Fiscal Notes, January 2000, Page 2

January 2000

On this page:
Taking a Byte Out of Crime
Who Wants to be a Billionaire?

Other States Put Tobacco Money Into Endowments, Health Care

How to Hoard Hertz

On Page 1:
Out of the Loop
From our Readers
From the Comptroller: Let's Stop Standing in Line
Comptroller News

Texas stats -- Fiscal and economic data

En español: Notas Fiscales de Diciembre 1999

Computers rescued from scrap heap,
repaired in prison, sent to schools
Taking a Byte Out of Crime
The factory floor is brimming with computer parts. Hard drives, monitors and circuit boards cover workbenches. Electronic equipment, in various stages of assembly, is stacked everywhere.
A personal computer factory with an inventory overload? In a way, yes. This is the scene at the Wynne prison unit of the Texas Department of Criminal Justice (TDCJ) in Huntsville where prisoners refurbish computers as part of a work-training program. The finished computers are delivered to Texas schools.
Since its beginning in October, the Computer Recovery Program has shipped 91 computers to 12 schools. That's just a start. Another 70 schools have asked for 1,107 computers. To meet the demand, officials will add a second shift early this year and may go into production 24 hours a day. The program is to expand to the Gatesville and Coffield prison units this year.
The program, approved by the 1999 Legislature, could help alleviate several critical problems.
One is the question of what to do with obsolete computers. State agencies and universities threw away or stored more than 50,000 computers in 1998, up from 37,481 in 1997. In 1994, the number was 14,045.
Another is the need for computers in Texas classrooms. The demand for the recovery program's products is ample evidence of that. Schools were notified of the program through the mail.
The computer repair and assembly skills inmates receive in the program should help prepare them for employment when they are released from prison. Job studies show that computer technicians are in demand. Other studies show that released inmates with marketable skills are less likely to return to prison.
Legislative OK
The program was authorized in a law written by Sen. Bill Ratliff, based on work done by the Texas Comptroller's office.
"It sounded like a reasonable and very cost-effective proposal if the prisoners could rehabilitate those PCs and put them back in use," Ratliff says. "It gave them a way to be trained on electronics and it is a source of rehabbed computers."
Under the program, Texas Correctional Industries(TCI), the prison system's work-training program, can receive, repair or refurbish and resell the state's surplus or salvaged data processing equipment. That allows state agencies to send everything from personal computers to typewriters to the Wynne Unit.
TCI factories employ more than 6,500 inmates overall, with about 60 working in the Computer Recovery Program.
So far, the program has been overwhelmed by the response from suppliers--state agencies and universities--and customers--the schools, which get first dibs on the computers. State agencies and other political subdivisions in the state are next in line.
Growing problem
By October 1999, the program had received 1,400 desktop computers, 2,000 monitors, 370 printers, 85 typewriters, eight printers from mainframe computers, two mainframe disk drives and two fax machines. That adds up to 50 tons of equipment. By December, the total had reached 125 tons.
Finding a useful place for obsolete computers is a national problem. An estimated 20.6 million computers were deemed obsolete in 1998, according to a study from the National Safety Council, but just 2.3 million computers--11.3 percent--were recycled. The rest were sent to landfills, stored in warehouses or sold for pennies on the dollar. About a third of the equipment that goes to TDCJ's program is unusable and scrapped.
Mike Vandervort, associate vice president and business manager for the University of Texas at Austin, has shipped several pallets of computers to TDCJ. "The new TDCJ computer recovery program is a great way to dispose of computers that will eventually end up in public schools," he says.
The Comptroller's office has shipped 326 units to the program (terminals, monitors, printers and hard drives).
Chris O'Dell, the agency's Information Resources Manager, says, "Once Workstation Support removes all sensitive information and software from the computer equipment, all we have to do is put it on pallets and shrink wrap it; TDCJ does the rest."
By December, 13 state agencies and universities had shipped equipment to the program. Agencies sending old equipment include the Comptroller's office, the Attorney General's office, the Texas Workforce Commission, the Texas Department of Public Safety, Sam Houston State University, the Texas Board of Architectural Examiners and the Texas Water Development Board.
Inmate training
While the program extends the life of computers, it also provides training for inmates. Candidates for the program must have good disciplinary records, participate in vocational classes through the TDCJ's Windham School District and express a desire to acquire vocational skills. Participants are usually two to five years from release. They become certified computer technicians after completing the program.
Using existing TDCJ funds and revenue from scrap sales, the initial capital outlay plus staff costs was about $400,000 for the first year of the program. Lawmakers provided no additional money to TCI for the project.
TDCJ will track the program's workers after their release.
Like any computer maker, recovery program officials want to satisfy their customers. So far, they have.
The first computers went to schools in the Huntsville Independent School District. Katherine M. Young, a pre-school teacher at Sam Houston Elementary, wrote to the program after getting the PCs:
"The children were very excited about receiving [the refurbished computers]. Words could never express how grateful we are to you and everyone that prepared them for our use. They will be a very valuable asset in our classroom. Thank you very, very much!"
Contributing to this article:
David Dennis and Mike Hay

