Rainy Day Fund [ ESF ]

The Rainy Day Fund [ Economic Stabilization Fund ]

Texas Economic and Stabilization Fund – Texas Comptroller of Public Accounts

Background:
The Economic Stabilization Fund (ESF) — commonly called the “Rainy Day Fund” — was created by the passage of an amendment to the Texas Constitution in November 1988. The ESF is established in Article III, Section 49-g of the Constitution and became effective on Sept. 1, 1989 Section 49-g spells out:

  • Revenue sources deposited to the ESF
  • Requirements for making appropriations from the ESF

In November 2014, a constitutional amendment was passed allocating at least one-half of certain severance taxes to the ESF and the remainder to the State Highway Fund. Statute provided that the Legislature must establish a sufficient balance in the ESF. Depending on the amount established compared to the balance at the time of transfer, more than half of the allocated severance taxes could be moved to the ESF in order to maintain the sufficient balance.

How the ESF is funded:

  • An amount from General Revenue (GR) equal to one-half of 75 percent of Oil Production and Natural Gas Production tax revenues in any fiscal year that exceeds fiscal 1987 collections, exclusive of legislative action altering that amount, with the remainder going to the State Highway Fund. These taxes are also referred to collectively as “severance” taxes.
  • One-half of any unencumbered GR surplus at the end of each biennium. Unencumbered GR is net of the amount of any tax allocations yet to be made, state agency encumbrances, accounts payable and payroll accruals, dedicated account balances and any required transfers to the ESF.
  • All of the interest earned on the ESF balance.
  • Direct appropriations to the ESF by the Legislature. Through fiscal 2014, no direct appropriations to the ESF have been made.

Problem:

Texas Constitution

  • 49-g (k) An appropriation from the economic stabilization fund must be approved by a three-fifths vote of the members present in each house of the legislature.
  • 49-g (m) In addition to the appropriation authority provided by Subsections (k) and (l) of this section, 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.
  • 49-g (g) During each fiscal biennium, the amount in the economic stabilization fund may not exceed an amount equal to 10 percent of the total amount, excluding investment income, interest income, and amounts borrowed from special funds, deposited in general revenue during the preceding biennium.

Solutions:

  • Raise the General Revenue Cap from 10% to 20%. The 10% cap has a negative impact on creating private sector jobs, providing public safety, building infrastructure and increases the need for a state income tax.
  • Amend Texas constitution to only require a simple majority for appropriation in each house. Currently 10 states including Texas require a super majority.
  • Feasibility study for a constitutional amendment requiring 3% of every budget be placed into the Rainy Day Fund. The most common contribution rule — used in 27 out of 46 states with a rainy day fund — is that a portion of the state’s year-end surplus may be placed in the rainy day fund. This rule has the advantage of ensuring that that the deposited funds are truly surplus and that the state does not need them for some other purpose. The disadvantage is that the rainy day fund is last in line for receiving state resources.

 

Texas Constitution
Code – Texas Constitution
Article 3 – Legislative Department
Section – 49.g Economic Stabilization Fund

 

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