a downturn in the manufacturing industry. There was a downturn in the oil and gas industry, and it wasn't long after the legislature got in session, those forces started coming to bear. What was remarkable, and I point this out pretty frequently, is that while we had a downturn in those industries, Texas economy was much more diverse than it had been in the past. And in the last 10 years, it's even more diverse than ever before. I tell people frequently, and I ask the question in this room, who could tell me what is the industry that contributes the most to Texas GDP than any other industry in the state of Texas usually is hands raised. They usually say the exact same industry time and time again. I love to say it in a room such as this because there's so many times people in that own industry don't even know that they contribute the largest GDP contribution out of all industry sectors in Texas.

(17:12):

And who is it that has changed in the last 10 years and went from if memory serves, and I didn't look this one up because I didn't have time between last night and this morning moved I think it was number four, had to move to number three, moved to number two, moved to number one, and that is what the financial sector, the financial sector is the number one contributor to the Texas economy 10 years later. Number two is the professional sector. Number three is still manufacturing. It's been right up at there at the top and will continue to be as Texas continues to build products all the time. And one of the things, if you look at the foundation of Texas that I tell people, if you look at the market today, you look at the uncertainty of the last few days, Texas exports more value of product than any other state in this nation.

(18:02):

We're not quite 10% of the entire GDP of the entire nation, but we export more than 20% of all the product out of the entire United States comes out of the state that you're sitting in Texas. So the point that I make with that is while we are looking at the conditions of the state of Texas as a whole, the 300, 254 counties, 12 economic regions, compare that to the rest of the nation. The fact is we have to look at the nation, the national economy, the global economy, and what are those headwinds. And one of the points that I wanted to make today is that while we have seen significant challenges, let's talk about a couple of those challenges. I mentioned in 2015, there was a downturn in the oil and gas industry into manufacturing 2017, unfortunately, we had a devastating hurricane that not only hit the Gulf Coast once, not only hit it once in Rockport corpus area, went back in the Gulf, hit it again in the Houston area, went back in the Gulf and hit it a third time in the golden triangle.

(19:08):

Beaumont Port Arthur dumped almost in some areas 50 inches of rain. It was a devastating hurricane that hit Texas a few years later. We all know there was COVID. During that COVID time, there was a day I was providing lunch. I had given lunch to my kids. We were having lunch. I was the cafeteria worker at school. And you go, wait, I thought we were in COVID. Yes, because they were at my house. I was working, I was making lunch. My phone was blowing up. I didn't know what it was. The kids were like, what is it? What is it? And I said, it can wait. And finally I looked and what it was is that was the day that futures markets started trading negatively never happened in history. Through the whole day my kids were asking, especially my oldest daughter Claire, she would ask, what is it now?

(19:55):

What is it now? And it's negative 17, it's negative 20, negative 24, negative 27. And then at one point, when it finally got to negative 34, I told her she was asking through the day true story, and she looked at me and I said, it's negative $34. And she looked at me and she just went like this. And I didn't know what that meant, but in case any of you have teenagers, that is teen talk from my mind is blown. That was a historical day that Texas and the world had to face. Then you fast forward a year, we have a border crisis in Texas. Then you fast forward another year and you can say whether it's a crisis or not, but it's something, a challenge that Glenn had. I don't know if y'all have heard or not. I had this little list that I was supposed to keep on who is boycotting the oil and gas sector?

(20:54):

It used to get a little of attention, actually. It used to get a whole hell of a lot of attention at these conferences. And we tried really hard. I think since then we tried really hard to have an intellectually honest conversation. We tried really hard to show the connectivity of the oil and gas industry to our daily lives. And while Texas believes in all types of energy sources, we believe in every types of eggs in the basket. We also believe that industry is going to continue to impact not just Texas, the nation and the globe for some time, as you were talking about, Glenn keeps getting more jobs. The broadband development office, it was important to connect the nation, connect the state, have nothing to do with drugs at all. I've never had drugs in my life, but they gave me the opioid fund counsel where I distribute funds to deal with a very serious issue of opioid abuse here in the state of Texas.

(21:52):

When that litigation started, it was about off script prescriptions, but instead it's changed to fentanyl where people like me and those other parents in this state and across the nation that have teenagers, those fentanyl pills, they look like candy, but they're not literally one pill can literally kill your child. It is a very serious epidemic that's in our nation, and me and my team are trying to distribute those funds across the state to fight that issue. So there's been all these different challenges that we've had. If you look at the state of Texas, the point in part is despite all that, the state economy has continued to grow. I told a group yesterday morning in San Antonio, a business group that while we don't know trade came up, tariffs came up and I said, yes, we have a statement for the press. It's a very important trade is important to Texas as important as any other state in the nation.

(22:58):

The number one port of entry for volume of trade is just south of here in Laredo, the busiest navigable waterway and ports is down in Houston. We have all these ports of entry that are extremely important to the state of Texas, and we are cautiously watching what the policy is. And I did not know that. My crystal ball yesterday was very clear. People ask me about my crystal ball, usually it's pretty cloudy. It's pretty fuzzy. It's like a snow globe that you shake, you can't quite see through it. But yesterday morning, unbeknownst to me, it was clear and I didn't even know it because I told the group, while we're talking about this right here, now could be at this moment, could be before the end of the day, we could actually have a rollback of the tariffs. Little did I know all those people think I am a brilliant individual because the president rolled those back yesterday.

