Texas, Inc.

Meat_Loaf

So, anyway, how are finances for the State of Texas going these days?

[Editor’s Note…this post ran in the newspaper in the beginning of July 2020]

Pretty well, thanks for asking. 

If you were to whiteboard the best financial practices for a big state, you would want three things. First, you would want transparency, both for officials making decisions as well as for citizens paying taxes. Next, you would want a conservative match balance between expected revenues and expected spending. Finally, you would want to ensure those revenues stayed strong and steady throughout an economic cycle.

In Texas, we’ve actually got significant amounts of financial transparency, which I’ll describe below. We’ve also got a conservatively-matched balance sheet, for specific reasons worth remembering.

Unfortunately, with the COVID-recession, there’s a lot to worry about when it comes to ongoing revenues. But, as Meat Loaf used to sing, two out of three ain’t bad. 

Damn that’s a great album cover

Actually, that last statement is a bit exaggerated for the purposes of making a late ‘70s rock reference, so let me qualify a bit. I expected to find financial devastation at the state level, but instead found merely areas of concern. 

Let’s start with the transparency part. The State Comptroller’s office supports a website all you Texas taxpayers should know about, called the State Revenue and Expenses Dashboard. This lets you create color-coded visualizations of all state revenues and expenses from 2011 to 2020. The “picture is worth 1,000 words” idea is that we can intuit changes over time, and relative sizes of fiscal categories, by building with and working with a visual dashboard that shows exactly what categories we want it to. The tool also lets you download data into a spreadsheet for further nerdy fun. Which I have done. And, oddly enough, enjoyed.

Some initial insights you can get from the Comptroller’s visualization tool.

  1. Transfers from the federal government are the largest single source of state revenue. (Sorry for you folks who believe in the sovereignty and self-sufficiency of the state.)
  2. The biggest source of locally-derived revenue is retail sales taxes, at 57 percent of taxes in 2019, and 26 percent of all state revenue. This means state revenues will be impacted by recessions, like this one.
  3. Oil extraction tax and gas extraction tax revenue is smaller than I expected, at about 3 percent and 1 percent of all state revenue, respectively.

A related page on the Comptroller’s website, the “Monthly State Revenue Watch”  shows state taxes and other revenue sources updated monthly. 

I know this is updated in real time because I checked it on July 1st, and the June 2020 numbers were already inputted. Impressive! So here is where we can get an idea of how well or how badly things are going in 2020.

Texas runs on a September 1st to August 31st fiscal year, meaning we have two months left in the year. Which further means we already know ten of the twelve months’ worth of numbers, to see any shortfalls versus budget projections.

If you were a worrying type person, you would ask questions like how badly the retail recession, and oil and gas industry disruptions, plus drops in hotel occupancy and car sales and car rentals might wreck state budget projections.

Tax revenue is down, it’s true. But it has not fallen off a cliff. Yet. Retail sales taxes are the largest single tax source, at 57 percent of all taxes. Collections through June are up slightly from 2019, although on track to fall short of the budget by about $2 billion of the projected $35.6 billion, on a total tax revenue base projection of $61 billion.

Franklin_dollars

Again, because we can see ten of the twelve months of the year already, we can see from the transparency website that revenues will fall short by approximately $2 billion in franchise taxes and maybe $1 billion in a combination of oil and gas taxes, with smaller effects in other areas. 

While this is not perfect and possibly a bit frightening, transfers from the federal government are already $4 billion above budget, with two months to go. So we could imagine this will roughly balance out this fiscal year ending in August.

I’m going through this partly because it is interesting on its own, but also partly to point out that the online transparency tools of the Texas state government are kind of awesome. 

Now a word about the fiscally conservative setup of state finances in Texas.

Texas sets its state budgets two years in advance. Future state government spending depends upon a Comptroller estimate – known officially as the Biennial Revenue Estimate (BRE). This is due at the next legislative session in 2021. Unlike the federal government, Texas is highly constrained from borrowing at the state level.

The Comptroller, by constitutional mandate, must sign an oath to certify that the BRE contains accurate revenue forecasts for the next two years. The next legislature must, again by constitutional mandate, produce a spending plan that does not exceed expected revenues in the BRE.

Spare a moment to imagine the difficulty for the Comptroller of signing this next BRE. Like, there are so many different possible economic scenarios in 2021 as a result of the COVID pandemic. 

