Austin Letter

Trusted Insights and Perspectives Since 1979

September 21, 2018

Volume 40, Number 25

Face it.  Whether you like it or not, advances in robotics and artificial intelligence will be used in battle by someone an enemy or an ally.  And Austin will be on the cutting edge of the effort to ensure US soldiers will have the best technologies available.  This was securely set in stone when the first new 4-star command in 45 years the Army Futures Command (AFC) – was established, not in a remote military base, but in downtown Austin.

While this is a development of yet-to-be-fully-understood, long-term-significance to the Austin area, it is a continuation of Austins quiet involvement for more than a halfcentury in private and public warrelated activities.  Two quick examples:  1) UTAustins Defense Research Lab was active in World War II in North Austin, where the Pickle Research Lab now sits, and where Sam, the first monkey to launch into space, was trained and 2) Tracor, the first home-grown NYSE-listed company, was founded in 1955 to work on US defense electronics.

What we know about the AFC’s economic impact in Austin is that, once fully operational, it will employ about 500 employees, including 400 civilians.  Not Dell-huge in terms of numbers, but important in high-level positions.  This is where university graduates and private sector workers come in.

“By tapping into private-sector and academic know-how, the Army can better develop solutions to future problems,” observed longtime Texas economist Ray Perryman.  “With Austins large number of professionals in science and technology industries and thousands of graduates each year in science, technology, engineering, and mathematics career fields, the area is well equipped to work with the Army to modernize.”

The Army hasn’t said so yet, but you can anticipate that millions and millions of government dollars will start flowing, as if from a fire hose, into UTAustin, established tech and computer companies, startup tech innovators, leadingedge researchers, etc.  This is how the Army can maximize the advantages of all that Austin offers.  Make no mistake, this will provide a significant infusion of funds into the area.

Want a phrase from an expert that puts the Army Futures Command Austin/Texas location into perspective? Try this from Perryman:  “In one of the most important arenas imaginable, Texas has shown itself to be an innovation juggernaut of global significance.” Read more →

September 14, 2018

Volume 40, Number 24

The Texas economy especially as it impacts the Austin area is so strong it has triggered an action not taken in 30 years.  State government, so important in Austin, is benefitting significantly from what is happening throughout the state not to mention the impact of the redhot Austin economy.  All this is due to betterthanexpected economic and revenue growth around Texas.

We’ve long maintained the Austin area is uniquely positioned economically.  Steady government paychecks provide a solid underpinning for the area.  In general, these jobs are not subject to ups-and-downs or twists-and-turns of the private sector.  So, add to this, the Silicon Hills of Austin is right now riding the crest of tech-driven private sector job growth, that is the envy of the rest of the nation.

Consider this:  the skyrocketing Austin private sector tech economy is set to get a rocketboost from normallystaid state government.  What?  How’s this?  The Texas Legislature that sets budget parameters for the many state agencies in Austin doesn’t even meet for almost four months.

Texas Comptroller Glenn Hegar, by law, is the state official who decides money guidelines the legislature must follow.  He says to legislators “this is how much money you will have to spend during the next two years of the biennium and you cant spend any more than that.”  Last October, he issued his forecast for fiscal year 2019.

For the first time other than a legislative session in 30 years, the State Comptroller has increased his certified revenue estimate he made last October.  And it was a big increase.  Remember, the Texas Legislature meets only once every two years for 140 days.  So its a big deal for setting a twoyear budget.

His reason for saying state agencies will have more money to spend starting in 2019 than earlier predicted are several fold:  sales tax revenue is up 10.5% over FY 2017 … oil/gas natural gas production tax revenue is up 56.1% … general revenue-related revenue, up 9.3%, etc.

