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Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts
Glenn Hegar
Texas Comptroller of Public Accounts

The Texas Economic Stabilization Fund Saving for Rainy Days

by TJ Costello, David Green and Patrick Graves

As most Texans know by now, the decline in energy prices is weighing on the state economy — and the tax revenue it generates.

In October 2015, the Comptroller’s office lowered its biennial revenue estimate for fiscal 2016 and 2017 by $2.7 billion, mostly due to legislative action and lower-than-expected collections of oil and gas production taxes and associated sales tax revenue.

But Texas does have a big budgetary backstop: one of the nation’s largest economic stabilization funds (ESFs), commonly called a “rainy day fund.” The state’s ESF balance at the close of fiscal 2016 was about $9.7 billion. According to a recent study by the National Association of State Budget Officers (NASBO), that’s equivalent to nearly 20 percent of Texas’ annual general revenue expenditures (and compared to an average of 6 percent among states with similar funds).

If the next legislative session doesn’t tap the rainy day fund, it should contain about $10 billion by the end of fiscal 2017.

Funding the Fund

The Pew Charitable Trusts report that 46 states have some form of rainy day fund.

Texas had the nation’s second-largest rainy day fund in fiscal 2015 and now has taken the top slot (Exhibit 1).

Exhibit 1: Largest State Rainy Day Funds, Fiscal 2015 and 2016

In Millions
State Fiscal 2015 Balance Fiscal 2016 Balance*
TEXAS $8,460 $9,715
New York$1,798$1,798

* Estimated

Source: National Association of State Budget Officers, The Fiscal Survey of States, Spring 2016, and Texas Comptroller of Public Accounts

Texans approved a constitutional amendment creating the ESF in 1988, following an oil price plunge and economic recession that forced lawmakers to raise taxes to keep state government in the black. The Legislature structured the fund to automatically set aside some tax revenues in boom years to help the state during downturns. Subsequent legislation and another constitutional amendment made further changes to its funding mechanisms.

The crude oil and natural gas production taxes are by far the most important funding sources for the fund, contributing more than 85 percent of its revenue over time. Ironically, the state has amassed its substantial cushion by tapping the same volatile revenue stream that has caused it financial difficulties in the past.

Historically, the rainy day fund received 75 percent of each year’s oil and natural gas production tax revenues in excess of the amounts they yielded in fiscal 1987—$531.9 million for oil and $599.8 million for gas. In fiscal 2015, by contrast, despite faltering energy prices and production, these taxes yielded nearly $2.9 billion and $1.3 billion, respectively.

A November 2014 constitutional amendment shifted half of the ESF’s share of oil and gas tax revenue to the State Highway Fund to address urgent transportation needs. Without further legislative action, this arrangement will end after fiscal 2025, and the fund’s share will return to 75 percent of oil and gas tax collections above the fiscal 1987 thresholds.

Other rainy-day revenue includes half of any unencumbered balance in general revenue (that is, revenue not reserved for any specific purpose) at the end of each biennium, and all interest earned on the balance and investments made with it. The Legislature also may make direct appropriations to the fund, although it has never done so.

Money Rolls In… and Out

Since its inception through July 2016, the rainy day fund has received deposits of $19.5 billion and earned $789.9 million in interest.

The Comptroller’s office has up to 90 days after the end of each fiscal year to transfer revenue to the fund; typically, these are made in late November. The agency’s next transfer, in November 2016, will total more than $439.5 million, with an identical sum transferred on the same day to the State Highway Fund.

The Texas Constitution authorizes the Legislature to make appropriations from the ESF in response to three circumstances:

  • a budget deficit during a biennium;
  • a projected revenue shortfall in an ensuing biennium; or
  • any other purpose the Legislature chooses at any time.

Appropriations for the first two circumstances require approval by three-fifths of the Legislature, while a general-purpose appropriation needs a two-thirds majority for passage.

The Legislature has made seven appropriations totaling $10.6 billion from the ESF since its inception, most recently in 2013. All were approved by two-thirds votes.

The purposes for these appropriations have included water projects, disaster relief, public education, economic development and health and human services. Only one appropriation — $3.2 billion in 2011, representing 34 percent of the fund balance at that time — was made to cover a budget gap (for fiscal 2011).

History in the Balance

In the 1990s, the fund’s year-end balance exceeded $100 million only once. The Legislature tapped the rainy day fund three times during that decade, each time exhausting almost the entire balance. After an appropriation to address school finance in 2005, the fund balance was reduced to $7 million.

The ESF’s huge balance today is due mainly to extraordinary growth in oil and gas tax collections during the recent shale boom. In 2006, it received its first revenue transfer based on the oil production tax since 1992; natural gas taxes also skyrocketed that year, responding to the surge in production based on hydraulic fracturing ("fracking") technology. Oil and gas taxes have contributed to the rainy day fund every year since 2006, though natural gas production taxes will not reach the transfer threshold in fiscal 2016 (Exhibit 2).

Exhibit 2: Economic Stabilization Fund Revenue and Expenditure History with Ending Balances

View Data.

Download chart data.