Texas spending tobacco money
on health care, endowments
Who wants to be a billionaire?
It's a good problem to have: Figuring out what to do with a financial windfall.
Spend it? Pay off debts? Invest it? Set some aside for a rainy day?
If you follow conventional investing advice, you'll spend some, invest some and sock some away.
And that's what the State of Texas is doing with the $17.3 billion it will receive over the next 25 years from the settlement of its lawsuit against tobacco companies, plus $580 million annually thereafter.
The biggest chunk of payments--$3.3 billion--comes up front and the 1999 Legislature was responsible for deciding what to do with most of it. Lawmakers used it to set up endowments whose interest earnings will pay for research at Texas medical schools and universities. They also set up an endowment whose earnings will pay for anti-smoking campaigns and smoking-cessation programs. The Legislature also took care of an immediate need, using $180 million to fund the Children's Health Insurance Program (CHIP). Local governments are guaranteed some funds by court order.
The money comes from the settlement of a lawsuit Texas filed against tobacco companies seeking to recover some of the billions of tax dollars spent treating Medicaid patients suffering tobacco-related ailments. Nationally, the tobacco industry has agreed to pay states a total of $246 billion to settle such claims.
The annualized payout equals about 2 percent of the current Texas budget, about the same amount of money the state collects in cigarette taxes. Here's an overview of how the state is managing its windfall. These figures are based on estimates. The first adjustment to the payment figures, as determined by cigarette sales, was due Jan. 10, 2000.
CHIPping away
Although lawmakers used much of the money to set up endowments that will generate interest earnings for programs, they did put some of the tobacco settlement to work immediately.
The largest current spending program was $180 million the Legislature appropriated for the Children's Health Insurance Program (CHIP). The program provides insurance for 500,000 children 18 and younger who are not eligible for Medicaid. Even this money will act as an investment of sorts because the federal government will reimburse the state 74 cents for every dollar the state spends on CHIP.
Permanent endowments
The Legislature will have placed more than $2.5 billion in permanent endowments in state and local treasuries by the end of the fiscal 2000-01 period for health programs in Texas. About $1.5 billion of that total will go to capitalize state endowments and the rest--$1.05 billion--will capitalize an endowment for local entities.
The Legislature created permanent endowments so that the earnings can be used for health programs without spending the principal. In addition, the law requires the funds to reinvest some of their earnings to hedge against inflation.
There are four basic groups of permanent endowment funds.
The largest group is made up of 13 permanent funds controlled by state universities and medical schools. These funds have been set up with $595 million, with the interest earnings going to the institution associated with each fund.
The second group is made up of five permanent funds with a total of $475 million capitalization and is managed by the Comptroller of Public Accounts. The earnings will go to the Texas Department of Health for programs such as tobacco education and enforcement, and to improve rural health-care facilities.
The earnings from the third group of permanent funds, capitalized with $420 million, will be used by the state's medical schools and other higher-education institutions. Seventy percent of the earnings will go to the medical schools through set formulas. The schools will vie for the other 30 percent in a competitive grant process administered by the Texas Higher Education Coordinating Board. The University of Texas System and the Comptroller's office will jointly manage this group of funds.
The fourth source--local governments' permanent fund--is the largest single endowment. The initial capitalization of $1.05 billion will be added to through 2003, reaching a total of nearly $2 billion. It is the only fund that will receive additional principal.
Spending it
Earnings from the 13 funds managed by the institutions of higher education and the three grant funds can be spent only on research and programs that benefit public health.
Earnings from the local governments' permanent endowment are to be distributed annually to the local entities--primarily the public hospital districts of Texas--based on their pro rata shares of health care expenses for which they are not reimbursed. That means that a hospital district with 2 percent of the state's total unreimbursed health care costs in a year will get 2 percent of the payout.
Most of these unreimbursed expenses come from providing health-care and medical services to people who do not have insurance and cannot afford to pay.
And because the payment will be, in effect, a reimbursement for costs already incurred, there is no restriction on how a hospital district eventually spends its distribution. Earnings from the prevention and treatment funds managed by the Comptroller are available for appropriation to the Texas Department of Health. Earnings from one fund would develop ways to improve children's health through prevention and intervention.
Another of these funds would make grants or low-interest loans to rural hospitals to pay for improvements, construction of new facilities or to buy capital equipment.
Investing the permanent funds
The permanent state funds will be managed as long-term endowments, following the "prudent investor" and "prudent person" standards, which means the money can go into investments that cautious and skilled investors would hold. In practical terms, it implies a portfolio with a balance of stocks, bonds and other assets suitable for long-term gain. The state's Permanent School Fund (PSF) and Permanent University Fund (PUF) are managed under similar standards.
In distributing money, the funds will use what is called the "total return" method. Under this approach, the total income to each fund, whether generated by dividends, interest or capital gains, will be adjusted for inflation and then distributed.
The state tobacco endowments are expected to allow for a distribution of 4.5 percent of the fair market value of each fund annually.
Contributing to this article:
James LeBas

