Future of the Texas Rainy Day Fund

A closer look at the Economic Stabilization Fund shows that it was originally structured from tax revenue set-asides during years of high commodity prices. Crude oil and natural gas production taxes have contributed more than 85 percent of its revenue over time. The strength of the fund contributes to Texas’ AAA credit rating, resulting in lower interest rates on bonds for Texas taxpayers.

Source: Texas Comptroller of Public Accounts

The state’s constitution sets the maximum balance of the ESF for each biennium at no more than 10 percent of general revenue funds deposited in the preceding biennium. The current cap is $16.2 billion. In 2014, a constitutional amendment redirecting a portion of oil and gas revenue to the State Highway Fund also required an unspecified floor, set prior to each session by a select committee tasked with taking into account the state’s needs and credit rating. This floor, or the sufficient funds balance, is currently set at $7 billion.

As of today, the ESF’s total balance sits at about $11.9 billion.

Appropriations from the fund can be made for the following reasons:

  • If the Texas Comptroller certifies that General Revenue appropriations exceed the GR funds available for the current biennium, the Legislature can tap the fund to cover the budget gap with a three-fifths vote of members present in each chamber;
  • If the Comptroller certifies that anticipated revenues for the succeeding biennium will be less than revenues available in the current biennium, the Legislature can use the ESF to make up the difference with a three-fifths vote of members present in each chamber; and
  • The Legislature can appropriate ESF funds at any time and for any purpose with a two-thirds vote of members present in each chamber.

Since 1990, the fund has been tapped to the tune of $10.6 billion for various purposes including water projects, disaster relief, public education, economic development, and health & human services. Of these various appropriations, only twice, in 2003 and 2011, were funds used to close a budget gap. In 2013, the legislature appropriated $2 billion to support water projects and $1.8 billion to pay the Texas Education Agency for a delayed installment. Neither of these would constitute an emergency or “unforeseen shortfalls.”

Approved by voters in 2014, changes to the funding formula for the ESF now direct up to half of previous revenue streams to the State Highway Fund. In concert with the oil and gas markets leveling off, the balance of the fund relative to the state budget will inevitably shrink. Although oil and gas production severance taxes have increased, the ESF received approximately $600 million less in revenue than the previous year.

Because the ESF does not rely on a stable revenue source, the prudent course would be to safeguard the fund for true emergencies, like natural disasters, one-time appropriations to repay debt, or conversion of government pensions to a defined
contribution system.

With recent budget spotlights on university “special items” funding and non-essential spending on corporate welfare (i.e., The Moving Image Industry Incentive Program and others), finding savings in the current budget in order to preserve the ESF is not just conservative, it’s common sense.

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