If needed, Rainy Day Fund is there for Texas

Photo by Todd Wiseman / Gustavo Devito

If you're fortunate enough to have a savings account, then you know it's a blessing during hard times. Texas is lucky to have a large savings account in its so-called Rainy Day Fund, created to prevent or reduce sudden massive cuts to schools, health care and other services Texans need. That is exactly why its actual name is the Economic Stabilization Fund.

Short-sighted tax cuts and diversions in recent legislative sessions mean that lawmakers may have reduced the General Revenue available to write the next state budget by at least $10.5 billion — independent of the drop in oil and gas prices.

Next week, we will learn from the comptroller's estimate exactly how much General Revenue will be available for schools, higher education, health and other services in the 2018-19 state budget. So this is a good time to get clear on the Rainy Day Fund itself and the proper uses of its $10 billion balance.

Since 1989, the Texas Constitution has required that a portion of oil and gas production taxes go into the Rainy Day Fund. Many states have a cash reserve, but Texas has the largest in the country. Our constitution authorizes the comptroller to make temporary transfers out of the Fund to make up for a General Revenue deficit. With a supermajority vote, the Legislature can also use the Rainy Day Fund as General Revenue in the current or next budget cycle.

State law requires the Legislature to set a minimum balance for the Fund every two years. This "sufficient balance" is $7.5 billion for 2018-19. The balance requirement was created in response to fears that too small a reserve would hurt the state's credit ratings. But in 2005, before the sufficient balance requirement existed, the Fund balance dropped to almost zero, with no harm done to the state's credit ratings.

As Comptroller Glenn Hegar noted in June 2016, "An ESF balance provides a flexible alternative, in addition to budgetary and revenue tools, to manage through challenging economic cycles. An ESF balance demonstrates fiscal strength and flexibility, but balances are not the only factor rating agencies consider."

So, when does it make sense to use the Fund? The Legislature has used the Fund frequently, for both one-time and ongoing budget items. Legislative approval by a two-thirds vote in the House and Senate is required to spend money from the Fund in most circumstances.

In the past, the Legislature has tapped the Fund for everything from public schools to criminal justice to closing shortfalls in Medicaid and the Children's Health Insurance Program. The Fund has been used for new budget items such as the State Water Plan or the Enterprise Fund.

It would be common sense for legislators to use the Fund when the only other choice would be state budget cuts that further destabilize the economy by, for example, triggering teacher layoffs or nursing home closures. Strategic, one-time uses of the Rainy Day Fund could also prevent larger costs in the future, such as those caused by underfunded state pensions.

Just as many households would do, dipping into savings can be part of a plan to get the state through a temporary shortfall. That's why the Rainy Day Fund was created. It is not designed to correct chronic underfunding of state services, and we don't advocate for such uses. If something needs additional funding in general, the Legislature should devise a way to provide permanent additional funding.

As the rhetoric heats up, let's remember that the Rainy Day Fund should be used as originally intended: to prevent sudden, massive cuts to schools, health care, higher education and other services on which Texans rely. 

Eva DeLuna Castro

Program director, Center for Public Policy Priorities