Texas Financial Indicators Analysis

Texas Financial Indicators Analysis

Abstract

The importance of financial indicator analysis lies with its ability to provide information relating to matters of the past, present and future economic standards of a state. In light of the same, it is such analysis that can inform decisions touching on market inefficiencies, the rainy day fund as well as the credit-ratings of the state. This paper shall align the consequential elements with the financial indicator analysis

Texas Financial Indicators Analysis

Introduction

Financial indicators analysis is a means through which the performance of the government is reviewed by looking into elemental financial indicators and from such, one can be able to gauge the past, present as well as the estimated future performance of the company (Bisogno et al. 2017). It is prudent to note that sound financial health is mandatory for the running of imperative obligations of the state government (Bolivar et al. 2014). In light of the same, this paper will seek to provide a financial indicator analysis for the Texas sub-national government. It will provide a historical as well as demographic data; explore the budgeting tools, the ethical rationales as well as the accountability measures. Additionally, it will look into the credit standard ratings and address the impact of market inefficiencies

Texas Historical Background and Demographic Data

The records of human habitation in Texas date back to over eleven thousand years, throughout TH the history, it has been occupied with Spanish explorers as well as the French. The town significantly acted as a buffer for these colonial territories. Notably, with the Louisiana purchase, it still retained its position as a buffer between the United States with New Spain. There was a war in 1836, between American settlers in Texas and the Mexican government which was made worse when Texas became a state in 1845 which led to the war between the Mexicans and the Americans which lasted for two years for the period between 1846 and 1848. It is prudent to note that the State incessantly grew and expanded through the civil war, and the last land battle of the same happened in Texas.

A significant economic shit was experienced in Texas for the first half of the twentieth century. In this regard, the discovery of oil in the state led to a colossal boom in the industries relating to oil and shipping. It is prudent to note that this made it a good location for the expansion of the United States military, the investment that was brought by the military-led to a diversification of the economy of the state. The United States government assisted the state to maintain its agricultural center especially subject to the rural-urban migration as well as the ongoing war. It managed to do this by bringing over one hundred thousand Mexican workers under the program dubbed Bracero.

The demographics of the state are diversified with the residents of the state being referred to as Texans. It is important to note that among the forty-eight adjoining states in the United States, Texas is the largest and sits in the South part of the country along the border of the United States with Mexico. The estimated population of Texas as at 2020 is at 29.47million. The projected population has been based on its growth rate, which is 1.80 percent and which ranks as the third-highest growth rate in the nation. The demographics in the state are as follows; the Non-Hispanic White account for 74.31percent of the population. They are followed by the African Americans who make up 12.07percent of the population. Asian American cover 4.69percent of the population and other races make up 5.74percent. It is prudent to note that Native Americans only account for 0.49percent, which is even lower than people of two or more ethnical backgrounds who make up 2.62percent of the Texas population.

Texas Budgeting Tools, Ethical Rationales and Accountability Measures

There are four constitutional budgeting tools utilized by the Texas state government to budget as well as control the appropriations. They include ”pay-as-you-go,” which is also referred to as the balanced budget limit, the limit that is placed on the rate of growth of specific appropriations, the limit on welfare spending as well as the limit on debt services (Weiss, 2018). This section of the paper shall discuss these tools, provide and ethical rationale for the same as well as give the accountability measures.

The Constitution of Texas under Article III, Section 49a, provides for this limit. The limit requires that bills that are making appropriations should be sent to the Comptroller of Public Accounts who will certify that the appropriations are within the estimates contained in the available revenue. The pay-as-you-go also referred to as PAYGO rule was designed as a means of encouraging the Legislature to counterpoise the cost of any appropriations which will increase spending on the entitlement programs or reduce revenue turnover, in a bid to maintain the deficit (Weiss, 2018). It is prudent to note that this bill on lawmakers implies that it does not require them to take decisive actions in order to reduce the deficits. Instead, it ensures that they are restrained from increasing the deficits or even emasculating any deficit-reduction efforts which had already been set in place

Under Article VIII, section 22 of the Constitution, the biennial rate of growth of appropriations from the state tax is limited if the edicts of the Constitution do not dedicate it to the estimated rate of growth of the state’s economy (Codes, 2019). Additionally, under Chapter 316 of the Government Code, the Legislative Budget Board (LBB), is directed to establish three things. Firstly, there is the present-day biennium’s level of appropriations which are guided by the limit. Secondly, there is the estimated rate of growth with regards to the economy of the state from one biennium to the next and lastly, the biennium’s limit of the successive appropriations which are also under the limit. Notably, this code postulates that the rate of growth should be defined as growth in personal income. Accountability measures, in this case, include the meeting that the LBB has prior to or on the first of December each year before the session (Codes, 2019). The meeting is intended for the adoption of a projected growth rate for the Texas economy as well as the subsequent spending limit of the next legislative session.

