Fiscal Notes, May 2001, Page 2

May 2001

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Olympic-sized Pool

High-tech, High-efficiency Government

Finding Fiber Gets Rough

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Sizing up the Snowbirds
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From the Comptroller: Invest in Your Future
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Texas stats -- Fiscal and economic data

En español: Notas Fiscales de Mayo 2001

TexPool assets reach all-time high
of $13.4 billion in February
Olympic-sized Pool
On February 13, 2001, assets in TexPool, the state-sponsored investment fund for local governments, reached an all-time high of $13.4 billion. That figure surprised even Mike Doyle, director of the Comptroller's Treasury Operations, which oversees the fund.
The average balance for the year was not that high--the fund's high point for a year always comes in February, thanks to a January deadline for local property taxes--but topping $13 billion was more than anyone anticipated. When cities, counties and other local governments receive property taxes, they invest as much of the proceeds as possible.
"When TexPool was created in 1989, no one expected it would ever be so large and successful," says Doyle.
Different after a decade
In 1990, TexPool's first full year of operation, the fund had an average annual balance of about $587 million and paid out $47.7 million to about 209 local governments.
By 2000, TexPool's average annual balance had grown to $8.9 billion and earned more than $500 million in interest payments over the year to more than 1,600 counties, cities, school districts, utility districts, institutions of higher education and various other local governments. The fund was earning as much interest as it had invested in its entire portfolio a decade before.
The governments that rely on TexPool couldn't be happier.
"TexPool has been invaluable to Bell County and to the investment of Bell County's funds," says Bell County treasurer Charles Jones, a charter member of the board when TexPool was formed.
"It has worked so well for us that we've set up our whole accounting and banking system around the pool," he says. "TexPool has allowed us the flexibility to set up 70 separate accounts, which has really helped us track the individual department accounts that the law requires us to keep separate. We have the flexibility we need to operate our financial system efficiently, while still getting the best return for our taxpayers."
Safe investments
TexPool offers local governments a way to conservatively invest the money they have on hand, while at the same time ensuring they can get their money, without penalty, if they need it in an emergency.
"We were one of the very first investors with TexPool, says Winnie Long, Texas Tech University's cash investment manager. "The money is always available in an emergency or, if we get money in that was unexpected, we can invest it there over the short-term until we can place it in a long-term commitment. We've had a good relationship over the years, and the service has always been good."
The majority of the fund--about 66 percent--is invested in government securities, with nearly a third invested in repurchase agreements and less than 2 percent invested in mutual funds.
Who's in
About half of TexPool's customers are school districts and cities. Of the $11.2 billion in the fund in February 2001, school district investments topped $6 billion. Another $3.1 billion came from city governments.
"We are aggressive users of TexPool," says Mark Hyatt, assistant superintendent for business at Carrollton-Farmers Branch Independent School District. "We take full advantage of the flexibility and simplicity of TexPool.
"I tout TexPool to other districts looking at investment alternatives. For short-term investments, TexPool offers a very competitive yield. Our school district has an active construction program, and TexPool enables us to have our funds available at a moment's notice."
Low risk
From 1989 to 1994, TexPool rolled along smoothly. But in December 1994, in a report on the financial woes of Orange County, California, the Wall Street Journal mentioned that TexPool was in similar straits. While TexPool, then run by the Treasury Department, did not include the same risky investments as Orange County's fund, the news nevertheless prompted an old-fashioned run on TexPool.
"TexPool was in no danger of defaulting on any of its securities," Doyle says. "But when a sufficiently large number of investors want their money at the same time, no investment fund can withstand the shock."
TexPool not only survived the run, but grew larger. The 1995 Legislature, which convened about a month after the December 1994 run, tightened the Public Funds Investment Act, which governs all investment pools.
"The new rules really didn't change how TexPool operates on a day-to-day basis," Doyle says. "But the Legislature did add some requirements that made the fund operate similarly to an SEC-regulated money market fund, which made some folks feel better about the rules governing the fund and the fund's prospects."
Outsourced, online
The biggest change since the fund's inception came in 1996 when the Treasury Department was abolished by voters and the Comptroller's office took over some Treasury responsibilities. TexPool's administration and investment operations were outsourced to two private companies.
First Southwest Asset Management Inc. provides customer service and marketing, while J.P. Morgan Chase & Company is the investment custodian and manager. The joint contract will be re-bid in 2002.
TexPool is also taking advantage of technology. By the end of 2001, TexPool will offer local governments access to their own accounts through the Internet. Investing governments can already conduct transactions over the phone. Going over the Web will allow participants to obtain more detailed account information more quickly.
"We want to continue to offer this valuable service to local governments, and we are always willing to listen to any suggestions our investors have to help us operate the pool more efficiently," Doyle says. "After all, it is the investors" pool, and it is their money." Pam Wagner

