FEBRUARY 2018 FISCAL NOTES
FEBRUARY 2018SP EC I AL ED IT IO NFISCAL NOTESA REVIEW OF THE TEX AS ECONOMY FROM THE OFFICE OF G LE N N H E GA R, TEX AS COMPTROLLER OF PUBLIC ACCOUNTSA STORM TO REMEMBER:HURRICANE HARVEY AND THE TEXAS ECONOMYG LE N N H E GA R, TEX AS COMPTROLLER OF PUBLIC ACCOUNTSAUGUST 25, 2017, 10:41 PM CDT
A Message from the ComptrollerIn 2017, we saw massive destruction along U.S. coastlines fromhurricanes Harvey, Irma and Maria. Texas, of course, was ground zerofor Hurricane Harvey, one of the costliest storms in American history.Harvey devastated much of southeast Texas in August, earninga page in the history books for its overwhelming winds and flooding.The storm brought unprecedented destruction to parts of our coast;dozens died and many more lost homes, automobiles and livelihoods.Many small communities may require years to recover, and some may not recover completely.But Texans are resilient, and so is our state. While the initial impact of Harvey was severe,the Texas economy has already absorbed much of the damage from this record-breaking stormand should avoid long-term losses.It may take years to tally Hurricane Harvey’s toll on Texas, but we’ve been working hardto analyze the net impact of the storm based on the data we’ve seen so far.Our analysis takes a wide-ranging view of the consequences, using a dynamic input-outputmodel to measure the storm’s economic impacts, both negative and positive, on our state. Weestimate lost business productivity from the storm resulted in a 16.8 billion decrease in grossstate product (GSP) — but that’s only part of the equation, because gains to GSP stemmingfrom recovery efforts and increased construction activity are likely to offset most of this loss.As you’ll see in this report, we estimate the net impact of Hurricane Harvey will be aloss of 3.8 billion in GSP during the first year following the storm, with a cumulative gain ofapproximately 800 million over three years.In this special edition of Fiscal Notes, we examine the effect of Harvey on the stateeconomy through data modeling. We also look at recovery efforts and possible opportunities toprevent other flooding disasters in the future. G LENN HEGARTexas Comptroller of Public AccountsCover: Radar image of Harvey on Aug. 25, 2017, 10:41 p.m.The statements contained in this report and the information referenced in it that are not purely historical are forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the Comptroller’s expectations, hopes, intentionsor strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward-looking statements included in this report are based on informationavailable to the Comptroller on the date of publication, and the Comptroller’s office assumes no obligation to update any such forward-looking statements. It is important to note that actualresults could differ materially from those in such forward-looking statements.The forward-looking statements included here are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, includingthose relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal andregulatory circumstances and conditions and actions taken or not taken by third parties including customers, suppliers, business partners and competitors and legislative, judicial and othergovernmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditionsand future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Comptroller’s office. Any of such assumptionscould be inaccurate and therefore there can be no assurance that the forward-looking statements included in this report will prove to be accurate.If you would like to receive paper copies of Fiscal Notes, contact us at fiscal.notes@cpa.texas.gov2 G LE N N H E GA R, TEX AS COMPTROLLER OF PUBLIC ACCOUNTS
A STORM TO REMEMBER: Hurricane Harvey and the Texas EconomyLate last August, Texans watched and waited anxiously as Hurricane Harveyapproached our state. Born in the Atlantic Ocean as a tropical storm,Harvey intensified rapidly to a Category 4 hurricane in the Gulf of Mexicoand hurtled directly toward the Texas coast.On Aug. 25, 2017, Harvey made landfall, devastatingPort Aransas, Rockport and other nearby communities with 130 mph winds and a six-foot stormsurge. Swinging north, the hurricane moved into theHouston area, bringing thunderstorms and tornadoesthat caused extensive damage.Although it downgraded to a tropical storm asit moved inland, Harvey wasn’t through spreadinghavoc. The storm lingered in Texas for several days,Aftermath of Harvey in Rockport, Texas.H U R R I C AN E C ATEG O R I E SEXHIBIT 1THE SAFFIR-SIMPSON HURRICANE WIND SCALESUSTAINED WIND SPEEDS(MPH)TYPE OF STORMCATEGORYTropical DepressionTD0-38Tropical ne3111-129Hurricane4130-156Hurricane5157 or higherSource: National Hurricane Centerbringing record-breaking rainfall and catastrophicflooding to the southeastern part of the state. Partsof the Houston metro area recorded