Nov. 30–Updated at 2:09 p.m.: To include Bettencourt’s comments on surging oil production.
AUSTIN — Amid uncertainty over the price tag of fixes for school finance, school security and Hurricane Harvey, a group of key lawmakers decided Friday to preserve as many options as possible on the use and investment of a record amount of state savings next year.
A bipartisan, House-Senate panel voted to maintain the same “sufficient balance” in the rainy day fund — $7.5 billion — as lawmakers did two years ago.
The effect will be to allow more rainy-day dollars to be invested more aggressively, which would maintain more of the money’s purchasing power, while lawmakers debate how to use the fund and the energy-production taxes that flow into it.
The rainy day fund is a fiscal cushion created by voters after the oil shocks of the 1980s to help counter the budget cuts and tax increases that were required when the state economy suffered. The fund’s main income is a big chunk of oil and natural gas production taxes, above what was collected in 1987.
For most of its history it contained less than $1 billion. Politicians as conservative as former Gov. Rick Perry were happy to deplete it. But even after recent diversions of energy taxes to help pay for highways, the fund’s balance is in the neighborhood of $12 billion.
Fracking techniques and a resurgence of Texas energy production, starting in the mid-2000s, dramatically swelled the fund, even as the tea party’s rise nine years ago made use of it very controversial.
Eager to assuage the tea party and keep Texas’AAA-bond ratings, state GOP leaders have kept a very large fund balance, even as they diverted some of the fund’s income to help them ease traffic congestion in the state’s fast-growing cities. That pleased both Wall Street and the state GOP’s most staunchly conservative activists.
But there are pent-up demands for spending — especially on public schools — even as tax increases remain off the table. That makes the fund and its sources of income attractive.
GOP leaders divided on plans
In the run-up to the 2019 session, not surprisingly, cracks in the GOP leadership have begun to appear when it comes to what to do with a record-setting bulge in the fund, formally called the Economic Stabilization Fund.
Comptroller Glenn Hegar has a proposal to treat most of the pool as a “legacy fund” that is invested more aggressively and used to help ease long-term problems such as pension solvency and insufficient infrastructure.
But other Republicans are wondering if it — or at least some of the energy tax money that feeds it — can assist with more immediate concerns.
Houston GOP Sen. Paul Bettencourt, who is close to Lt. Gov. Dan Patrick, floated the idea this week of changing the flow of energy-production tax dollars to help reduce local school property taxes and modernize the state’s obsolete system of funding public schools.
Bettencourt offered few details. But any change to how severance tax dollars flow probably would reduce the rainy day fund’s receipts.
The proposal sparked resistance from Hegar, who noted the volatility of the energy-production taxes makes them a poor choice for covering costs of ongoing programs.
At a meeting of the state school finance commission later Friday, Bettencourt defended his proposal. He noted several new pipelines are being built to export oil from the Permian Basin near Midland to ports along the Texas Gulf Coast.
“Oh yes, oil fluctuates up and down frequently” in price, he said. “But when the production increases, that’s an enormous change.”
Senate Finance Committee Chairwoman Jane Nelson, R-Flower Mound, noted Friday at the bipartisan panel’s meeting that she has prefiled a bill that would create a legacy fund along the lines of what Hegar has recommended.
The rainy day fund should have more than $11.8 billion at the end of the current two-year cycle, next Aug. 31, Hegar has said.
“No one believes this much money should be sitting in the treasury pool earning less than the rate of inflation,” Nelson said in a written statement.
“We should leverage these funds wisely and maximize investment income while ensuring there are sufficient reserves on hand,” she said. “We must also ensure that future legislatures have the flexibility to access our savings account in the event of an emergency or financial crisis.”
Setting the balance
Nelson and Houston GOP Rep. Sarah Davis are the co-chairwomen of the panel that met Friday, called the Select Committee to Determine a Sufficient Balance of the Economic Stabilization Fund.
When it first met four years ago, it decided $7 billion was the sufficient balance. Going into the 2017 legislative session, it upped the amount to $7.5 billion. Before Friday’s meeting, the plan was to step the figure up to $8 billion, Nelson and Davis confirmed.
But House members objected, saying that would just leave more funds earning less than inflation. Senators agreed to Davis’ motion to leave the amount at $7.5 billion.
Nelson stressed that the balance “is not a floor” because lawmakers next year, in the first 45 days of the session, can adjust the number.
Picking the number does two things: The amount over $7.5 billion can be invested more aggressively. And if lawmakers tap the fund so heavily that the balance dips below $7.5 billion, the transfers of energy-tax money to the road fund shut off, at least temporarily, until the savings account is replenished.
The panel and the sufficient balance were created under a constitutional amendment that voters approved in 2014. The amendment diverts half of the energy-production tax money to highways instead of adding it to the rainy day fund.
Funds in the sufficient balance are kept “very liquid” in U.S.Treasury notes and other high-grade government and corporate securities so that the money is available at any time, said Phillip Ashley, deputy associate comptroller for fiscal affairs.
Money above the balance is invested, “not aggressively” but with “a little more flexibility,” Ashley said.
Since September 2015, when a new law required an “investment fund” within the rainy day fund, the comptroller’s office has earned an additional $70 million above what those “above-balance” funds would have earned if parked in Treasury notes and other super-safe securities, Ashley said.
The session begins Jan. 8.
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