TX Rainy Day Fund Proposal

By The Banker | Blog Posts, Texas
5 May 2017
  • Sumo

texas_financeTexas Comptroller Glenn Hegar proposed last month significant shifts in management of Texas’ Rainy Day Fund, and it’s all shockingly sensible.

I say shockingly not as a diss against Hegar, but rather because my usual stance with respect to fiscal prudence among government leaders is an exasperated shrug. It’s usually “Oh, they went and did THAT again?” Pffft!! Gah!

For Hegar, however, all I can offer is a congratulatory fistbump and an ‘attaboy.’ He’s applying prudent principles of financial management. It’s almost enough to make a financial cynic believe in, like, good fiscal leadership.

Three simple financial rules – as true for individuals as they are for governments – come into play with the Economic Stabilization Fund (ESF) in Texas, the so-called Rainy Day Fund.

First, automated savings plans are the best savings plans. Second, long-term money should earn a higher rate of return than cash, through riskier investments. Finally, setting aside money during surplus times can make an extraordinary difference in the future, when the lean times inevitably come.

Following these principles – setting aside money automatically, investing for a higher return, and delaying spending until its needed – is notoriously difficult for both individuals and governments to do. I’d say especially governments, because competing financial needs – right now – always seem so compelling. And in a democratically elected system, being responsive to citizens is sometimes hard to square with fiscal prudence.

Legislators created the ESF in 1988 to be automatically funded mostly by excess oil and gas extraction-tax revenue. The fund didn’t amount to much throughout the 1990s, until the revival of the industry after 2006 – via fracking – began to fill up the ESF’s bucket. The neat thing about the ESF, from my perspective, is the automatic nature of the savings. With a savings plan you should try to make a rule and then try not to think about savings as they build up. That benign neglect is the key to success.

A rule written long-ago, automating savings for the state, suddenly brought in a kind of savings windfall. Ten years into the fracking revolution, Texas has the high-class problem of about $10 billion in the ESF. That’s quite a nice “set it and forget it” savings plan.

glenn_hegar_rainy_dayRegarding investments in higher-risk, higher-yielding opportunities, the ESF has until now always erred on the side of caution and low returns. Historically, the vast majority of ESF funds have earned little more than cash, not even keeping pace with inflation. With a balance above $10 billion, however, Hegar’s proposal sensibly calls for dedicating a portion of the ESF to higher-return investing. Every billion in the ESF that could earn an extra, say, 4 percent annually, would mean $40 million in additional government revenue. The state’s legislative budget board estimates a net gain for the state of more than $82 million by August 2019 if this bill passes

Earning an extra $40 million per year by following a prudent reallocation seems like a good plan to me.

Regarding spending the gains from investment, Hegar proposes a Texas Legacy Fund from which future legislatures could vote specifically for long-term, fiscally prudent, projects. If big public pensions suffer a short-fall in the future, something he and I both worry about, funds from the Legacy Fund could plug the hole. Relatively small amounts now, applied steadily to public pensions, could stave off big problems in the future.

So given how sensible this is, will it actually pass this legislative session?
Ah, representative democracy. So much potential, and yet, so frustrating!

rainy_day_fund_texas

Ready for a rainy day

Hegar’s proposed changes to the ESF came relatively late in the Texas legislative session, through HB 855. The enemy of the bill may not be any particular opponent, but rather the limited time remaining in the legislative session. Changes to the ESF cannot be made without a vote in the Texas House and Senate.

As of this writing, HB 855 had passed out of the House committee, but the state Senate still needed to hear and opine on the proposal.

Setting fiscal prudence aside and thinking more about my needs, I mentioned to Hegar last week that Alaska has a similar ESF fund, but that Alaska makes an annual distribution of close to $1,000 per year to every resident. I think of that money as hardship pay for living through those winter months up North.

I’m originally from Massachusetts and I feel like living in Texas in July and August is worth at least $1,000 per citizen. So I tried on the phone to goad Hegar into agreeing to simply distribute ESF funds to all citizens of Texas every year in the form of a hardship dividend, given our summer heat.

Hegar countered that the good people of Houston might have a stronger claim to summer hardship payments because of humidity rather than the ‘dry heat’ of San Antonio. Dry heat? I thought to myself. I have three words for Hegar: What. Ev. Er.

texas_heatMy proposal is that we get a distribution chart from the Comptroller for every city in

Texas determining which people in the state get the best ‘dividend.’ Can we settle who has the worst summer heat? I feel like my city deserves it the most and there’s potentially a lot of money at stake.

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