Financial forecasting is extremely challenging right now. The chief financial officer of any given company must be pulling her hair out trying to estimate future revenue, but at least a private company can kind of wing it on future projections, and then borrow as needed, if things go awry. The Texas Comptroller may not wing it. And there are huge constraints on borrowing. The result has been conservative fiscal state management, which is good. The result in the future – I fear and expect – is a pretty austere two-year revenue projection and therefore spending plan beginning in 2021. This won’t be fun.

Between a pandemic, a recession, and specific oil and gas industry woes – not to mention the 17-year locusts and murder hornets surely set to arrive any moment now – I had expected worse financial numbers for Texas. Can we be blamed for flinching into a reflexive crouch of endless worry in 2020? With strong transparency and a fiscally conservative set-up, I feel a bit better about Texas, Inc, having seen the state’s transparency tools. 

It’s safe to expect budgeting next year will be tougher than this year.

A version of this ran in the San Antonio Express News.

Please see related posts

Transparency Tools in Texas

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Financial Readiness – My 5 Stages of Grief

financial_readinessMy personal bank – which also offers insurance and investments – recently invited me to discover my ‘Financial Readiness’ score, available in five minutes by taking a quick online survey.

Now, I am a competitive person who likes to win. For example, I know my SAT scores from high school, as well as my fastest one-mile and marathon racing times, by heart.

As a finance guy, I knew I would rock the Financial Readiness score. Bring. It. On.

The online survey asked me about my type of work, personal annual income, plus household income. Not bad, I thought, not bad.

Next, I answered questions on whether I rented or owned a home, the size of my monthly housing payment, and whether or not I budgeted. Home ownership, yes, budgeting, not so much. I hate budgeting.

Further questions prompted me to discuss my insurance against disability or loss of life, my dependents, and my retirement savings and investments. Well, I like to think I don’t over-insure, but I do have some retirement accounts.

Finally, the survey asked about whether I have documented my will, and whether I have named a health-care proxy. Yes. Totally. Nailed it.

My score

At the end of the survey my pulse quickened in anticipation of a huge pat-on-the-back for my incredible financial readiness.

I got a 66. Out of 100.

What?! Me? There must be some mistake.

A 66?

I’ve never gotten a 66 on anything in my life. Even worse, a 66 on my finances?!

I have three thoughts about my Financial Readiness Score.

financial_readiness_score
A 66?!

My first thought I already told you, which is: “What?!”

That thought represents “Denial” and “Anger” steps in my five stages of grief.

Second Thought

My second thought – (possibly part of “Bargaining and “Depression”?) – came from a closer review of the Financial Readiness plan which my bank provided, following my score.

My Financial Readiness Report showed areas where I could improve my score, by reviewing and changing my approach to savings, planning, and financial protection.

The report suggested setting budgetary goals. That’s probably not happening. It also prompted me to consider upping my insurance coverage. Not surprisingly, my bank is also involved in savings accounts and insurance, so you can see a bit where they’re coming from.

I’m not saying their wrong. I’m just saying they have an agenda.

I have strong feelings about some of these things, and I think on at least a few topics, reasonable people could disagree.

Building an “Emergency Fund” – which my report strongly encourages – happens to be something which I philosophically disagree with, as I’ve written about in the past. LINK [http://www.bankers-anonymous.com/blog/some-terrible-financial-advice-the-emergency-fund/]

Boosting my auto-insurance total coverage, or my wife’s life insurance coverage – also recommended by my Financial Readiness report – also is something I’m not likely to do, as I’m philosophically an insurance minimalist [LINK: http://www.bankers-anonymous.com/blog/guest-post-dont-buy-too-much-insurance/]

In exploring these areas for boosting my score, I noticed robust prompts to action. In modelling out my retirement planning, for example, I got a chance to see how my intended retirement age, as well as my appetite for risk, would affect the probability of meeting my retirement goals. It was pretty cool, actually.

Third Thought

financial_readinessMy third thought about my Financial Readiness score, as I move toward “Acceptance,” is that these simple but potentially catalytic surveys – paired with calls to action – might be quite useful. Let me expand on that thought for a moment.

Most of us need financial guidance. A fundamental theme of my financial writing is that almost nobody feels confident that they have all their finances figured out, yet few know where to turn to a trustworthy source.

