Glenn Hegar May 4, 2015 The Honorable Greg Abbott, Governor The Honorable Dan Patrick, Lieutenant Governor The Honorable Joseph R. Straus, III, Speaker of the House Gentlemen: Over the course of the next several weeks, the Conférence Committee on House Bill 1 will deliberate and make their final decisions regarding the composition of the state budget for the 2016-17 biennium. In doing so, the conferees will consider the state’s spending needs for the upcoming two year budget cycle. As Comptroller, 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. 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. 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. Attention to these issues is vital to the maintenance of that rating, Infrastructure Texas’ continued rapid population growth and other stresses on the state’s infrastructure, especially transportation, is a significant factor exerting pressure on the state’s credit rating. The Texas Department of Transportation estimates an additional $5.0 billion in revenue is needed per fiscal year to maintain road and bridge conditions and keep congestion from worsening beyond 2010 levels. Pension Funding Recent credit rating downgrades in Illinois, Pennsylvania and New Jersey have been attributed, in part, to failure to adequately address their growing public pension obligations. As of Aug. 31, 2014, Texas’ Employees Retirement System (ERS) had a net pension liability of $14.46 billion as calculated under the ‘most recent accounting standards and with the current contribution rate being insufficient to amortize that liability over an acceptable timeframe. Both Standard and Poor's and Moody's have noted that a continued history of funding below the actuarially determined annual required contribution as a risk factor for the state. Long-Term Debt ‘According to the Bond Review Board’s Aug. 31, 2014 Annual Report, Texas’ constitutional debt limit remained below the maximum of 5 percent for a total of 2.71 percent including both outstanding debt (1.20 percent) and authorized but unissued debt (1.51 percent) payable from the general revenue fund. Texas’ total general obligation (GO) debt outstanding has increased 115.6 percent over the past 10 years from $7.00 billion to $15.09 billion and GO debt per capita has increased 79.8 percent during the same time period. Included in these numbers is debt payable from the general revenue fund, which impacts the biennial budget and has grown 53.8 percent over the past 10 years from $3.14 billion to $4.83 billion. ComptrolerTexas.Gov 12463-4408 Po. Box 13528 Tol Free: 1-800-531-5441 ext: 34484The Honorable Greg Abbott, Governor The Honorable Dan Patrick, Lieutenant Governor ‘The Honorable Joseph R. Straus, III, Speaker of the House May 4, 2015 Page Two Other Postemployment Benefits Both ERS and Texas’ Teacher Retirement System (TRS) have large unfunded liabilities associated with their Other Postemployment Benefits (OPEB) plans. As of Aug. 31, 2014, the unfunded actuarial accrued liability was $33.3 billion for TRS and $24.7 billion for ERS. ‘These plans are funded on a pay-as-you-go basis and current accounting standards do not require the full recognition of these amounts on the state’s balance sheet. However, the long-term fiscal implications of these plans cannot be understated. Absent legislative action, TRS expects its health insurance program to run out of money as early as fiscal 2016. Texas Tomorrow Fund The Texas Guaranteed Tuition Plan, also known as the Texas Tomorrow Fund, has a constitutional funding guarantee, The fund is expected to experience shortfalls as early as fiscal 2019, which will result in a constitutional general revenue draw. As of Aug. 31, 2014 the unfunded liability was $568 million and it will continue to grow until addressed by the Legislature. eferred Maintenance Continued deferred maintenance of state facilities reduces the valuation of those assets over time and will impact future budgets with increased costs for repairs. Recent estimates put the deferred maintenance cost as high as $1.5 billion. {As the final version of the state’s 2016-17 budget takes shape, [ urge you to give priority to these and other similar long-term balance sheet issues. My office stands ready to assist in these final weeks of the 84th Regular Session. Sincere| Glenn ao ce: The Honorable Jane Nelson, State Senator, District 12 ‘The Honorable John C. Otto, State Representative, District 18