Should Federal Funds Drive Texas' Rainy Day Fund Cap?

As the calendar year inches its way to a close, the 2017 Texas Legislature is primed to start session in January with an increasingly tight budget brought on partially by the slowdown of the oil industry. This has created a buzz around the state regarding spending money from the state’s Economic Stabilization Fund (ESF), often referred to as the “Rainy Day Fund.” 

Texas voters overwhelmingly approved the creation of the ESF in 1988 as a means to help cover tax revenue shortfalls that had led to large swings in taxes and government spending. Funded predominantly by a portion of natural gas and oil production taxes, collectively called severance taxes, the ESF is expected to total $10.4 billion by the end of the current 2016- 17 biennium.

The Foundation recently released a paper detailing the specifics and issues related to the ESF
including the following recommendations on how to reform it:

1. Limit the use of the ESF “at any time and for any purpose” by increasing the required vote count from two-thirds of members present in each chamber to four-fifths of all members in each chamber;
2. Pass a constitutional amendment to lower the ESF’s maximum cap of 10 percent of biennial general revenue (GR) related funds to 7 percent. Research indicates that such a reduction would safeguard Texas from budget instability by covering most, if not all, of budget shortfalls during the most “severe” recessions; and
3. Require funds that would ordinarily remain in GR if dollars exceeded the ESF cap would instead reduce government by primarily returning the dollars to taxpayers or secondarily paying down mounting state liabilities.

Texas’ Legislative Budget Board (LBB) recently published research directing attention toward the often-overlooked effect of federal funds on calculating the ESF cap. Federal funds were typically deposited into special funds outside of GR before the ESF. However, with the abolishment of most special funds in the early 1990s, federal funds were consolidated into GR and initially represented only 1.5 percent of deposits into GR while increasing to 30.3 percent in 2015. 

With federal funds now representing a significant portion of the deposits that are used to calculate the 10 percent ESF cap, the level of the cap has grown at a more rapid pace. With the 2016-17 biennium cap of $16.2 billion, the expected ESF balance of $10.4 billion is at 64 percent of the limit. The LBB notes that if federal funds were eliminated from the calculation, the ESF’s new cap would drop to $11.4 billion, bringing the expected balance to 91 percent of the cap. Similarly, pursuing the Foundation’s recommendation of lowering the cap from 10 percent to 7 percent of GR-related funds, including the current deposits of federal funds, would also drop the cap to approximately $11.4 billion. Implementing either option would mean that funds could soon exceed the cap and allow those dollars to be returned to taxpayers to reduce the size and scope of government.

Whether legislators would prefer to lower the percentage of total GR used to calculate the ESF cap or eliminate federal funds from the calculation, the message is clear that options on how to best use taxpayer dollars are available so that Texans benefit.

http://www.texaspolicy.com/blog/detail/should-federal-funds-drive-texas-rainy-day-fund-cap