We don’t like banks. We don’t trust our financial advisor. Insurance confuses us. The last thing we want to do as adults is spend precious free time with a lawyer to talk about what happens to all our stuff when we die. In all that confusion and natural aversion, we tend to not even know where to begin. So, like everybody else, we punt decision-making until some medium-distant future, maybe months from now, maybe when a crisis happens, or maybe until never.

Possibly, a five-minute internet-style quiz from my bank becomes the on-ramp to better planning and decisions?

I mean, not in my case, since the quiz is obviously flawed and they got my score wrong. But, you know, maybe for others.

 

A version of this appeared in the San Antonio Express News

 

See related posts

Why I hate my bank

Emergency Fund – That Silly Sacred Cow

Insurance

 

 

 

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Personal Budgets and Quantum Physics

Observer effect coffee machineI hate personal budgets.

Even so, I made my students in my Personal Finance course keep track of their expenses for three weeks.  Not necessarily to torture them, but because they might need it later on.

I don’t keep one, so I’m not about to suggest that that everyone else needs to start writing down all their purchases, packing those little flimsy receipts into their wallets and stressing until every last purchase gets recorded into their personal accounting software.

Since I don’t keep one myself, I hesitate to suggest it for others.

And yet, if debt is a problem, you might need it.

The Observer Effect

The “Observer Effect” from physics explains is why you should budget expenses every month if you’re having trouble getting out of debt.

The Observer Effect is often described in shorthand as the Heisenberg Uncertainty Principal,[1] although I recently learned these are different, frequently conflated, phenomena.

Quantum theory posits that the act of observation influences electrons in spatial relationship with other particles.

In other words, to look at an electron is to alter either its position or its momentum.  Which kind of leads to messed up science.

Messed-up Science

But messed-up science can be our friend in personal finance.

To take a more common personal situation than quantum physics, doctors who study effective weight-loss techniques struggle with the basic scientific problem of Observer Effect.  Essentially, when you enroll people in a study to observe weight loss effectiveness, you more often than not change the behavior of the people in the study.

Consciously or not, study subjects begin to consider more carefully their behavior and its effect on their weight.  Whether you’re enrolled in the ‘control’ or the ‘study’ group, you no longer act or think precisely the way you did before enrollment.

Personal budgeting is a way to take advantage of this observer effect, if you have trouble coving your costs on a monthly basis.

We can use the observer effect to our advantage, altering our behavior in the act of observing it.

How I use the Observer Effect in my own life

I don’t carry monthly credit card debt, which is my primary excuse for not doing personal budgeting.[2]  Frankly, my behavior when it comes to monthly expenses is fine already.  Because I’m cheap.

But I periodically struggle with two other problems: time management – and keeping to a regular exercise schedule.  I already know the ‘right answers’ when it comes to these behaviors, but knowing the right answers is not the same thing as doing the right thing on a monthly basis

Hence, the observer effect.

When I get really stuck, I’ve learned I can track either of these behaviors in a spreadsheet.    Do I think I run four times a week but really I only run twice a week?  Do I think I go the local gym twice a week but really it’s twice a month?

Am I wasting two hours a day surfing Facebook, clicking ‘like’ on Gawker articles?  When I track every half hour of my day, I can begin to see that a scheduled twenty minute conference call actually eats up an hour and a half, between preparation time, and follow up emails, and daydreaming about what I should have said during the call.[3]

This tracking inevitably changes my exercise and time management behavior, subtly altering it for the better.

Look, I know it’s not a permanent change, and it’s not a cure-all.  But it’s a start – and better than doing nothing.

A very successful business leader once told me the hardest part of his business is enacting adult behavior change.

I’ve learned over time that personal habits – especially personal habits we’re not proud of – rarely survive wholly intact after exposure to close observation.

All of which is to say if you have a hard time covering your expenses on a month-to-month basis – try budgeting.

Heisenberg Uncertainty


[1] Apparently the ‘Uncertainty Principal’ describes the difficulty of simultaneously measuring paired properties in particles like electrons – such as location and momentum.  The ‘Observer Effect’ with which it is often confused describes the problem of observing certain phenomena without changing the measured phenomena in the act of observation.

[2] My secondary excuse? Laziness.

[3] Here’s the best time-management book I’ve ever read, 168 hours: You Have More Time Than You Think by Laura Vanderkam.  Also, she provides a handy spreadsheet that you can use to track your time.

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