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Glenn Hegar: Let’s leverage Texas’ Rainy Day Fund for Greater Returns
March 31, 2015
Most of us learn about the mysteries of interest as young adults, when we’re beginning to earn a living, paying bills and making our first large purchases.
We usually set up a checking account and a savings account, for instance. We learn that the checking account provides convenient access to our money, and that a savings account, while it might limit that access, will pay interest. And eventually, we also learn that leaving too much money in checking rather than savings costs us interest and subjects our money to the slow erosion of inflation.
In other words, we learn about the tradeoff between liquidity — the availability of cash for immediate use — and earnings.
Today, our state leaders are being reminded of these basic lessons by the extraordinary growth of Texas’ Economic Stabilization Fund (ESF), often called the rainy day fund. The fund, created by Texas voters in 1988, puts aside a portion of our oil and gas tax revenues to help the state through rough economic patches, such as the 1986 downturn that inspired its creation. It’s intended to help the state cover expenses whenever tough times cause tax revenues to fall.
In recent years, the fund has grown beyond the wildest dreams of its creators. Until 2002, the balance never topped $200 million. Now, driven by the extraordinary rebirth of Texas energy production, it’s on track to hit $8.5 billion by the end of fiscal 2015, and $11 billion two years after that.
Today, most states have some form of a rainy day fund, but our fund dwarfs nearly all of them. Among the 10 most populous states with rainy day funds, Texas’ is the largest by far, with a balance almost as large as that of the other nine states combined.
Rainy day funds are a legitimate and useful tool of government finance, particularly in economic times as volatile as the present. They’re a way of ensuring that the many services the state provides to its most vulnerable citizens can continue without interruption. But even the architects of the original rainy day fund proposal say that they never intended or envisioned that it would become so huge.
As it was designed in law, the fund is structured for liquidity, with investments in vehicles such as U.S. Treasury securities, so the state can move the money quickly as needed to meet a financial shortfall or a disaster such as a major hurricane.
We pay a considerable price for that convenience. Recent fund investments have earned less than 1 percent annually. Given a current inflation rate of about 1.5 percent, that means we’re actually losing money — and not a small amount, either. It comes back to that question of liquidity vs. earnings.
If our investments had only matched the inflation rate in 2014, the state would have earned an additional $100 million.
In the current Texas legislative session, several lawmakers have introduced legislation that would allow the state greater flexibility to manage resources in such a way that would not only prevent the erosion of our resources, but also increase growth potential to cover at least part of inflationary costs. The bills achieve this in various ways, and I look forward to working with the Legislature as they debate these proposals.
I am encouraged to see the Legislature engaging in this conversation. It is important to note that I would never support putting our rainy day savings into high-risk investments, and I strongly believe the state should maintain a robust savings account. But we can and should manage at least a portion of these funds in ways that safely produce greater returns for Texas taxpayers, while keeping our essential services protected.
Like every adult, the state must find the right balance between the demands of liquidity and earnings.
I’m convinced we can do a better job of it.
Glenn Hegar is the Texas comptroller of public accounts. Reach him at glenn.hegar@cpa.texas.gov.