Article III, under Section 51-a of the Texas Constitution, provides that “the amount which may be paid from the state funds for purposes of assistance grants, or one behalf of needy, dependent children as well as their caretakers, should not exceed one percent of the state budget in any biennium (Codes, 2019).” It is prudent to note this limit has faced criticism on the grounds that it is limiting some of the appropriations that it does not control. In this regard, it is essential to note that the appropriations which are under this limit do not entirely fall under the purview of the legislature. For example, federal laws control the spending related to Medicaid. Critics of the same have opined that the legislature should endeavor to limit that which it has absolute control over.

Under Article III, section 49(j) of the Texas constitution, there is a limitation to the authorization of the supplementary state debts in the case where in the fiscal year, the consequential annual debt service that should be paid from the unrestricted General Revenue Fund exceeds five percent of the average annual unrestricted General Revenue Funds for the recent three years (Codes, 2019). In order to monitor this, the Bond Review Board (BRB) computes the two debt ratios. It is prudent to note that the debt limits, in this case, are intended to perform the same functions as all the other limits.

The ethical considerations of the limitations in Texas as a budgeting tool shall be hinged on the ethos of the Current Era: The New Governance as opined by Hijal-Moghrabi and Sabharwal (2018). The ethics in this new public service are rooted in the extant virtues of the public sector, which include honesty, integrity, impartiality as well as community service. The ethical rationale in that case, therefore, includes the fact that it makes the government accountable for their actions. Fischer (2016) establishes that among the elemental ethical requirements of public administration officer, accountability is critical. Limitations of expenditures, as well as taxes, force discipline over the spending as well as the taxes which is for the benefit of the future community since it avoids the possibility of substantial generational debts and deficits as evident in the federal government.  The limitations also aid in diffusing the power of self-interest, which augments the impartiality aspect. Lastly, this limits also grant a voice to the citizens in line with the aspect of democratic inclusion, over issues of taxes as well as the desired service levels for government services.

Measures of Solvency Data

It can be seen from the Bay city government can generate income over a certain period to pay its bills as evidenced by the current ratio. The operating ration provides for the ability to generate enough to cover its budgetary needs without incurring any debts or deficits.  From the revenue per capita, it can be seen that the city can provide for its community in the required and desired form.

Critique of the Impact of Market Inefficiencies in Texas

Market inefficiency is a situation where the present-day prices do not offer a reflection of the demand and supply information which is available publicly (Devos & Li, 2017). This may be subject to negligence, or the breakdown of communication between the seller and the buyer. According to the economic theory, what can be termed as an inefficient market is one where the price of an asset is not an actual reflection of the true value of the asset. It is prudent to note that the impact of inefficiencies is albatross losses. While most markets do show some inefficiencies level, it is prudent to note that in the event of extreme cases of market inefficiencies, market failure will be the result. Additionally, according to the Efficient Market Hypothesis, the asset prices in an effective working market are an exact reflection of the true value of the asset (Campbell et al. 2018; (Bartram & Glinblatt, 2018)). For example, information on a stock that is publicly available should be fully reflected in the present-day market price. However, this will not be the case with an inefficient market where the price will not entail all publicly available information.  In order to understand the market inefficiencies in Texas, it will be prudent to lay down the perception of what an efficient market looks like conformable to the economic theory of market failure.

The efficient market hypothesis (EMH) takes on three forms, which are weak, semi-strong and strong. The former form posits that what will suffice to be an efficient market will be one that will reflect all the historical information about a stock that is publicly available. The middle form opines that what would be an open market would be one whose reflection entails both historical and present-day public available information (Bartram & Glinblatt, 2018). Lastly, the following form hypothesizes that an efficient market is one which will reflect the historical as well as the contemporary information which is public and additionally, it will also reflect information not open to the public. The proponents of the EMH share the belief that the high degree of efficiency in a market protects the market from outperformance. On the other hand, critics of the EMH are of the opinion that shrewd investors can be able to outperform a market and as such, the best option for a market will be actively managed strategies. This, therefore, translate to the fact that while some investors may lose much more than they had anticipated in an inefficient market, others would report returns in excess. It is prudent to note that such opportunities and threats will not be extant in the case that the market was efficient (Bartram & Glinblatt, 2018).