The legislature will have more money to dole out.  If state agencies get bigger bucks, it will mean bigger paychecks circulating through the Austin economy.  A nice future boost. Read more →

September 7, 2018

Volume 40, Number 23

For a year now, the Austin area has been considered one of the favored locations for Amazons 50,000person second headquarters, Amazon HQ2.  Still no public word on when Amazon will announce its next step.  A $5 billion investment in the HQ2 city, spread over 1020 years, has many cities salivating.  In fact, it has been said a prosperity bomb will be dropped on the ultimate HQ2 city.  How can the Austin area prepare for such an event?

Austin’s proposal has not been made public, but several cities have revealed proposals that have incentives valued up to a billion dollars.  Hey, they probably figure, if we invest a billion dollars for a $5 billion returnits worth it.  Don’t know if this was their logic.

But it emphatically emphasizes the humongous aspect of Amazon HQ2.  Amazon estimates it generated $38 billion in economic activity in its home base of Seattle between 2010 and 2016.  Okay, so HQ2 will be big.  Really big.

Washington, DC-based think tank Brookings Institution in a new study examined how the city that wins Amazon HQ2 could ensure its arrival does not rapidly drive up housing costs – an important element in the Austin area economy.

Brooking’s Joseph Parilla said this “should include not only stimulating new market-rate development through zoning, but also setting aside some of the tax revenue generated by Amazon to fund and preserve affordable housing.”

Other than housing, Parilla said Amazon should invest in local business initiatives, such as a startup accelerator and should source services and goods from resident suppliers.  And, the new HQ2 city should prepare existing residents to take advantage of employment opportunities created by Amazon.  In other words, the “diversity of the entire region” should be brought into play in business planning around Amazon.

Back to housing for a moment.  In Amazons HQ1 city, Seattle, the cost of housing has outpaced wage gains.  While the income of families at the 20th percentile of the earnings distribution grew by 14% between 2014 and 2016, rents increased at 19%, according to Zillow.  Sound familiar?  If Austin is selected for HQ2, Amazon will be on familiar territory and should work with Austin to alter such an imbalance. Read more →

August 31, 2018

Volume 40, Number 22

Dear ,

The National Science Foundation announced this week that UTAustin will receive a $60 million grant to build one of the most powerful supercomputers in the world.  And, it will be the fastest of any university in the nation.  This moves UTAustin to the very top in the field.  And while vastly important for academic disciplines at UTAustin, the recognition also reinforces Austins overall tech economySo, how did UTAustin reach this pinnacle?  It got a rocket boost 35 years ago when it did something it had never done before, nor since.

First a little background:  In 1983, Microelectronics and Computer Technology Company (MCC) was a brand-new consortium composed of 15 of the US’s top tech companies (it later grew to 21).  MCC’s task was to counter Japanese dominance in the tech field, which was supported/funded by its government.  In other words, Japanese companies were beating the butts off US companies that didn’t have that level of R&D financial backing.

With a wink and a nod to US anti-trust rules (later validated by Congress), these companies ponied up big bucks and committed to offering their best and brightest minds to work together for far-sighted tech research.  Then the companies took the research results and competed in their own way in the world marketplace.  MCC’s site location was a prize sought by 57 cities in 27 states.

Bear with us.  We’re getting to UTAustin’s unprecedented role.  But, first you need to know Austin, Dallas and San Antonio were all part of the initial 57 cities.  Following a presentation led by Texas Governor Mark White and UTAustin Engineering Dean Ben Streetman, Austin became one of the four finalists along with San Diego, Atlanta, and Raleigh-Durham.

Governor White tapped his chief of staff, Pike Powers, to corral the full force of state and Austin resources to successfully lure MCC to Austin.  The governor said “Don’t leave anything to chance, Pike.”  So, a team of mostly volunteers collaborated to prepare a precedent-breaking proposal that involved UTAustin.