more than50 inches of rain in a four-day period, while inlandcommunities such as La Grange, Bastrop andSmithville saw massive flooding as the ColoradoRiver overflowed its banks.1The Saffir-Simpson Hurricane Wind Scale classifieshurricanes and tropical storms according to theirmaximum sustained wind speeds (Exhibit 1). A “major”hurricane is defined as one at Category 3 or higher.Once the danger passed, it was clear thehurricane had caused dozens of deaths and billionsof dollars’ worth of physical damage to homes,buildings, vehicles and basic infrastructure in theaffected areas.Texans have weathered many major stormsthrough the years, but Harvey — the strongesthurricane to hit Texas since Carla in 1961 — wasparticularly devastating. 2 According to data collectedby the Texas Division of Emergency Management asof Nov. 30, 2017, Harvey damaged or destroyed morethan 178,400 Texas homes and inflicted an estimated 669 million in damage to public property such asgovernment buildings, roads, bridges, water facilitiesand electric utilities. 3 October estimates from theTexas Department of Motor Vehicles suggested flooding may have ruined from half a million to a millioncars and trucks, although more recent estimates putthe number at around a quarter-million vehicles.4Harvey also exacted a high cost on manyof the state’s industries. According to the TexasA&M AgriLife Extension Service’s most recentestimates, the storm caused more than 200 millionin Texas crop and livestock losses. 5 The coastaltourism industry suffered crippling damages,especially in Rockport-Fulton, where the Chamberof Commerce estimates winter tourism was down by50 percent. Other economic sectors — particularlyCONTINUED ON PAGE 4FISCAL NOTES — SPECIAL EDITION 3
Hurricane Harvey and the Texas EconomyCONTINUED FROM PAGE 3manufacturing, energy, chemical production andretail sales — suffered damage to structures andequipment and, in many cases, experienced significant and expensive downtime due to flooding, lostelectrical power, employees’ inability to get to workand other situations causing temporary disruptionsto the flow of goods and services.Most businesses in the affected areas had toclose in the immediate aftermath of the storm,although the period of lost production varied. Manyencountered structural damage, floodwater, debrisand downed utilities.This is a preliminary analysis. We may not knowthe full impact of Hurricane Harvey for years. Butthe National Center for Economic Information haspredicted Harvey will prove to be one of the mostexpensive natural disasters in U.S. history, perhapssecond only to 2008’s Hurricane Katrina.6 The mostrecent estimate from the National Oceanic andAtmospheric Administration estimates Harvey’stotal costs at 125 billion.7 Once actual damagesand repair costs are determined, the cost may beeven higher.Although the losses stemming from HurricaneHarvey are enormous, they will be counteracted,to some degree, by economic activity — primarilyreconstruction and repair — following the storm. Toestimate the full economic change resulting from thestorm, we must consider not only losses but gains.ECONOMIC IMPACTSThe extent and cost of Harvey’s destruction weresignificant. But when balanced against the anticipatedincrease in business activity due to reconstructionand restoration efforts, combined with an influx offunding from federal aid and insurance payments,the effect on the state’s economy may be much lesssevere than many expected. Gains from increasedA H I STO RY O F H U R R I C AN E STo put Harvey’s costs in perspective, consider previous storms with similar characteristics. These storms shared many similarities with Harvey in theireffects on lives, homes and infrastructure.TROPICAL STORM ALLISON (June 2001): Like Harvey,HURRICANE IKE (September 2008): Ike, a Category 2 hurricane,Allison was responsible for severe flooding in the Houston area,dropping more than three feet of rain in four days and producing23 tornadoes. Allison caused 43 deaths and damages estimatedat 8.5 billion (or 11.9 billion in 2017 dollars), making it one ofthe most deadly and expensive weather events in Texas history.8hit Galveston with winds of up to 110 mph and a 20-footstorm surge. In addition to causing 112 deaths, Ike damagedoil platforms, storage tanks, pipelines and refineries, causinggasoline shortages in the southeastern U.S. The storm caused anestimated 30 billion in damages ( 34.8 billion in 2017 dollars).13HURRICANE KATRINA (August 2005): Katrina made landfallPOST-TROPICAL STORM SANDY (October 2012): Sandy,on the Louisiana and Mississippi coasts as a Category 3 hurricane,bringing a 20- to 30-foot storm surge and strong winds thatdamaged many levees, flooding more than 80 percent of NewOrleans and causing at least 1,833 deaths in five states.9 Withdamage costs estimated at 125 billion ( 161.3 billion in 2017dollars), Katrina remains the costliest storm in