Reforming Texas' Rainy Day Fund
Since 1988, Texas has flourished with a less volatile state budget under the protection of the Economic Stabilization Fund (ESF); commonly referred to as the state’s “Rainy Day Fund.” This fund has allowed the state to protect itself from major budget shortfalls during economic downturns and natural disasters without large tax hikes or spending cuts.
However, recently the current ESF charter has shown weakness as multiple, non-emergency withdrawals have not only contributed in depleting the fund but also setting a dangerous precedent away from the original, emergency-only purpose that voters approved on the ballot in November 1988 (HJR 2).
Therefore, to better represent the will of voters, the Foundation recently released a paper highlighting that the ESF must be reformed to responsibly accumulate funds while definitively promoting greater economic stability and opportunity for all Texans.
The ESF receives funding from:
Withdrawals from the fund may be made:
While the ESF has served its purpose of covering revenue shortfalls as voters approved on the ballot, the fund has been increasingly ransacked through a two-thirds vote for non-emergency reasons. Figure 1 shows billions of dollars were allocated to non-emergency expenditures since 1989 where legislators have often found it in their best interest to dip into the ESF instead of funding these items with GR to bypass the constitutional spending limit.
While there’s no doubt that these expenditures are important, their funding from the ESF should be questioned if they are not to fund budget shortfalls ($3.2 billion) or disaster relief ($0.2 billion), which combines to less than one-third of the $10.7 billion appropriated. The other two-thirds appropriated risks the opportunity of the ESF to cover unforeseen budget shortfalls.
To eliminate these ESF abuses, the Legislature should pass a constitutional amendment that requires a four-fifths vote of all members (not just those present) to allocate ESF funds at any time and for any purpose outside of emergency funding. In doing so, the ESF will be more likely to retain its financial strength while also discouraging unnecessary budget growth.
Additionally, legislators should consider a constitutional amendment to reduce the current ESF maximum limit of 10 percent to 7 percent of certain biennial GR-related funds. Research indicates that the 7 percent maximum cap would provide sufficient funding, along with spending cuts, to cover substantial revenue shortfalls during the vast majority of economic recessions while allowing the other potential 3 percent to be used for more productive purposes.
The final consideration is for the Legislature to pass a constitutional amendment that requires funds above the ESF cap to go either towards payments of state liabilities or be returned to the taxpayer. In the former scenario, Texas would be able to decrease its debt— thereby reducing future tax burdens—and in the latter, funds above the cap would be returned to taxpayers by temporarily lowering the state’s sales tax through the Sales Tax Reduction (STaR) Fund.
The ESF is critical in maintaining a conservative budget, free of massive tax hikes or spending cuts in times of depressed revenues. However, it’s equally critical that we limit the scope by which the ESF can be tapped for non-emergency reasons to ensure that there’s not unnecessary spending. This is essential to restrain growth in the total budget to more than population growth plus inflation, thereby keeping taxes lower than otherwise to support economic stability and growth—key components of vast economic opportunity statewide.
The Texas Public Policy Foundation released the paper, Leaky Umbrella: The Need to Reform Texas’ Rainy Day Fund, today that highlights the history, problems, and reforms to Texas’ economic stabilization fund (ESF), also known as the state’s rainy day fund. The Foundation’s Director of the Center for Fiscal Policy Talmadge Heflin and Economist Dr. Vance Ginn issued the following statements:
“The ESF is critical in maintaining a conservative budget, free of massive tax hikes or deep spending cuts in times of depressed revenues,” said Mr. Heflin. “However, it’s equally critical that we limit the scope by which the fund can be tapped for non-emergency reasons to ensure that taxpayer dollars aren’t unnecessarily spent.”
“At a time when legislators are already calling for dipping into the rainy day fund because of a potential tight budget session, the ESF must be reformed to reduce the use of severance tax dollars for purposes other than unforeseen budget shortfalls,” said Dr. Ginn. “This is essential to passing conservative budgets that increase by no more than population growth plus inflation while keeping taxes lower than otherwise to support economic opportunity for Texans.”
To read the full publication, please visit: http://txpo.li/leaky-umbrella
The Honorable Talmadge Heflin is Director of the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. In the 78th Session, Heflin served as chairman of the House Committee on Appropriations and navigated a $10 billion state budget shortfall through targeted spending cuts that allowed Texans to avoid a tax increase.
Vance Ginn, Ph.D., is an Economist at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.
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The Texas Public Policy Foundation is a non-profit, free-market research institute based in Austin, Texas.
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Vance Ginn, Ph.D.