Safety First
In the early months of 2001, faced with a lot of uncertainty in the financial world and declining interest rates, local governments like cities, counties and school districts invested their excess money where they thought it was safe, and where they could get to it quickly if they needed it.
Instead of buying their own fixed-income investments, which government entities cannot cash in quickly, government officials put their money in TexPool, which allows them to retrieve their money within 24 hours.
"I don't know if it was caution, fear or just prudent investing, but local governments participating in TexPool put a whole lot more money into TexPool in the first quarter of 2000, and they're leaving it there," says Mike Doyle, director of the Comptroller's Treasury Operations, which oversees TexPool.
TexPool's average daily balance reached $13 billion in February 2001--nearly 40 percent more than the same day in 2000, when the average daily balance topped $9.3 billion.
Another reason for the increase could have been the difficulties experienced by a private investment pool competitor. Participants withdrew about $1.2 billion from that pool in the wake of a corporation's failure to make timely payments on investments it had purchased.
'Some of those withdrawals probably ended up in TexPool," Doyle says. "Safety has been one of our primary concerns at TexPool, and I think investors know we'll do everything we can to avoid putting their money at risk."
Commercial paper
In addition to safety, TexPool has stressed customer service. When another investment pool began to buy a form of short-term commercial debt called commercial paper, some local governments asked TexPool to offer that type of investment option as well. TexPool polled its membership and found that a majority favored the new idea. Other TexPool customers, however, said their investment policies prohibited investing in commercial paper.
To keep those customers from violating any investment policies, TexPool officials declined to add commercial paper to its investment mix.
Fans of commercial paper weren't left out in the cold, though. To satisfy governments in favor of commercial paper, TexPool officials are considering the creation of a second, separate investment pool that would invest in these instruments.