(23:57):

But the point was, while it's important, while it's critical, it can have a significant impact on this state, on this nation and globally because I believe in free trade and it's been beneficial to the state of Texas. Just take a deep breath sometimes. And I think that's one of the things that I have tried to tell people when we were in the CO pandemic when we were in these other 2015, the oil and gas downturn, the manufacturing downturn. The fact is the foundation of the Texas economy is strong. Do we have challenges? Yeah, we have real challenges. Last year I issued a report that one of the biggest challenges that I think facing the state of Texas, when I would have my credit rating meetings with some of y'all, we talked about the benefits of Texas housing affordability was one of them. And then it was not long in that 10 years, I'd had to say, well, it's really good except for in Austin it's really good, except Austin and the Metroplex.

(25:01):

It's really good. Well, but it's not as good as it used to be in Texas. Housing affordability I think is a critical issue for the state of Texas. If you also look at some of the issues for the state, my good friend Nick and I were talking a minute ago and when we first met talking about things that have changed, I'm not sure that Texas and New York got along too good, but over that time, I think we've become friends. Besides the fact of trying to work together and trying to just, the facts are the facts. And to me that's all that's important. The facts are the facts. One of the issues that I tried really hard, and I'm going to tell you as an elected official trying to talk to people about pensions that doesn't move the electric, but it was important to talk about to the legislature that we've got to find ways to invest your money.

(25:56):

We got to find ways to deal with pensions. We got to find ways to solve these really big, tough issues. And Texas is on a glide path to actually deal with our pension issues. And one of the points that I make when it comes to revenues, our revenues, while they are not as strong in our forecast as they have been in the past, compared Texas to 19 other states where their revenues, their expenditures are actually flat and or negative. So the point is, when you wake up and you look across the station, you look across the world, the foundation of the House of Texas is strong. Yes, we have challenges in housing. Yes, we have to continue watching our pensions. Yes, we have infrastructure with roads and water and electrical grid. The amount of usage of electricity continues to boom every single year. But the point being is the tools in the toolbox are there to keep Texas strong.

(26:53):

So if you're going to ask me revenues, I'll tell you one last thing and then I'll stop. Our revenues in the last month in sales tax were negative. And people say, oh, what does that mean? And many years ago, my first year, I think it was, I was sitting at my desk looking at the spreadsheet of revenues and one revenue number popped out at me. Wasn't a big piece, but it stuck out. And I called my revenue estimator and I said, I was looking at this and I just don't understand. In June, we had negative alcohol sales in Texas. Nobody drank. What happened? I did my part.

(27:43):

I don't understand. And Tom said, actually, I saw that too. And I've actually called our sister agency, Texas Alcohol Beverage Commission. They collect those. And he said, I have an answer for you, Glenn. I said, please tell because I'm mystified. I don't understand. And he said, well, actually, the staffers that actually key in those numbers for us, the money's there, but to key it in actually didn't get to key it all in because a couple of 'em are on vacation. So guess what July looked like we had a hell of a party in taxes. And so my point to you is this. I've used that ever since then as don't take a data point in and of itself, take a bigger picture. And I use that jokingly. But seriously, for Texas, yes, sales tax revenues were negative last month in March compared to a year ago.

(28:35):

But in fact, the three month average is still positive. It's slightly, but it's positive. And so while we don't know the exact forecast, and I do caution the legislature to be mindful of the uncertainty, to be mindful of leaving revenues still in the bank for that uncertain time ahead, because there can be a major event nationally and globally that can be a drag on the sale and be a headwind to Texas no matter what. The future of Texas is bright. I do have an idea. I said this in a group yesterday. They were saying about a problem and an issue, and they said, well, Glenn, you've tackled all these issues in your agency. What would you suggest? And I said, well, I kind of think that sounds like a great issue for higher education. And I think Texas a and m would be the prime landing spot for that problem and that issue.

(29:26):

So in fact, I'm excited about the new job. I'm excited about the new role. It's an amazing system. We've had significant growth in the state of Texas. We educate 160,000 students in this great state. Every single year we run eight state agencies that are critical to the function of the operation of this state in a wide range of things. I'm at that point in my life with a 20-year-old daughter, a 17-year-old daughter, a 17-year-old son, nieces and nephews and friends, where I look forward to being the guy that, yes, I got to wear the cheaters. Yes, I have gray hair. And I think I have finally got to that point in my life where I actually have a few things of wisdom that I can pass down to the next generation. So being able to take over one of the most impressive, amazing university systems, not in Texas, but in the nation where you can have an impact on the future.

(30:22):

Leaders of not just this state, but of this nation and the world is exciting. My kids the other day said, so, I hear the border Regents want you to have a vision. You're going to work on this strategic plan once you get in the office. So dad, what is your vision? What is the vision that you're going to give the Board of Regents to the people of the state of Texas? And I said, I've thought about this quite a bit in the last few months. True story. It was a little different version than that, but it's true. And I said, I do have that vision. And they said, what is that vision? And actually, my youngest daughter who loves sports, she put the family pool together for NCAA basketball and she labeled our family pool. That vision, that vision, if you want to know, is called world domination. So I would highly encourage you, if you're not an Aggie, you damn sure better make sure your kids come to the Texas a and m system because without that, you're not going to be part of world domination. God bless y'all and have a great day.