Keep in mind, at the time, the university already enjoyed a solid reputation in computer science and electrical engineering.  But, in 1983 it decided to make a quantum leap, and invest heavily and uniquely (with the help of benefactors) to support the bid to attract MCC to Austin.  UTAustins commitment raised Austins proposal above all others.  Check the next item for how UTAustin helped itself, while it helped the city and the state. Read more →

August 24, 2018

Volume 40, Number 21

Things are going so well in the Austin area right now you might be tempted to pinch yourself to see if youre dreaming.  This is especially true if you happen to remember two past disruptions that caused some serious damage the dotcom bust and the real estate recession.  They occurred in Austin less than 20 years ago.  And, they were like a slap upside the head.  A lot of people and companies were seriously hurt or even destroyed.

This report is not intended to be a downer.  And it’s not a dull recitation of local history.  But, there are so many new residents in the area, it might be helpful to remind them they have arrived at a great time.  Those who have lived/worked here for at least twenty years have vivid memories of when times were not-so-great.  And, more importantly, many of those who survived those times are responsible for Austin’s economic success stories today.

Think about this.  Roughly a million people have moved into Austin and the surrounding areas in the 5county metro during the decades following the two downturns.  They didn’t experience the hard times.  All they’ve seen is one of the most amazing periods of expansion experienced by any major world city.

Many of these new residents are pulling down compensation greater than those who were hammered by the downturns.  A lot of them are living and/or working in gleaming, modern towers downtown – or, in new office buildings, apartments and homes outside the Central Business District.

The downtown newbies probably can’t comprehend “see-through office buildings, where three million square feet of office space had to go begging – even though the spaces were cut-rate subleases from leases businesses committed to prior to the recession.  This is as much space as six Frost Bank Towers!

Here’s one example that vividly illustrates the contrast between then and now.  Drive to Fifth and San Antonio Streets downtown.  Marvel at the architecturallysignificant Federal Office Building that will still be standing on that site a century from now.  At one point, global semiconductor chipmaker Intel started building a $124 million tower on that site.  Then as the dot-com debacle hit, Intel pulled the plug half-way into the project in March 2001.  For six years, the “Intel Shell” reminded all of what might have been.  The takeaway:  Recent residents will do well to understand what they have inherited.  This is a special place. Read more →

August 17, 2018

Volume 40, Number 20

Mexico is the most important international trading partner for Texas by far.  Austin also benefitsRelations recently have been a bit dicey, especially with the NAFTA trade agreement between Canada, Mexico and the US under review.  “Review is a soft word.  Soon NAFTA that went into effect in 1994 may no longer resemble its former self.  With a newlyelected president of Mexico starting a 6year term December 1, 2018, lets examine what may happen.

This is not the stuff of everyday headlines.  In fact, many find a discussion of international trade pretty boring.  But this is very important for the future growth of the Austin area and the Texas state economy.  Take Texas first.  Texas has been the nations top exporting state for 14 years in a rowAnd Mexico, by far, is the top country for Texas exports — $97 billion to 2nd place Canada’s around $30 billion in 2017.  All other nations are back in the pack.

Austin takes a big chunk of this dynamic export business.  In fact, the AustinRound Rock area is the 26th largest exporter region in all of the US.  And it is growing.  Exports grew 30% over a 10-year period from 2006 to 2016.  The metro area exports approximately $10 billion in goods and services a year.  More than 2,000 businesses in the Austin metro exported $540 million worth of merchandise to Mexico in 2016.

So what could impact this significant hunk of our economy?  First of all, President Donald Trump has long maintained the US gets the short end of the stick in NAFTA saying the trade agreement favors Mexico and Canada.  He even called for abolition of NAFTA (which stands for North American Free Trade Agreement).

Now Trump is playing Mexico against Canada, saying the US might end up with two agreements, a different one for each nation.  Hes saying negotiations with Mexico started again July 26th and are coming along nicely.” But talks with Canada are on hold.  Trump is even praising Mexico’s left-leaning president.