e-Texas proposals would bring
state agencies into the tech revolution
High-Tech, High-Efficiency Government
Texans are witnessing the beginning of a dramatically different era in human affairs. Call it the Information Revolution.
The U.S. Department of Commerce estimates that information technology (IT) has accounted for almost a third of the nation's economic growth and at least half of its rise in overall productivity since 1995. Computers and Internet access have provided companies and consumers alike with vastly expanded choices and convenience on a 24/7 basis. Being a part of the Wired World is no longer a competitive advantage in the marketplace; it's become a competitive requirement--the standard way of doing business. And governments across America are struggling to catch up to this new state of affairs.
Government falling behind
Texas state government has a long way to go before it can live up to the expectations created by e-commerce. People have grown accustomed to a nonstop business environment, to firms that can deliver goods to their doorsteps quickly, cheaply, and with a minimum of consumer effort. And IT's potential for improving government operations in a similar way is virtually unlimited.
It can eliminate lines in government offices, for instance, allowing Texans to pay taxes, apply for permits and file required reports from their own homes or businesses at any time of day or night. It can more efficiently give taxpayers easy access to useful information on how their government works--or doesn't work. Perhaps most importantly, IT can erase the frustrating boundaries between dozens of different agencies and programs, allowing citizens to deal with a virtual "front counter" that offers access to all the services and information state government provides.
One of the foremost goals of Texas Comptroller Carole Keeton Rylander's e-Texas Commission has been to help state agencies bring the speed and flexibility of modern e-business to their own operations. This goal is reflected in a number of the recommendations Rylander delivered to the 2001 Texas Legislature in a December 2000 report.
Bringing IT projects together
One key proposal calls for central coordination of major state IT projects. Texas agencies are poised to spend literally hundreds of millions of dollars on technology projects, but much of the benefit of these efforts could be lost if they are not coordinated and managed from a statewide perspective--something not always easy to achieve, given the fact that Texas' state government is the nation's most decentralized. Traditionally, Texas state agencies have served their customers and developed technological systems more or less independently.
"Most state agencies aren't used to a statewide perspective," says Shannon Porterfield, e-government team leader for the e-Texas effort. "They haven't had to worry about whether their efforts are duplicating those of another agency, or whether they could integrate some of their functions with those of another agency to save money."
The Comptroller has recommended that Texas follow the lead of a number of other states, including Florida, Virginia and Michigan, in establishing a central state authority to ensure that major IT projects proceed with common approaches and standards. This would help the state achieve economies of scale, eliminate unnecessary duplication and minimize the use of incompatible computer systems and software.
The proposed Program Management Office (PMO) would be established within the state�s Department of Information Resources (DIR) to guide, promote and support IT initiatives across state government, coordinating projects involving multiple state agencies as well as those involving local governments and the federal government.
"The Program Management Office would help us ensure that the state's major [IT] projects affecting multiple agencies are managed consistently and successfully," says Carolyn Purcell, director of DIR. "It would give us the tools we need to ensure that Texas taxpayers get the most out of their investment in technology, and that those investments further the state's strategic goals as effectively as possible."
In 2002 and 2003, the proposed PMO would oversee the development of a number of systems designed to offer services to citizens, primarily through the state's recently created TexasOnline Web site www.texasonline.com. Ultimately, TexasOnline is intended to become the state's portal--a comprehensive, one-stop location for getting information from or doing business with Texas government, regardless of the agency involved," says Porterfield. Many of e-Texas' recommendations involve expanding the services and information available through the site.
Put it on the portal
One recommended role for Texas' portal is a one-stop online service for new businesses. A Web site accessible through the portal would allow new businesses to complete forms essential to starting a business and obtain permits and assistance via the Internet, to serve business' varying startup needs in an efficient and seamless manner. Ideally, this "Starting a Business" site would erase existing boundaries among agencies, as far as its users are concerned, making the process as trouble-free as possible.
Another recommendation concerns the numerous occupational and professional licenses offered by various state entities. In fiscal 1999, 22 Texas state boards and commissions issued 62,500 new occupational and professional licenses and renewed more than 400,000, collecting $60.3 million in professional fees. Despite years of technological advancement, most of these licensing processes are still paper-based, expensive, time-consuming and inconvenient for many citizens. The Comptroller has recommended that state entities issuing occupational and professional licenses, with the aid and coordination of the PMO, offer more online licensing services through TexasOnline.
Online licensing services are both thrifty for government--Accenture (formerly Andersen Consulting) estimates that every in-person transaction moved online saves $400 in paper and labor costs while every phone transaction moved online saves $40. It is also much more convenient for licensees, allowing them to apply for or renew licenses quickly and easily, without disrupting work schedules.
Clarified for citizens
Health and human services (HHS) represent another arena that could be improved by the application of information technology. Many of Texas' numerous HHS agencies offer information about their services over the Web, but these sites can be difficult for the average citizen to navigate. Often they are written in overly technical language or are organized by agency department rather than by the actual services provided.
The e-Texas report recommends that the state's Health and Human Services Commission (HHSC), which oversees most Texas HHS agencies, coordinate with the PMO to place consistent, user-friendly information on the TexasOnline site, and eventually to add online applications for all Texas' HHS services. HHSC is already developing integrated ITsystems for the agencies under its oversight.
The problems and solutions in Texas' environmental programs are similar. The Texas Natural Resource Conservation Commission and 16 other state agencies charged with protecting the environment and managing natural resources offer huge amounts of information on the Internet, including environmental data, regulations and public outreach information. But citizens and businesses still find it difficult to determine which agency is responsible for specific functions, issues or information, and existing agency Web sites offer little help.
E-Texas has proposed that these agencies work with the PMO to create a single environmental and natural resource portal within TexasOnline to offer citizens and the regulated community information, services and detailed descriptions of regulatory requirements.
IT also could streamline and improve the state's processes for hiring new employees, not a small issue in view of an aging state work force and fierce competition from the private sector for talented employees. E-Texas recommended that the DIR work with the Texas Workforce Commission and other state agencies to develop ways to reach and attract more job candidates, and to consider creating a system for receiving résumés and job applications online.
Bruce Wright