A clear understanding of the Market inefficiencies in Texas will focus on the Texas electricity market.  The electricity market in Texas (wholesale) falls under the management of the Electricity Reliability Council of Texas (ERCOT) (Woerman, 2019). This is an independent system operator which schedules the supply of electricity from power plants and additionally, focuses on the coordination of grid lines which ensure that electricity is delivered to consumers. It is prudent to note that ERCOT is dependent on the competitive market forces to meet the demands of the twenty-three million Texans (Woerman, 2019). This competition has up to the year 2013 worked efficiently since the inception of ERCOT into the electricity market. The huge amount of money that has been invested in a generation has, in turn, led to the Texans receiving a reliable source of affordable power. However, concerns were raised on ERCOT having a “capacity market” in order to align it with other power markets in the United States (Hartley et al., 2019). It is pertinent to note that in such a market as was proposed, it would be the government and not the market, that will determine when the supply of electricity is adequate to meet the reliability needs. However, ERCOT does not have a capacity market to date. In essence, the electricity market in Texas is free.

It is prudent to note that a fundamental principle in an economy is that the key to a free market that could be termed as a well-functioning as well as efficient is transparency (Campbell et al. 2018). This is a state of affairs that provide similar access to information to all the participants, which allows them to make decisions on what to purchase or sell. In what could be seen as a free market, where the deregulation of electricity was lauded as a means of unleashing free enterprise power. The impact of failing to deregulate electricity in Texas has born greatly on the residents (Woerman, 2019). To begin with, the inefficiencies have led to confusing pricing and terms for the retail plans, secretive bids in the wholesale markets as well as gaming the system so as to push costs to consumers by the big commercial as well as industrial power users. The lack of market inefficiency due to lack of transparency has resulted to consumers within the power markets of Texas paying steep prices for electricity as compared to those purchasing power from regulated utilities (Devos & Li, 2017).

In the wholesale power markets, the operations are multifaceted since the generators, in this case, are required to bid from the lowest as ERCOT does. It is prudent to note that in other states, the bidding of wholesale power markets is public, and similarly, the prices are made available to the public immediately. However, such does not happen in Texas where information relating to such bids are kept secret for almost sixty days. Additionally, ERCOT withholds information relating to the entities that hold their power back from the market (Zarnikau et al. 2019). The effect of such is that the market can be manipulated. In May 2019, there was a two-minute data error that was evidenced with 4000megawatts of power suddenly going offline, and prices soared from forty dollars per megawatt-hours to nine thousand dollars which are the maximum price allowed by the state (Hortacsu et al. 2017). It is important to note that the cause of the price spike was also hidden from the public, and the information became public when the responsible company owned the responsibility. Price transparency, which may be achieved through accessible posted prices, may result in effective outcomes as well as lower prices.

The impact that electricity costs have had on the Texan market is immense. To begin with, it is prudent to note that power prices have incessantly been the fundamental signal even for capacity markets. However, in Texas, this is the only signal and the fact that it is often hidden from the public makes it even more fragile and inefficient (Woerman, 2019). The main concern with regards to these inefficiencies with regard to Texan market is the effect that it has on investors. With the extreme volatility as well as the unbankable uncertainty that surrounds the power prices, investors are most likely to avoid investing in Texas (Zarnikau et al. 2019).  While such an impact is inevitable by virtue of the free market, it is important to note that the market has failed to favor new investors whose investments may be impeded subject to lack of resources as well as capital.

Investigation of the Use of Rainy Day Funds or Stabilization Measures

Voters in Texas approved the creation of the rainy day fund in 1988, to act as an emergency piggy bank that seeks to salvage the government of the state in the case, similar situations that surrounded the gas and oil crash in the 1980s (Pope & Leland, 2019). The main question with regard to the use of Rainy Day Funds is whether the far-reaching effects to the economy due to the current Corona Virus pandemic will necessitate the use of these funds as well as the rolling out of stabilization measures. The Texas state has the nation’s largest economic stabilization fund (ESF). By the close of the 2016 Fiscal Year, the balance was nearly $9.7 billion (Pope & Leland, 2019: Bi & Bae, 2019). This translates to nearly eighteen percent of the annual general revenue expenditures in Texas and which is three times more than the federal average, which stands at 6.5 percent among other states that have similar funds.

The rainy day fund in Texas has managed to receive deposits accruing to $19.9billion, which have consequently earned interest amounting to $832.4million by the start of the 2017 Fiscal year. In regard to the use of these funds, the Texas Constitution has mandated the Legislature to make appropriations from the ESF in the event of three circumstances (Pope & Leland, 2019). Firstly, in response to a budget deficit that may occur during a biennium. Secondly, when there is a projected revenue shortfall in a subsequent biennium, and thirdly, in response to any other purpose as the Legislature may deem fit. It is prudent to note that the authorization for the first two uses, three-fifths of the Legislature should approve while for the last use, the two-thirds majority rule applies (Garrett, 2016).