So, what is likely to happen?  Former USAmbassador to Mexico Tony Garza (who lives and works in Austin and Mexico City) said the new Mexican president has his own man sitting in on current negotiations.  “The new administrations embrace of the talks has sparked renewed optimism for a quick finish, with some negotiators even pointing to completion by the end of August,” said Garza.  Stay tuned. Read more →

August 10, 2018

Volume 40, Number 19

If you look at the calendar with eyes that have some economic development expertise, you can logically assume Amazon will soon publicly announce the next big step in the selection of a city that will be its choice for its second headquarters, Amazon HQ2.  In January, 20 cities including Austin were told they made the cut from 238 original submissions.  Since that time, Amazon has made no public utterance.  But, its selfimposed deadline is nearing.

Don’t expect Amazon’s next announcement to be the city.  Amazon initially said it will decide the HQ2 city in 2018.  But, if Amazon follows standard site selection procedure, a handful of finalist cities will be revealed a Final Four,” or some small manageable number.  Winnowing down the smaller number to the “winner” will probably include further site visitations, negotiations and a comparative analysis.  This could take a few months.  And by this time, Amazon’s own deadline will be upon them.  For these reasons, you can expect the final cut of cities should be announced sooner rather than later.

Amazon earlier confirmed site selection teams visited all 20 cities.  The visits were very private.  Even some city officials didn’t know they were in town.  And those who met with the site selectors were asked to sign confidentiality agreements.  Even the HQ2 team members didn’t reveal their full names.

This, by the way, is the norm for most economic development visits, though usually it is to make sure the company’s competitors are not aware of their plans.  However, in this case there are no competitors.  Amazon announced it would invest about $5 billion in the chosen city, and HQ2 would grow to about 50,000 new highpaying jobs over the years.  Amazon HQ2 has no peer.

The Austin and Dallas regions were the only two Texas sites among the 20 that made the first cut.  And, an Amazon team not only visited these sites, they also met with the Texas governors office to gauge the states role.  So, make no bones about it, Texas’ no-income-tax, low-regulations, business-friendly-leaders add tremendous clout to local presentations.

A final note about Austin’s chances:  from Day One, Austin Chamber of Commerce officials who guided the Austin effort, have used the phrase Austin Region” – not City of Austin.  So, if Austin makes the “Final Four” – and it is considered one of the favorites – dont be surprised if the physical location is outside Austins city limits. Read more →

August 3, 2018

Volume 40, Number 18

Are there Chinese and Russian spies in Austin?  Preying on Austin tech interests.  According to one report, the FBIs Austin office may think so.  It is believed Austin may be the target for cybersecurity espionage due to its concentration of tech companies that could harbor important data worth stealing.  Further, there is concern that some Austin tech operations are unprepared to deal with this espionage.

Buried in the next-to-last paragraph of a very lengthy and starkly detailed July 27, 2018 report in Politico magazine is the reference that grabbed our attention.  After recounting what was called “a fullon epidemic of espionage on the West Coast by China and Russia, aimed at science and technology companies, the report said mid-sized cities with thriving tech industries will likely see an uptick in counterintelligence cases.  Then, came this quote:

One former intelligence official noted that the FBIs office in Austin, Texas, has built up its counterintelligence capacities.”  There you have it.  Of course, the FBI is not talking for obvious security reasons.  But it makes sense.  And it’s not because of the logical big targets in Austin like Dell, Apple, Google, etc., but also tech startups that are especially vulnerable.

“Russian and Chinese operatives have an easier time infiltrating organizations without any security systems or hierarchies in place,” noted the report.  “These services like penetrating young companies and start-ups because its always better to get in on the ground floor when seeking to pilfer valuable information or technology.”

The espionage efforts by the Chinese and Russians are diverse and complicated.  For example, here in Austin there is a treasure trove of data at UTAustin where research is conducted on vital topics, such as energy and computer technologynot to mention defense contracts.  UTAustin probably has massive precautions in place.

