Needless to say, last week’s winter storm has left an indelible mark on Texas and the complexion of the legislative session. Last week, was dominated by the fallout from the winter storm and power grid failures, which will also dominate much of this week … and likely the rest of session. Here is a quick rundown of the latest from the Capitol, including a brief synopsis of what to expect going forward with respect to the winter storm.

Senate Finance begun hearings on the state budget. Prior to the storm, Senate Finance did begin hearings on S.B. 1, the state’s budget bill. Those hearings will resume this week as they dig deeper into Article III, which covers public education and higher education.

  • The budget outlook is improving. Comptroller Hegar testified before Senate Finance and again provided a much more optimistic outlook on the current budget. Once forecasting a $4.5 billion budget deficit in the current biennium, the Comptroller estimates that the current deficit is only $950 million. That number does not take into account several important unknowns. On the positive side, budget cuts made by state agencies starting in June 2020 are likely to erase most, if not all of the projected deficit. Moreover, we still don’t know the impact of the use of CARES Act funding to replace general revenue. On the negative side, the projected deficit does not take into account any supplemental budget. Typically, the supplemental budget is dominated by a big Medicaid shortfall – but none is expected this year, thanks in large part to an increased federal match due to COVID. The combined effect of these factors likely means the Legislature will enter the next biennium with a surplus, not a deficit.

  • The revenue outlook is trending in the right direction. Prior to his testimony, the Comptroller reported January revenue collections, which were approaching pre-pandemic levels. Moreover, oil prices are hovering near $60 – more than the $50 and $55 dollars assumed for FY2022 and FY2023 respectfully – which is a good sign for the overall health of the Texas economy. We expect the Comptroller to continue to watch the next couple of months of revenue collections. Should those remain on the current trajectory, we expect the Comptroller will revise his Biennial Revenue Estimate upward, giving appropriators more money to spend.

House appropriations sub-committees announced, hearings to begin. Last week, Chairman Bonnen announced the make-up of the subcommittees. In addition, the committee will have two hearings this week.

Census data delayed to September. The Census Bureau announced that it will NOT deliver Census data on a flow basis. Instead, all data will be delayed until September. This means that the Legislature cannot take up redistricting during the regular session, something that was in doubt anyway. We expect this delay to spark litigation, as often follows reapportionment. We also believe there is a high likelihood that election delays will likely result from these postponements.

A brief overview of the winter storm, the power outages, and expected legislative fallout. We want to provide a brief overview of last week’s events and the likely fallout. This week hearings will be held on Thursday by Senate Business & Commerce and jointly by House Natural Resources and House State Affairs.

What happened. Let’s start with the most basic cause: the weather. By all accounts, Texas was hit by a historic winter storm. All 254 Texas counties were hit with a deep freeze for multiple days in a row. While extreme cold fronts often reach Texas, they rarely affect all 254 counties for such an extended time. The state also received historic levels of frozen precipitation. Texas generators are built to meet peak demand, which in Texas occurs during extreme heat waves. As a result, many generators were unable to meet expected generation levels. This occurred while demand spiked, rivaling demand seen during extreme heat waves. This imbalance required ERCOT to shut off power to nearly 4 million people across the state. The outages were necessary to avoid a much wider severe damage do the grid and much wider and longer outages.

Expect an immediate response from state leadership and legislators. As mentioned, both chambers are holding hearings this week to understand what happened and discuss ways to avoid such issues going forward. Below we provide a list of key issues to keep an eye on.

  • Winterization of generators. One topic that is likely to dominate is how to winterize our generation. This was a recommendation back in 2011, when the state experienced rolling blackouts, but evidently was never fully implemented. The Governor has made clear that winterization will happen. The only question that remains is who will pay.

  • ERCOT Reform. ERCOT is shouldering most of the blame for last week’s power outages. ERCOT is likely to stay in the spotlight during hearings this week and beyond. In particular, we would expect conversations to focus on personnel and oversight.

  • Sky-rocketing electric bills. The Governor convened a meeting of legislators from both chambers over the weekend. The topic will be how to deal with skyrocketing electricity bills that consumers are seeing. There seems to be consensus among legislators that consumers shouldn’t have to foot the bill … that leaves the question of who will?

  • Renewables v. natural gas. Even before power was restored, a political back and forth emerged regarding the performance of renewables and natural gas. We believe that both sides raise key issues, but mostly ignore a more fundamental issue. In terms of raw megawatts, more natural gas came offline. But, natural gas makes up a far greater portion of the generation mix. Wind and solar completely nose-dived in terms as a percentage of previous and expected generation. However, we believe the real debate underlying this discussion is whether and how the energy mix has been impacted by market manipulations, through the subsidy of renewals on the one-hand and the regulatory handicapping of more reliable, but “dirtier”, generation like coal. Coal, along with nuclear, performed the best on a percentage basis and has steadily declined as a percentage of Texas energy mix over the last decade. Texas had 3 early “retirements” of coal plants just back in 2018.