Other states put tobacco money
into endowments, health care

State legislatures have followed similar patterns in how they handle the $246 billion from the tobacco lawsuit settlement and how they spend it, according to the National Conference of State Legislatures.
Some have set up endowment funds in which money from the settlement will be invested and only the interest earned will be spent. Much of the money will pay for tobacco education programs and general education; health care programs; and, in tobacco-growing states, help for tobacco farmers.
Here is a look at what some states are doing with their tobacco windfall. Kansas: Created the Kansas Endowment for Youth Fund to pay for programs aimed at the health and well-being of Kansas' young people. A group, called the Children's Cabinet, will recommend ways to spend the money.
Nevada: Set up the fund for a Healthy Nevada and the Trust Fund for Public Health. The money will provide pharmaceutical and independent-living services for senior citizens; programs to prevent, reduce and treat effects from tobacco use; provide health services for children and people with disabilities.
Hawaii: Will put 35 percent toward the Children's Health Insurance Program and health, disease and prevention programs. Another 25 percent will go to the Hawaii Tobacco Prevention and Control Trust aimed at reducing cigarette smoking by young people and helping smokers quit. The rest will go to a rainy-day fund for budget emergencies. New Hampshire: Created an education trust fund to provide grants to local school districts.
Michigan: Set aside $86 million for the Michigan Merit Award Scholarship Trust Fund to help high school students attend community college and state universities. Minnesota: Established the Medical Education Trust Fund, which will pay for scholarships for medical students and health-care providers in clinical residencies.
Louisiana: Set up the Millennium Trust Fund with an Education Excellence Fund that will assist private schools, charter schools and public K-12 schools. North Carolina: Created a nonprofit corporation that will oversee the spending of about half the settlement money each year to assist tobacco-dependent and economically affected communities.
Virginia: Set up the Virginia Tobacco Indemnification and Community Revitalization Fund to reimburse tobacco farmers and related industries for lost income and encourage alternative development.
Source: National Conference of State Legislatures.

Office keeps energy savings
going and going...
How to Hoard Hertz
The San Jacinto College District in East Harris County reduced energy expenses by $1.57 million over seven years--despite rate increases, more facilities, additional equipment and extended class hours.
The savings resulted from an energy plan initiated in 1991 by the three-campus community college. The latest, and most ambitious, part of that plan is construction of two thermal energy storage systems financed through the State Energy Conservation Office (SECO).
The office, created in 1975 in response to the OPEC oil embargo, helps reduce energy costs through a variety of programs. The program came under the Comptroller's office in September after operating in several other state agencies over the years.
The $2.7 million San Jacinto loan is financed through SECO's Texas LoanSTAR (Saving Taxes and Resources) program. It pays for energy projects for state agencies, institutions of higher education, school districts and local governments. The interest rate is 4.04 percent for school districts and 4.25 percent for all other entities.
The revolving loan structure allows borrowers to repay loans with money saved by the energy retrofits. Program administrator Theresa Sifuentes says the projects have saved taxpayers more than $75 million since 1990.
The thermal energy storage systems at San Jacinto generate chilled water during off-peak electric use hours. That water--1.7 million gallons--is then stored until it is needed to cool facilities during peak hours. Larry Logsdon, the college district's supervisor of construction, says the district built a similar storage system at its north campus in 1994.
"We recognized quite a bit of savings from that," Logsdon says. "So we decided we would expand the program to our other two campuses."
The energy costs saved from the latest project--an expected $340,000 a year--will repay the SECO loan. Reliant Energy (formerly Houston Lighting & Power Co.) also is giving the college a $500,000 rebate to help repay the loan, because Reliant has an interest in reducing peak power use.
Utilities must have access to enough power to meet periods of peak use such as summer afternoons when air conditioners run nonstop. By shifting electric use--in this case, chilling the water--to off-peak periods, the utility can avoid those energy costs ultimately passed on to customers.
LoanSTAR projects are approved only after a technical analysis determines there will be sufficient savings. Projects usually are expected to produce enough savings to pay the loan back within eight years.
Sifuentes says SECO also monitors and meters energy use at all projects before and after the work is done to compare actual energy savings to estimated savings. "More than 50 percent of the projects have exceeded the estimated savings," she says.
SECO also runs a Schools/Local Government Energy Management program, Sustainable School Design program and housing, transportation and alternative fuels projects.
Contributing to this article:
Daryl Janes

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