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Restructure the Rainy Day Fund for growth, better security

OTHER VOICES: Special to the Star-Telegram
by Glenn Hegar

May 16, 2017

I applaud the Star Telegram for highlighting an important bill making its way through the Legislature, House Bill 855, which passed the Texas House of Representatives unanimously on May 4. ("Don't make Rainy Day Fund unreachable," May 9 editorial)

The bill is a key first step toward giving my office the tools and flexibility it needs to manage the state's Economic Stabilization Fund (ESF), also known as the Rainy Day Fund, in a prudent and responsible manner.

The Star-Telegram rightly points out that the bill protects the ESF against corrosive inflation eating away at the purchasing power of the taxpayer dollars held within it.

HB 855 addresses the concerns I have raised about investing our funds wisely — rather than treating them no better than cash buried in a coffee can in the Capitol lawn — by establishing a two-tiered fund structure.

Tier 1, the Stabilization Fund, would be invested in low-risk strategies designed to keep up with inflation.

Tier 2, the Texas Legacy Fund, would be invested more aggressively and would produce significant long-term earnings.

This bill is only the first step in a larger effort I am putting forward to protect future generations of Texans and potentially prevent a costly downgrade in our state's credit ratings.

If the Senate acts quickly to pass HB 855 and implement the Texas Legacy Fund, it will lay the groundwork for the creation of a distribution fund designated to address long-term balance sheet issues facing our state.

Because these issues often don't require immediate attention, they are allowed to linger unaddressed, festering on the state's books.

By placing earnings from the Legacy Fund into this distribution account we can protect the ESF and create a mechanism to address long-term fiscal challenges.

Every year, when I present the state's financial position to investors and credit ratings agencies, I am asked about the status of issues like state debt, infrastructure needs and pension obligations.

Thus far we have been able to maintain our top ratings and keep Texas' debt service costs low, but recently these investors and entities have begun to voice concerns.

They've watched cities like Detroit and states like Illinois leave similar issues unaddressed for far too long and with serious consequences.

My proposal takes Texas off of that hazardous path and puts it back on the road toward lasting fiscal health and economic strength and stability.

Additionally, my office completed an analysis of potential growth in the fund and found that delaying passage could cost the state nearly $1 billion over the next two biennia.

Texans everywhere are right to demand a careful examination of my plan, and I welcome the opportunity to address the concerns of taxpayers and lawmakers alike.

To date, those concerns fall into two primary categories: exposing the Rainy Day Fund to excessive market risk; and endangering the necessary and prudent distribution of dollars earmarked for highway construction meant to maintain our state's transportation infrastructure.

HB 855 addresses both of these concerns.

First, by pegging the balance of the Stabilization Fund to a percentage of the General Revenue-Related (GR-R) budget, this plan reliably protects the state's savings account and ensures lawmakers will always have the funds necessary to weather future economic storms.

Investing this tier in low-risk strategies designed to keep pace with inflation will provide short-term liquidity if the state needs to access these dollars to address one-time funding shortfalls or emergency situations.

The Legacy Fund would be exposed to additional market volatility, but because it is designed to function as an endowment fund, short-term market fluctuations would not have lasting impact on the long-term growth of the endowment.

The endowment would provide security for future generations of Texans who might not be able to tap oil and gas severance taxes many decades from now when wells begin to run dry.

Finally, State Highway Fund transfers are not threatened under HB 855.

Rather, they are carefully protected by tying the transfer to the full fund — inclusive of both the sufficient balance and Texas Legacy tiers.

As long as the entire ESF balance equals or exceeds 7 percent of the GR-R budget, then the State Highway Fund will continue to receive severance tax transfers.

Furthermore, because the long-term gains in the market value of the fund will help ensure that the ESF balance is always greater than the sufficient balance, my plan actually provides stronger protections not only for the State Highway Fund transfer, but other future potential appropriations deemed necessary by lawmakers.

Glenn Hegar is Texas Comptroller of Public Accounts.