U.S. history.10originally a Category 3 hurricane, hit the northeastern U.S. witha storm surge of up to 12 feet and about a foot of rain.14 Sandydamaged or destroyed thousands of businesses and hundredsof thousands of homes.15 Total damages were estimated at 65 billion ( 70.2 billion in 2017 dollars), making Sandy thesecond-costliest storm in U.S. history after Katrina until Harvey.16HURRICANE RITA (September 2005): Rita made landfallnear the Texas-Louisiana border as a Category 3 hurricane withsustained winds reaching 115 mph. Rita’s 10- to 15-foot stormsurge, combined with up to 15 inches of rain in some areas,caused extensive flooding and wind damage.11 Rita caused 119deaths and an estimated 18.5 billion in damages ( 23.9 billion in2017 dollars).124 G LE N N H E GA R, TEX AS COMPTROLLER OF PUBLIC ACCOUNTS
EXHIBIT 2D I R E C T AN D I N D I R E C T DA M AG E SWeather events such as Harvey cause both direct and indirectdamages. Direct damages include the destruction of buildings,possessions, vehicles and infrastructure, such as roads,water systems and power lines. Indirect damages refer tothe interruption of business activity caused by the storm —disruptions caused by safety concerns, the loss of electricalpower, damaged machinery or the temporary inability ofemployees to reach work. These affect the economy throughlost business income as well as reduced employee earnings or,in some cases, lost jobs.17While direct damages represent the most obvious andvisible effects of the hurricane, they do not enter into ouranalysis because they represent what economists call retrospective or “sunk” costs — in essence, money already spent,economic activity that has already taken place. A home, forinstance, affects economic output when it is built, but not if itis damaged or destroyed a decade later by a storm. Its repairor rebuilding, however, will affect the economy.construction activity and associated spendingundertaken to repair and rebuild should help offsetlosses in the months and years to come.During and immediately following the storm,Texas communities in the affected areas faced costsassociated with emergency response, evacuee shelters, debris removal and infrastructure repair. Manysuffered damage to public buildings and vehiclesthat must be repaired or replaced. Many businesses,in addition to repairing damaged facilities, mustreplace some or all of their equipment and inventory.Meanwhile, thousands of evacuees staying inhotels or rental units faced temporary housing costsand, upon returning to their flood-damaged homes,began replacing floors and sheetrock and purchasingfurniture, household goods, electronics, clothesand vehicles.Harvey disrupted a broad range of industries, butmanufacturers represented a large share of them.18Although many were back in operation within five orso days, some experienced significant disruptions fortwo weeks or more.19Based on information submitted to theComptroller’s office, federal, state and local governments, along with private insurers, had spent orcommitted about 31 billion for Harvey-relatedFUNDING SOURCES FOR HURRICANE DISASTER RELIEFFEDERAL EMERGENCY MANAGEMENT AGENCY National Flood Insurance Program: payments for flood claims Individual Assistance: payments to individuals and households Public Assistance: reimbursements to state and localgovernments and certain nonprofitsSMALL BUSINESS ADMINISTRATION Home loans Business loansU.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT– COMMUNITY DEVELOPMENT BLOCK GRANTSSTATE AND LOCAL FUNDSPRIVATE INSURANCE COMPANIESNONPROFIT ORGANIZATIONSSources: Congressional Research Service and the Texas Legislative Budget Boarddisaster relief and rebuilding as of Nov. 30, 2017. Thisnumber is likely to rise. Money for reconstructionefforts will come primarily from the FederalEmergency Management Agency (FEMA), state andlocal governments and private insurance (Exhibit 2).All of this spending will spur economic growth.Without the boost from rebuilding, Texas’ grossstate product (GSP) would have required four yearsto recover to pre-Harvey expectations; personalincome would require five years. Single-familyresidential housing stock would take seven years torebound to normally expected levels, while nonresidential building stock in the affected areas wouldrequire four years for recovery. 20 With the help offederal, state and local government aid, however,all of these measures should recover in the secondyear after the storm, and Texas should gain abouthalf as many jobs as it would have lost in the absenceof government aid.Exhibit 3 displays the estimated indirect lossesand gains to Texas GSP resulting from HurricaneHarvey. In all, the total estimated net impact (lossesplus gains) is a 3.8 billion loss in GSP in the first yearfollowing the storm. (To put this loss in perspective,Texas’ GSP was 1.6 trillion in 2016.)21Recovery will stimulate economic activity,producing an estimated 800 million cumulativeCONTINUED ON PAGE 6FISCAL NOTES — SPECIAL EDITION 5