This graph describes economic stabilization fund history

Source: Texas Comptroller of Public Accounts

Maximum, Minimum

The state’s constitution limits the ESF’s maximum balance in each biennium to no more than 10 percent of the amount of general revenue deposited during the preceding biennium. (Interest and investment income and interfund borrowing are excluded from this cap.)

In practice, maximum ESF balances have never come close to the cap amount. The cap for the current biennium (fiscal 2016 and 2017) is $16.2 billion.

The November 2014 constitutional amendment that redirected a portion of oil and gas tax revenue to the State Highway Fund also included a requirement that the ESF retain a “sufficient” amount on hand. This requirement protects the ESF by reducing or eliminating State Highway Fund transfers if the ESF dips below a certain threshold. Neither the state constitution nor state law specify this amount, however.

Instead, this “sufficient fund balance” is determined prior to each regular legislative session by a joint select committee and submitted to the Legislature. The Legislature may set a different number, but otherwise the committee’s figure takes effect.

The sufficient fund balance is set at $7 billion through the end of the 2016-17 biennium.


Throughout most of its history, the Texas Treasury Safekeeping Trust Company, an entity chaired by the comptroller, has invested rainy day fund revenue in short-term, low-yield, highly liquid instruments, to keep the funds readily available if needed.

To maintain the ESF’s purchasing power in an era of historically low interest rates, however, the 2015 Legislature authorized the Trust Company to invest the portion of the ESF balance above the sufficient fund balance through its Texas Economic Stabilization Investment Fund.

This investment fund is intended to provide safe and steady returns and prevent the erosion of the ESF balance due to inflation. It’s subject to a “prudent investor standard” and must be maintained so the balance is adequate to meet cash-flow requirements. Currently, the Trust Company is investing a majority of ESF revenue above the sufficient fund balance through this fund. This enhanced investment authority expires on Dec. 31, 2024.

At the end of July 2016, the Trust Company had invested about $2.6 billion in this way, and produced a net return of about $56.4 million for the ESF since its September 2015 inception.

Paying It (or Saving It) Forward

The Texas economy has proven its resilience after the recent fall in oil prices, a situation much improved from the 1980s oil and real estate busts that spurred the rainy day fund’s creation. Texas is faring far better financially than other states with large mining and energy sectors, such as Oklahoma, Louisiana and North Dakota.

Our state still faces challenges, however. State revenue growth has slowed, while financial strains on our infrastructure persist. In preparation for the upcoming legislative session, state leaders have identified some programs facing funding challenges, specifically foster care and health benefits for retired teachers. Texas legislators also could face more pressure to use the rainy day fund in light of other ongoing obligations, such as employee pensions and deferred maintenance.

The size of the rainy day fund, coupled with the state’s latest funding challenges, could cause the fund to be a topic of debate in the 2017 legislative session. FN

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Economic Stabilization Fund Revenue and Expenditure History with Ending Balances

In Billions of Dollars
Fiscal Year Beginning Balance Natural Gas Production Related Transfers Oil Production Related Transfers Unencumbered Balances Transfers Interest and Investment Income Appropriations Ending Balance
1990 0 18.5 0 0 0.8 0 19.3
1991 19.3 7.8 0 0 1.9 -29 0
1992 0 18.4 118 20.2 6.8 0 163.4
1993 163.4 0 0 0 7.4 -119 51.7
1994 51.7 31 0 0 3 -56.6 29.1
1995 29.1 0 0 0 0.6 -21.5 8.1
1996 8.1 0 0 0 0.4 -0.5 8
1997 8 0 0 0 0.4 -0.1 8.5
1998 8.5 47.5 0 0 2.3 0 58.3
1999 58.3 17.9 0 0 3.8 0 80
2000 80 0 0 0 4.7 0 84.7
2001 84.7 103.1 0 0 8.7 0 196.5
2002 196.5 685.8 0 0 21.6 0 903.9
2003 903.9 83.6 0 0 19.4 -446.5 560.5
2004 560.5 352.6 0 0 5.5 -553 365.6
2005 365.6 594.5 0 0 17.3 -970.5 6.9
2006 6.9 793 112.1 0 21.5 -528.2 405.2
2007 405.2 1,304.50 247.3 0 65.8 -691.5 1,311.40
2008 1,311.40 971.8 226.9 1,779.90 136 -90.5 4,355.40
2009 4,355.40 1,563.70 678.3 0 128.8 -0.4 6,725.70
2010 6,725.70 606 263.9 0 97 0 7,692.60
2011 7,692.60 94.3 357.2 0 67 -3,198.70 5,012.40
2012 5,012.40 382.5 705.2 0 33.3 0 6,133.40
2013 6,133.40 701.1 1,177.90 0 29.6 -1,871.80 6,170.20
2014 6,170.20 671.6 1,843.30 0 24.5 -2,006.00 6,703.50
2015 6,703.50 487.4 1,252.70 0 31.4 -6.1 8,468.90
2016 8,468.90 255.237 879.431 0 110.77 0.7 9,715.07
2017 9,715.07 0 439.5* 0 125.5** 0 10,280.70

Note: * Based on FY2016 actual Data
** Based on 2015 Certification Revenue Estimate

Source: Texas Comptroller of Public Accounts