Oil’s link to school funding called risk
Texas’ reliance on the oil and gas industry could jeopardize up to $29 billion in public school funding over the next 15 years, according to a new study by two nonprofit policy groups.
The report, released Wednesday by the Center for Houston’s Future and Texas 2036, analyzed the impact of declining oil- and gas-related revenue under various scenarios over the next decade and a half, when the Lone Star State will celebrate its bicentennial.
The analysis calls attention to the state’s “complex, difficult-toforecast and increasingly at-risk”
method of funding public schools with gas and oil revenue — a strategy that is susceptible to the market swings that caused 60,000 Texas oil and gas job losses in 2020.
“Most people would be surprised to learn that K-12 education in Texas is affected by world oil prices,” said Brett Perlman, the CEO of the Center for Houston’s Future, which conducted the study. “That would be a surprise to people. But when you start to look at this in more detail, what you find is that there is quite a significant link. And so what happens over the next 15 years in world oil prices is going to matter a lot to the state of Texas.”
Researchers said the recent power outages across the state and the coronavirus pandemic underscore the need to prepare for seemingly unthinkable and devastating scenarios.
“State officials and policymakers would do well to begin planning today for the possibility that the economic role that oil and gas plays in the state of Texas might be significantly different in the future,” the report said.
In 2019, the oil exploration and production industry contributed about $13.5 billion in revenue to state funds. That year, about $6 billion in public school funding could be linked to the oil and gas industry, either through property tax collections or other revenue — about 20 percent of total expenditures for K-12 schools, according to the analysis.
The state’s Permanent School Fund, a more than $46 billion endowment, is also tied directly to the success of oil exploration, as it is funded solely by the industry’s returns.
“If we live in a world where we do have low oil prices over a sustained period of time, the impacts could be quite large,” Perlman said.
The study evaluated the potential consequences of price drops using three “low-but-plausible” scenarios, compared to a constant pricing of $60 a barrel, roughly the current rate. The three scenarios included one in which oil prices drop steadily over the next 15 years to $30 a barrel; one in which the industry fluctuates between $30 and $40; and, finally, one that predicts two cycles with prices fluctuating between $30 and $40.
In the worst-case scenario — the steady decline to $30 a barrel — Texas state and local tax collections could drop by $130 billion over 15 years, the study found. The Texas economy overall could narrow by about $1.6 trillion, according to the analysis, which did not adjust dollars for inflation.
“They are scenarios intended to provoke thoughtful evaluation of potential actions that Texas might take to better insulate its economy from possible negative consequences as the role of oil shrinks in coming decades,” the report states. “The priority is to ensure that school funding mechanisms like the Permanent School Fund, which could be impacted by decreasing oil prices, do not become catastrophic issues for future legislators to face.”
Analysts developed several recommendations, including an immediate focus on the state’s longterm financial planning. The state comptroller releases an economic forecast each fall, and the Legislature budgets through the biennium, but researchers said the state doesn’t currently have a longterm financial planning process.
“We’re going to have to have significant conversations about what the state’s revenue mix should look like,” said John Hryhorchuk, the vice president of policy for Texas 2036. “That is a difficult conversation.”
A.J. Rodriguez, the executive vice president of Texas 2036, a nonpartisan group, said that while the state still depends on oil and gas returns, revenue sources have diversified over time. The Legislature could create a commission to evaluate how those entities may change in the future, he said.
“What are the potential areas of volatility, energy and oil and gas being one?” he said. “Are there other sources that could potentially have some volatility? And then what are some alternative sources of revenue?”
In the immediate future, the study suggests that legislators could also evaluate ways to “streamline” management of the Permanent School Fund, which is split across multiple agencies. The fund itself has had its own sets of troubles in recent years, reporting increases in management fees and declining contributions to schools, a Chronicle investigation found.
Such changes could make the fund “more resilient, so that it can serve as that buttress against future market volatility,” Hryhorchuk said.
“If we live in a world where we do have low oil prices over a sustained period of time, the impacts could be quite largee.”
Brett Perriman, CEO of the Center for Houston’s Future