In the 1990s, the end-year balance of the fund topped $1000million only once. In regard to this decade, the Legislature tapped into the rainy day funds for a total of three times, and with each tapping, the consequent appropriations nearly exhausted the entire balance. Notably, after the period, the fund was tapped again in the year 2005, with an appropriation that was intended to address the finances of the school (Garrett, 2016). The resulting consequence was that the fund reduced to $7million. It is prudent to note that the huge balance of the ESF as evidenced today can be attributed to the unusual growth of the oil as well as gas tax collections subsequent to the contemporary shale boom (Pope & Leland, 2019). The taxes on oil and gas have made great contributions to the ESF.

It is pertinent to note that there is a maximum-minimum rule that governs the use of the rainy day fund. The Texas Constitution has placed a limit of no more than 10% of the amount deposited in the previous biennium on the ESF’s maximum balance for each biennium (Bi & Bae, 2019). In a practical sense, the maximum ESF balance has never been close to the cap amount.  With the current distresses on both the federal and state infrastructure, leaders of the state often face pressure to utilize the funds towards funding obligatory duties of the state including health benefits, deferred maintenance, as well as employee pensions (Bi & Bae, 2019). However, it is prudent to note that the ESF maximum balance continues to grow with each year, as evidenced in the table below.

Confirmation of the Statistical Credit Ratings

If the long-term debt obligations of a state are poorly managed, they end up causing a downgrade to the credit ratings of the state which result in increased costs of borrowing and decreasing the confidence of the investor (Greer, 2016). Notably, Texas has attained the highest possible credit rating from Mood’s and Standard and Poor’s (Aaa-stable since 2012 as well as AAA since 2013) respectively (Greer, 2016).  However, the liabilities incurred form unfunded pensions have in recent years resulted in declining debt scores. It is prudent to note that these rating agencies are private and autonomous entities which represent a projection of the state’s ability as well as its inclination to meet its fiscal obligations (Beatty et al., 2018).

The high rating of Texas under these credit ratings can be attributed to the population growth which is above average, the developed infrastructure, the networks of trade presents, the financial reserves in the form of ESFs as well as the disciplined budgetary practices (Benson & Marks, 2016). The rating agencies have also noted some weaknesses including the incessant significance of the volatile energy industry in relation to the economic base of the state and similarly, the considerable shortfalls encountered in pension contributions from employees (Greer, 2016). The table below provides the Standard and Poor’s Analytic Framework for rating the states in the United States

Texas as a state has been receiving scores which have been declining since 2014 according to the Standard & Poor’s debt and liability profile. The possible scores under this rating are from one to four. It is prudent to note that one is the strongest or the highest score. In this regard, Texas scored a 2.1 in 2013, but the score reduced to an average of 2.7 according to the 2016 ratings (Greer, 2016). S&P assigned these scores concerning the contributions under actuarial annual determined contribution. Additionally, Standard and Poor noted that pension funding policy in Texas is set a percentage of payrolls, in law which implies that the contributions in future will be below the determined contribution (Greer, 2016).

The Criteria as employed by Moody, on the other hand, seeks to conduct an assessment of the relative debt burdens, the affordability of debt, the structure of debt as well as the capacity to fulfil long-term debt obligations which may include unfunded pension liabilities (Greer, 2016). (See table below for rating methodology). An analysis conducted by Moody posited that the Texas record of “below-actuarial-level” contributions is the driving factor of the upsurge of pension costs. It is prudent to note that while Moody’s in the year 2013 and 2014 credited Texas with successful pensions, a report by the same agency in 2016 reported that state has the most significant pension shortfalls attributable to continued underfunding (Greer, 2016).

Conclusion

Texas State has managed to maintain an excellent financial record over the years.  Although there are years when economic recessions have miscued the state for one, it has managed to develop structures and measures which have benefited it along the way. One particular measure is the tax and expenditures limitation. This has boosted its financial discipline as well as ensured that the state gains the public trust by way of giving voice to the population. Additionally, with the use of the rainy funds that is increasing annually, given that the administration has desisted to tap into it provides reserves for the State, which will cushion it during distressing economic times. The mundane analysis of financial indicators can be likened to a doctor’s checkup.  However, it prudent to note that this routine analysis traverses beyond what is presumed to be a periodic review. This is because it provides a fundamental idea of the government’s financial status.

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