Hurricane Harvey and the Texas EconomyCONTINUED FROM PAGE 5gain in GSP over three years. 22It’s also possible to assess economic costs on alocal basis by examining the counties included inTexas’ councils of government (COGs), multi-countyregional planning bodies. Harvey affected eight COGregions — the Houston-Galveston, South East Texas,Golden Crescent, Coastal Bend, Brazos Valley,Deep East Texas, Capital and Alamo areas — and41 counties within them were designated as disasterareas (Exhibit 4).The storm hit the 13-county Houston-GalvestonCOG region hardest, causing an estimated 16 billioneconomic loss during the first year. FEMA designatedall 13 counties in this region as disaster areas. TheCoastal Bend, South East Texas and Golden CrescentCOGs can expect first-year losses projected at 350 million to 800 million each. The Alamo Area,Capital Area and North Central Texas regions, bycontrast, stand to gain in Harvey’s wake, each with anestimated 1 billion to 2 billion inadditional economic activity.EXHIBIT 3NET ECONOMIC IMPACT OF HURRICANE HARVEY ONTEXAS GROSS STATE PRODUCT(IN BILLIONS OF DOLL ARS)YEAR 1YEAR 2YEAR 3YEARS 1-3Estimated Losses( 16.8)( 2.0)( 1.0)( 19.8)Estimated Gains 13.0 4.1 3.5 20.6Net Economic Impact( 3.8) 2.1 2.5 0.8Source: Texas Comptroller of Public AccountsOur estimate of first-year effects on real GSP bysector show the hardest-hit industries include memberships (to clubs, sports centers, parks, theatersand museums), telecommunication services andentertainment, while those faring the best includehealth services, food and beverages and, for obviousreasons, rental housing, motor vehicles, furniture andclothing.The auto industry in particular should seeincreased demand as consumers seek to replace thecars and trucks damaged or destroyed by flooding.EXHIBIT 4TEXAS COUNTIES AFFECTED BY HURRICANE HARVEYCounties declared by FEMA as disaster areas and boundariesshowing the eight Councils of Governments affected.DETCOGDeep East Texas Council of GovernmentsJasper, Newton, Polk, Tyler, Sabine, San JacintoSETRPCSouth East Texas Regional Planning CommissionHardin, Jefferson, OrangeH-GACHouston-Galveston Area Council Austin, Brazoria, Chambers, Colorado, Fort Bend,Galveston, Harris, Liberty, Matagorda, Montgomery,Walker, Waller, WhartonBVCOGBrazos Valley Council of GovernmentsGrimesCAPCOGCapital Area Council of GovernmentsBastrop, Caldwell, Fayette, LeeGCRPCGolden Crescent Regional Planning Commission Calhoun, DeWitt, Goliad, Gonzales, Jackson, Lavaca,VictoriaSource: Federal Emergency Management Agency6 G LE N N H E GA R, TEX AS COMPTROLLER OF PUBLIC ACCOUNTSAACOGAlamo Area Council of GovernmentsKarnesCBCOGCoastal Bend Council of GovernmentsAransas, Bee, Kleberg, Nueces, Refugio, San Patricio
Although this increase in demand is expected tospike during the first year after the storm, it shouldreturn to pre-Harvey levels within five years.As expected, the Texas economy as a wholeappears to have bounced back to pre-Harvey levelsas of the end of the fourth quarter of 2017. 23DATA AND ASSUMPTIONSFor this analysis, Comptroller economists used aRegional Economic Models Inc. (REMI) model basedon Texas’ 24 COG regions to examine economicactivity. Eight of the 24 include the 41 counties thatbore the brunt of the damage inflicted by Harvey, asdetermined by FEMA’s disaster designation.The methodology used to estimate losses andgains in economic activity as a result of Harvey reliedon a combination of data, assumptions and estimates.REMI calculates the effect of losses and gains onprojected GSP for the duration of the time periodused in this analysis. (Appendix 2 provides a detaileddescription of the methodology used in this analysis.)Several factors influenced the inputs used togenerate this estimate, including the number andpopulation of counties affected by Hurricane Harveyas well as the extent and duration of the damage.Because the affected areas do not match upneatly with COG boundary lines, this estimateassumes only the affected counties experiencedproductivity loss and reduces nonfarm productivityby the proportion of people in affected counties tothe total population of each region.Our estimate also addresses reconstruction andrepairs in the first three years, although no actualtimeline for reconstruction has been determined.The estimate also assumes the duration ofbusiness closures or reduced revenue as follows:· medical care facilities: four days anufacturing and oil- and gas-related·mproduction: two weeks· all other industries: o
glenn hegar, texas comptroller of public accounts a storm to remember: fiscal notes a review of the texas economy from the office of glenn hegar, texas comptroller of public accounts n hurricane harvey and the texas economy august 25, 2017, 10:41 pm cdt february 2018.
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