Now with the allimportant Army Futures Command establishing its headquarters in Austin, its entirely possible Russian and Chinese espionage efforts will ramp up in Austin exponentially.  The Army, too, will have extensive safeguards.  But remember:  spies don’t just concentrate on hacking, etc., spies also compromise individuals who may have access to what they want.  Get ready:  espionage will expand in Austin. Read more →

July 27, 2018

Volume 40, Number 17

Dear ,

As the state of Texas goes, so goes Austin.  Some think the vice versa is more true.  But since Austin is the home of the massive state government that must keep up with the impressive growth of Texas, its important to examine the economic health of the Lone Star State.  Especially as the Texas Legislature will meet in Austin in less than six months for its everytwoyears decisionmaking sessionAnd, legislators will have a lot of money to spread around.

When you think about it, it’s really impressive how the amazing Texas economy is churning out enormous amounts of money to run the government.  And, unlike the vast majority of other states, Texas is doing this without a state income tax.  The single largest source of revenue for Texas is the General Sales Tax instituted in 1961.  And, get this, the state sales tax rate of 6% has not increased since 1990.

The booming state economy has caused the sales tax source of revenue to zoom almost 10% since last year at this time.  As a result, State Comptroller Glenn Hegar now predicts legislators will have more than $110 billion (with a b”) to spend during the next biennium — $2.8 billion more to spend than originally anticipated.

Now then, enough about mind-numbing big bucks.  Let’s talk about another economic factor.  Separate from the sales tax, Texas has “benefitted from rising oil prices and production,” Hegar pointed out.  This translates simply into a 2019 balance in the states savings account – the Rainy Day Fund” – growing to almost $12 billion, the largest ending balance in the states history.  Talk about economic stability.

Not only that.  After voters approved a constitutional amendment in 2015 to increase funding for highways, the adopted formula means $2.5 billion will be allocated to highways from collections this 2018 fiscal year.  This is huge.  And it is occurring because of the increased sales tax receipts.

At least one group is urging legislators to “buy down some existing taxes” with additional funds. (Explanation:  Back in 1992, the legislature allowed municipalities and special districts, such as transit authorities, to levy local sales taxes.  The maximum municipal rate is 2%.  This is why some sales taxes are as high as 8.25%, depending upon the locale.) Read more →

July 20, 2018

Volume 40, Number 16

The UTSystem should be nearing the end of its search to replace retired Chancellor Bill McRaven.  There is no stated deadline and former UTAustin President Larry Faulkner is a very capable interim replacement.  But, the Texas Legislature convenes in Austin in less than six months and a new Chancellor needs time to get uptospeed on critical issues.  One question:  what should the Board of Regents pay to attract a worldclass caliber candidate?  Do the Texas Aggies hold the key to that answer?

No doubt about it, the job of UTSystem Chancellor is a tough one, overseeing as CEO 8 academic institutions (including UTAustin) and 6 health institutions that include 6 medical schools, 2 dental schools and 8 nursing schools, among other professional programs.  Consider this:  The UTSystem confers more than onethird of the states undergraduate degrees and educates over half of the states healthcare professionals.  This is a major responsibility.  And, ancillary to this, the newly-named Chancellor will become an influential citizen of Austin.

So, what should the Regent’s search committee pay to get someone of that caliber?  Start off thinking of an amount north of a million dollars a year.  The Chronicle of Higher Education released a 2016-2917 national salary survey this week.  TexasA&MSystem Chancellor John Sharps salary was among the nations highest at $1.29 million for acting as CEO of 11 institutions.

Even the president of the single campus TexasA&MUniversity in College Station, Michael Young, pulls down a $1 million annual salary.  By the way, UTAustin president Greg Fenves turned down a million dollar salary offer when he was hired in 2015 and now makes $762,220.

The precedent has already been set.  When he retired as UTSystem Chancellor earlier this year, McRaven earned just more than $1.5 million in combined base pay, bonuses and other financial perks during the 2017 fiscal year.

The Board of Regents will hire the new Chancellor at whatever salary it takes to attract its chosen candidate.  The search committee is headed by current Regents Chair and Vice Chair Sara Martinez Tucker and Jeffrey Hildebrand.  They are joined by two former chairs, Don Evans and James Huffines and a former vice chair, Paul Foster. Read more →