  • Capacity market. Although this issue may stay just beneath the surface, we expect chatter around whether Texas should move towards a capacity market. Briefly put, Texas is an electric-only market, which means that generators are paid only for the electrons they actually produce to the grid. Capacity markets incentivize (usually through higher consumer rates) extra capacity by paying generators not just for the electricity they produce, but also the capacity they have on standby. Texas has resisted this move several times over the last two decades, and that remains a reason ERCOT seeks to avoid FERC regulatory oversight (something we also believe will be a topic of intermittent conversation).

Here’s an update as we head into Week 5 …

Speaker Phelan announced committee assignments. On Thursday afternoon, Speaker Phelan announced committee assignments. Read here and here for some local analysis.

  • Leadership of the major committees saw some changes, but also saw some of former Speaker Bonnen’s chief lieutenants remain in key positions. For instance, Greg Bonnen (Friendship, TX) – the former Speaker’s brother – was tapped to head the Committee on Appropriations, replacing Gio Capriglione (R-Southlake) who had been overseeing the budget process leading up to the release of H.B. 1, the House’s initial draft of the budget. Dustin Burrows (R-Lubbock) who had chaired Ways and Means during last session’s monumental property tax reforms will now chair the powerful Calendars committee. Craig Goldman (R-Fort Worth), who was often seen on the dais of the House Chamber last session, will chair Energy Resources. He will be taking the reins from Chris Paddie (R-Marshall) who will assume the Speaker’s former role as chair of State Affairs. Todd Hunter (R-Corpus Christi) will head the Redistricting committee during this redistricting cycle.

  • Speaker Phelan also placed thirteen close Democratic allies in key positions: Joe Moody (D-El Paso), who will again serve as Speaker Pro Tem, is vice-chair of Calendars. Terry Canales (D-Edinburg) will continue as chair of Transportation. Chris Turner (D-Tarrant) will chair Business & Industry. Joe Deshotel (D-Beaumont) will chair Land & Resource Management. And Senfronia Thompson (D-Houston) will chair Licensing & Administrative Procedures.

  • But, the Speaker signaled his reliance on new confidants as well. Brooks Landgraf (R-Odessa) will chair Environmental Regulation. Will Metcalf (R-Conroe) will chair House Administration. Briscoe Cain (R-Deer Park) will chair Elections.

  • You can view the full list of assignments by committee here, and by member here.

Governor releases his budget. On Friday, the Governor released his budget for the 2022-2023 biennium. The budget echoes many of the priorities that he emphasized in his state of the state. The document is primarily a policy statement and does not play any formal role in the appropriations process. You can view Governor’s Budget here.

Senate Finance will begin consideration of the state’s budget. As we mentioned last week, Senate Finance will begin its consideration of S.B. 1, the state’s budget, this week. Today, they will hold an organizational meeting. Later this week, they will begin consideration of Article I and Article IV.

Last night’s State of the Sate very much tracked the preview we were able to provide yesterday morning. Below we track the major themes of the speech – using excerpts from the speech itself. We’ve tried to share key themes from the Democrats’ response to the State of the State throughout, and you can watch the official response from the party here.

Please also note brief comments pertaining to the budget below.

“[A]s we gather tonight, I can tell you that the state of our state is brimming with promise.” The Governor indeed struck a hopeful tone last night, emphasizing the pandemic will not be “a reversal of who we are as Texans.” While fully recognizing the “personal hardships and the pain that we have all endured,” he declared that “Texas remains the economic engine of America. The land of unmatched opportunity.”

  • In response, Texas Democrats offered a more sobering outlook. Senator Carol Alvarado lamented: “I wish I could tell you that the state of our state is strong and working for all Texans, but the sad truth is it’s not.” Democrats emphasized the on-going pandemic, including continued high case counts and high unemployment, slow vaccine distribution, and a high uninsured rate.

The Governor declared several emergency items. As foreshadowed yesterday and is typical for the State of the State, the Governor declared several emergency items. As a reminder an emergency item is simply anything the Governor deems important enough to prioritize during the coming legislative session. By designating the item as an emergency, members are permitted to decide to vote on those items earlier in the session than they are normally permitted to do by the Constitution. Of course, they should also be viewed as a use of the Governor’s bully pulpit. Here are the five (5) items that he declared emergency items … they largely track the issues we previewed yesterday.