Businesses feel pinch from
lack of fiber optic cable
Finding Fiber
Gets Rough
So, you're ready to start video-conferencing, putting more of your business systems online and making use of the latest technology. If so, you'll probably need to get wired with fiber optic cable. And that could be a problem--an ongoing shortage of the cable has some businesses' plans on hold.
Hot commodity
It is a good year to be a fiber optic cable manufacturer. In fact, the last two years were also good years to be a fiber optic cable manufacturer. From 1999 to 2000, the Telecommunications Industry Association (TIA) reports that U.S. exports of fiber optic cable jumped 88 percent to nearly $1.5 billion, and fiber optic market research firm KMI Corp. estimates that between 2000 and 2004, firms worldwide will spend $6.3 billion expanding fiber optic networks.
Demand is explosive, and despite a slowing economy, demand shows no signs of letting up. The question is when manufacturers of the cable will be able to meet that demand as the industry enters the second year of a fiber optic cable shortage.
It's all about bandwidth
"What's driving [demand] is exponential growth of bandwidth needs," says Steve Kester, director of Public and Legislative Affairs for the AEA-Texas Council (formerly the American Electronics Association - Texas Council).
In the last two to three years, more people have gone online at home, more businesses have started using the Internet and using it more extensively, and more companies have developed that cater specifically to e-business. Nua, a Web-publishing solutions provider, says Internet usage jumped from 150 million users worldwide in December 1998 to 407.1 million in November 2000.
In addition, the new technologies developed to provide increased data, voice and video transmission require much more bandwidth than earlier technologies, such as e-mail and basic Web pages. No longer content with just having a Web presence, many major corporations now want immediate transmission of huge data files and streaming video. "It's the big guys--IBM, insurance companies, Wall Street--who need real-time information," says Grant Seiffert, vice president of External Affairs and Global Policy for the TIA.
The fiber advantage
To send and receive more information on the Web faster, you need fiber optic cable. Fiber cable consists of a bundle of glass threads, on which data is transmitted using light waves. Traditionally, data was transmitted on metal lines, usually copper wires, using electrical signals. But fiber optic cable has several advantages over metal and electricity, and in recent years, companies have increasingly replaced metal-wire systems with fiber.
Fiber optic cables have much greater bandwidth, which means that they can carry more data and can transmit faster and over longer distances than metal cables. Some cables can carry as much as 400 gigabits of data--the equivalent of 12,000 encyclopedia volumes--per second on a single strand of fiber.
Fiber optic technology also is less susceptible to electromagnetic interference than metal cable and is more secure. Since the fiber in the cable is a continuous strand of glass, it is not possible to tap into the stream of data as it passes through the strand without physically breaking into the fiber.
Fiber optic cable is more expensive to manufacture and install than copper cable, but technological advances are making fiber more affordable.
A fly in the ointment
The hitch in this love affair with fiber cable is that manufacturers can't meet the demand. Patrick Fay, an analyst with KMI Corp., says virtually all of the cable that will be manufactured in 2001 is spoken for.
"The shortage is still ongoing and should continue through 2001," he says.
Charlie Reavis, vice president of Sales and Marketing for Optical Fiber Solutions at Lucent Technologies, says signals of a shortage appeared in late 1999 as a number of new carriers appeared. The new carriers indicated much larger quantities of fiber in their business plans than manufacturers had seen up to that point.
"In addition," Reavis says, "existing carriers said they'd need tremendous expansion of their networks."
The shortage hit when existing telecommunications carriers increased the size and number of their fiber orders, and new carriers secured financing and began to place orders in early 2000. Existing fiber customers were shocked when manufacturers quoted delivery estimates of well over a year, up from about four to six weeks. Many customers were unable to find cable without a contract already in place.
Out of luck
The result was that in 2000, major manufacturers like Corning, Lucent and Alcatel concentrated primarily on filling orders that had already been placed. Companies trying to place new orders either had to delay their plans or turn to smaller manufacturers and distribution houses for cable.
"It does have an impact on their ability to build out," says Seiffert. Kester says that the situation in Texas is the same as it is worldwide. Some carriers have had to put their plans on hold, but customers who can place large, long-term orders are finding fiber.
Austin-based Broadwing Inc. said that after being surprised last year by the shortage, it scrambled to find a manufacturer that could meet its needs without delaying its plans for deployment. Dallas-based CapRock Communications inked a deal with Alcatel last May to provide fiber for more than 2,000 miles of infrastructure, and San Marcos-based Grande Communications announced in February that it locked in an agreement with Alcatel for 100,000 kilometers of fiber and related hardware over the next three years.
But not everyone is getting what they need when they need it, and Fay says there are reports that some network operators have cancelled their orders.
Kester says that end users--the people trying to use the Internet via the fiber optic lines--are only marginally affected at this point. Businesses say they have the bandwidth they need for current operations, but many are unable to upgrade to new services like video conferencing.
"They're not realizing their full potential in using the Internet," Kester says. Home users aren't an issue yet. Seiffert says only about 2 percent of home users who want fiber technology have it due to the expense of installing it. Most home users looking for fast, high-volume connections have DSL (digital subscriber lines) or cable modems. That will change soon, though. Technological innovations are bringing down the cost of fiber, and Reavis expects carriers like SBC Communications--Southwestern Bell's parent company--to offer fiber to home users sometime in the next five years.
Alternatives
For those unable to find the cable they want, Reavis suggests companies consider reducing the number of fibers per cable or reassessing their schedule. Fay echoes that. By reducing the fiber-count, a company can get more miles of cable from the same amount of glass.
Kester says other technologies could fill in the gaps until supply ramps up to meet demand. He says products like wireless communications, laser point-to-point technologies and satellite technologies can be just as capable.
"They're just not as pervasive," he says, "though that's changing."
Relief coming
The long-term solution, though, is more cable.
"The demand for fiber is not going to go away," says Kester.
Reavis says that depending on the size and type of an order, current delivery times are about six to nine months. He says big manufacturers are working to increase production by adding facilities and equipment and by working on ways to get more production out of existing facilities.
Of Lucent he says, "We are expanding all of our global facilities and have been in expansion mode for the last two years--really since 1998."
Manufacturers are also keeping an eye on the economy to see what effect, if any, the economic slowdown will have on the cable industry.
"We have to watch that very closely," Reavis says.
No one is predicting exactly when the shortage will end, except to say that it won't be before 2002. In the meantime, businesses may just have to settle for good old-fashioned conference calls.
Suzanne Staton

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