Economic Stabilization Fund Testimony: Texas Should Narrow the Permissible Uses of the ESF Fund.

Economic Stabilization Fund Testimony: Texas Should Narrow the Permissible Uses of the ESF Fund.

TCCRI submitted the following written testimony to the House Appropriations Committee in advance of the committee’s April 19, 2016 hearing on the Texas Economic Stabilization Fund.

Background

This committee is charged, in part, examining with potential legislation to narrow the uses of the Economic Stabilization (Rainy Day) Fund (ESF). The ESF was created after its approval by voters in the November 1988 constitutional amendment election. Article III, Section 49-g of the Texas Constitution establishes four sources of revenue for the ESF:

  •   50 percent of any unencumbered general revenue (GR) balances on the last day of a biennium
  •   75 percent of oil and natural gas production tax revenues in excess of what those taxes generated inthe fiscal year ending August 31, 1987
  •    Interest earned on the balance of the Fund
  •    Any additional amounts appropriated directly to the ESF by the LegislatureThe Constitution directs the Comptroller to calculate and deposit these revenues into the ESF. While there is no minimum required balance for the ESF, it is capped at no more than ten percent of general revenue (GR) income during the previous biennium. If any of the transfers outlined above would lead to the ESF exceeding the ten percent cap, the Comptroller is directed to reduce the transfers accordingly and to retain the remaining funds in GR.Use of the Economic Stabilization FundArticle III, Section 49-g, subsections (k), (l), and (m) outline the three situations in which the Legislature may appropriate funds from the ESF:

(k) For the current biennium: If the Comptroller certifies that appropriations from GR made by the preceding legislature exceed available GR and cash balances for the remainder of that biennium. This type of appropriation from the ESF requires a three-fifths vote in both the House and Senate.

(l) For a succeeding biennium: If the Comptroller estimates that anticipated revenues for the succeeding biennium will be less than the revenues that the Comptroller estimates to be available in the current biennium. This type of appropriation from the ESF requires a three-fifths vote in both the House and Senate.

(m) For any purpose and at any time: this type of appropriation requires a two-thirds vote in both the House and Senate.

Current Balance

The Comptroller’s 2016-17 Biennial Revenue Estimate projects that the ESF will contain a balance of $11.0 billion at the end of the biennium, well short of the constitutional limit, which the Comptroller estimates to be $16.1 billion:

It is worth pointing out that the 83rd Legislature appropriated $2 billion from the ESF to water infrastructure projects under the purview of the Texas Water Development Boardii, transferred $1.75 billion from the ESF to the Foundation School Program (FSP)iii, and authorized the transfer to the State Highway Fund (SHF) of $1.4 billion in oil and gas severance tax revenues that would otherwise have been deposited to the ESF.iv This latter transfer was subsequently approved by voters at the November 2014 constitutional amendment election. Without these three actions, the balance of the ESF at the end of the 2016-17 biennium would be approximately $16.1 billion, right at the maximum balance permitted under the constitution.

The Importance of Maintaining a Healthy Balance in the ESF

Maintaining a healthy balance in the ESF is critical to ensuring that the state can meet future revenue shortfalls, and to retain Texas’ strong bond ratings. In its 2015 annual report, the Texas Bond Review Board noted that Moody’s latest action on Texas’ general obligation bond debt rating was to affirm its Aaa rating and stable outlook. Moody’s stated that “[t]he Aaa rating reflects the strong fundamentals of the Texas economy; a rainy day fund that provides a healthy budgetary cushion; and low bonded debt levels.” [Emphasis added]

When voters endorsed the creation of the ESF in 1988, they approved a constitutional amendment “establishing an economic stabilization fund in the state treasury to be used to offset unforeseen shortfalls in revenue.” Until the 83rd Legislature, with two narrow exceptions, the ESF had only been used to make supplemental appropriations related to revenue shortfalls: SB 7 (71S6, 1991), HB 7 (78R, 2003), HB 10 (79R, 2005), and HB 4 (82R, 2011). The two exceptions, SB 171 (73R, 1993) and SB 532 (73R, 1993), related to Texas Department of Criminal Justice (TDCJ) capacity issues and totaled less than $200 million.

However, as noted above, the Texas Constitution is clear that the ESF may be used for any purpose with the appropriate legislative approval. Article III, Section 49-g(m) states that “the Legislature may, by a two-thirds vote of the members present in each house, appropriate amounts from the economic stabilization fund at any time and for any purpose.” It was under this constitutional provision that the 83rd Legislature passed legislation proposing a $2 billion appropriation from the ESF for water infrastructure and considered legislation appropriating ESF revenue for transportation infrastructure. The 83rd Legislature also used the ESF to undo the $1.75 billion deferral of the final Foundation School Program payment of the 2012-13 biennium, underscoring the beginnings of a troubling trend of the Legislature using the ESF for what should be core GR expenditures.

It is only through the defects of the original constitutional language creating the ESF that such expenditures from the Fund are permitted. As noted above, Article III, Section 49-g(m) of the Texas Constitution allows funds to be spent from the ESF for any purpose upon a two-thirds vote of the Legislature. In order to protect the balance of the ESF and promote fiscal restraint, this provision should be substantially narrowed.

Recommendation: Amend the Texas Constitution to narrow the permissible uses of the ESF to cover:

  •    Revenue shortfalls in the current biennium
  •    State debt retirement
  •    One-time infrastructure projects
  •    Expenses related to a state of disaster as declared by the GovernorNarrowing the uses of the ESF would achieve what is frequently considered a best practice in governance of state rainy day funds. For instance, the Institute on Taxation and Economic Policy argues that “rainy day funds should only be used to reduce the impact of budget shortfalls that arise from cyclical economic downturns—not to cope with long-term structural problems.”v Similarly, the Mercatus Center at George Mason University suggests that states should “[e]nact rules governing the use of rainy day funds”vi:State legislators can do more to ensure fiscal stability for their states by adopting requirements for deposits made to their rainy day funds and by setting strict rules about withdrawals. States that have already adopted such rules have, on average, lower spending volatility across years than states without such rules.Amending Article III, Section 49-g(m) of the Texas Constitution to specify that other than in times of budget shortfall for a current biennium, the ESF may only be used for retirement of existing debt, one-time infrastructure payments, or to cover expenses related to a state disaster as declared by the Governor under the Texas Government Code §418.014 would achieve this goal. House Joint Resolution 94 (84R, Burkett) should be used as a model for future legislation. HJR 94 proposes to amend Article III, Section 49-g(m) as follows:…the legislature may, by a two-thirds vote of the members present in each house, appropriate amounts from the economic stabilization fund to:(1) retire state debt;
    (2) pay costs associated with a state of disaster declared by the governor; or (3) pay nonrecurring costs of infrastructure projects

    [at any time and for any purpose].

    It is important to note that HJR 94 would still allow funds from the ESF to be used to address budget shortfalls, since those situations are covered under Sections 49-g(k) and (l) of Article III of the Constitution.

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