Analysis: A Mistaken Revenue Forecast With No Instant Consequences

Glenn Hegar cleared his first serious obstacle as the state’s comptroller of public accounts with a little brains and a little luck.

His forecast of how much money the state will bring in during the next two years was wrong.

Brains? He was quick to reveal the problem because, as a former legislator, he learned the only important lesson about surprising the state’s top leaders: Don’t.

Luck? His misestimate was big but inconsequential, at least in the short term.

It helped that the problem was with oil prices and that everybody who’s been paying the smallest amount of attention knows now and knew months ago that the energy markets were wobbly.

Hegar was sworn into office at the first of the year, just before the Legislature came into session to write a 2016-17 budget. He gave them an official estimate of how much money the state will collect in taxes and fees and such over the next two years, with plenty of cautionary orange traffic cones around energy prices.

“Our projections are based on expectations of a moderate expansion in the Texas economy and reflect uncertainties in oil prices and the possibilities of a slowing global economy,” Hegar said in January as he unveiled that original forecast.

He said lawmakers would have $113 billion in state money to fund the two-year budget that took effect Sept. 1. Buried inside was the assumption that the taxable value of a barrel of oil would average $65 to $75 during those two years. His agency’s economists are now forecasting taxable per-barrel prices of $44.53 during the first year and $50.87 during the second. And last week, he lowered his estimate of state revenue by $2.6 billion.

Telegraphing that punch turned out to be smart; lawmakers, especially the ones who write the state budget, were not caught off guard. That early uncertainty and the current Legislature’s conservatism provided the luck. Lawmakers only budgeted $106.2 billion in general revenue spending in the current budget.

Hegar’s new and lower estimate is still more than $4 billion above what’s required for this budget. There won’t be as much money left over in two years, but there will be money left over.

It’s nearly impossible to get each of the numbers in a revenue estimate right, but the forecasters hope that, on balance, their mistakes on particular taxes will offset each other. But the economy shifts, and so do those revenues. Hegar’s predecessor, Susan Combs, also a former lawmaker, issued a bad forecast in 2011 that led lawmakers to cut spending for public education and other programs. The cuts turned out to be deep, and some state leaders said later that the cuts would have been less deep if the revenue forecast had been correct.

Combs’ mistake was not unprecedented. Things change in the economy often, and without warning. But her numbers surprised state leaders — back to Lesson One, above — and her mistake was consequential.

Lawmakers might have acted differently if Combs had more accurately predicted how much money would be available. The Legislature was full of newly elected fiscal conservatives who might have made dramatic budget cuts anyway. The counter-argument is found in the budgets that followed, gradually restoring much — but not all — of the spending that was cut in the 2011 session.

Her numbers changed their behavior, for better and/or for worse.

Hegar’s miss — lucky for him — didn’t make an immediate difference. The money lawmakers wanted to spend is still there. They’ll have less money later, but that wasn’t really what they were talking about as they wrote the budget.

Combs bet wrong on the boom in the state economy, and the state ended up with a surplus when she had predicted something far worse. She got blasted for it, within and without her own Republican Party.

Hegar made a cautiously optimistic estimate, pointing to the bug — oil prices — even as he did so.

That was pretty smart. And he’s pretty lucky.