“From medicine to education to business, broadband access is not a luxury—it is an essential tool that must be available for all Texans.” Emphasizing that telemedicine had “proved very helpful during the pandemic,” the Governor noted Texas must seize this momentum to permanently expand telemedicine. As the quote above reflects, the Governor also notes that the expansion of broadband access is essential for education as well. Response from legislators – on both sides of the aisle – showed broad consensus for expanding broadband access. We expect bills that would establish a statewide broadband office, mandate a statewide plan, and – assuming money is to be had – create a broadband development incentive program (particularly for rural Texas) to move quickly through the legislative process.

  • State Representative Senfronia Thompson (Houston) emphasized: “The COVID-19 pandemic uncovered the ugly truth of the inequities in our healthcare system” and called to increase coverage for women to 12 months of post-partum care and alluded to the need for expanding coverage by “draw[ing] down federal Medicaid dollars.”

“To keep Texans safe, and to discourage cities from going down this dangerous path, we must pass laws that prevent cities from defunding police.” As expected, the Governor continued to emphasize that “Texas has always been a law-and-order state” and the need for continued support of law enforcement … and declared this issue an emergency item. We expect a bill which would use the power of the state’s purse to disincentivize cities from defunding police to be heavily pushed by the Governor’s office.

  • Criticism from Democrats revolved largely around the continued need to improve policing: “Our communities should not have to live with trauma and fear of wondering if they or their families or their neighbors will be next to die from police brutality.” (Dr. Candice Matthews)

“To fix our flawed bail system and keep dangerous criminals off our streets, I am making the Damon Allen Act an emergency item this session.” As we suggested yesterday, bail reform will be a major priority for the Governor this session. Two years ago, the Governor announced the Damon Allen Act, which would have increased qualifications for magistrates able to set bail and amended the Texas Criminal Procedure Code to ensure that magistrates consider criminal history when setting bail. Damon Allen was an officer that was killed in the line of duty by a man who had been released on $15,000 bail despite having been previously convicted for assaulting a sheriff’s deputy.

“Texas businesses that have operated in good faith [during the pandemic] shouldn’t have their livelihoods destroyed by frivolous lawsuits.” Emphasizing the great measures that businesses have taken to remain open and operate safely, the Governor asked the Legislature to quickly pass a bill that would protect from civil liability individuals, employers and healthcare providers that operated safely throughout the pandemic.

“One thing all of us should agree on whether you’re a Republican, Democrat, or Independent, is that we must have trust and confidence in the outcome of our elections.” The Governor also declared election integrity as an emergency item, but offered few specifics on how to address the issue of election integrity.

In his own words … other major priorities. The Governor also mentioned several other major priorities. Here are a few other highlights from the speech:

  • The budget and taxes. “To say the least, we must balance the state budget without increasing taxes.”

  • Jobs. “There's no brand more powerful than Made in Texas … Products with the Texas brand must be made by Texans. We must protect Texas jobs for Texas families. Employers should be hiring Texans when they fill job openings. If job training skills are needed, Texans will work to provide them.”

  • Civics education. “[I]f we expect the next generation of Texans to keep Texas the best state in the nation, we must teach them why we are so exceptional. We must educate them what it means to be an American and what it means to be a Texan.”

  • Freedom of religion. “We must ensure that freedom to worship is forever safeguarded. I want a law this session that prevents any government entity from shutting down religious activities in Texas.”

  • Border security. “Public safety also extends to our border. Because of the federal government’s open border policies, Texas must fortify its efforts to secure our border.”

  • Life/Abortion. “Estimates show more than 40 million babies lost their lives to abortion in 2020. That’s shocking. It’s horrifying. It must end.”

Senate Finance Committee sets hearing dates. The Senate Committee on Finance has scheduled several meetings to discuss S.B. 1, the state budget. The first meeting will be held on February 8, when the Senate returns to Austin. The Committee has scheduled 16 hearings that will run through March 2.

State Sales Tax Revenue totaled $3.1 billion in January. On Monday, the Comptroller released his monthly revenue watch, reporting that sales tax – the primary revenue source for the state budget – totaled over $3 billion. Importantly, collections were only 0.3% below last January. The number demonstrates a continued return to pre-pandemic activity … where revenue and collections were actually running ahead of previous projections. Notwithstanding the positive sales tax news, the Comptroller did note that these gains were “offset by continued deep declines in collections from recreational services and the oil- and gas-related sectors.” Oil and gas severance taxes directly fund the state’s Rainy Day Fund and the State Highway Fund and should be watched closely as the economic recovery continues.

House committees to be announced soon. We expect Speaker Phelan to announce committees very soon … possibly by the end of this week.


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