Protecting The ESF As An Endowment

A strong Texas needs a strong savings account.

In 1989, Texas voters approved a constitutional amendment creating the Economic Stabilization Fund (ESF), commonly referred to as the “rainy day” fund, “…to be used to offset unforeseen shortfalls in revenue.” After the oil bust in the early 1980s, Texans voted for the ESF to save money in the good times to soften the blow of hard times.


Van Taylor
Funded by energy taxes, the ESF has a very volatile revenue stream. In 10 of the last 23 years, the fund had less than $50 million flow into it. In the past 14 years, the comptroller’s estimates have been off by an average of 150 percent. Basically, we have only a vague idea what will go into this fund, if much at all.

Between 2008 and 2011, the legislature let the ESF grow so that, in 2011, we could be in a position to withdraw $3.2 billion to balance the budget that fell 4 percent short of revenue projections. The last time this happened and no rainy day fund existed, legislators proposed raising the state’s sales tax.

Over the past two years, the Texas economy has rebounded magnificently. Estimated state tax income has increased from $72.2 billion to $96.2 billion–a 33 percent increase from the last Biennial Revenue Estimate to this one. During this time of plenty, we should save our cash and prepare for lean times that will come.

Right now our savings account has $8 billion. While that seems like a lot of money, it is only 2 months of state spending. Further, to keep our credit rating, the rating agencies have indicated that we must set aside at least $7 billion for the next biennium. If in 2015 we have another 4 percent shortfall in revenue, we cannot both draw down the $4 billion we would need and keep our credit rating. Over the past decade revenue estimates have been off an average of 12 percent.

Clearly, with such an unpredictable revenue stream, we must have a strong ESF. Drawing down billions from the ESF weakens Texas’ financial health, hurts our credit and drains our flexibility.

Right now the ESF earns a mere 0.3 percent in interest income per year. If a bill working through the legislative process passes, we could increase the return to between 2.5 percent and 3.5 percent per year without giving up much liquidity. Consequently, we could constitutionally dedicate the investment income from the ESF to causes that need it.

Assuming that the ESF reaches $10 billion and earns 3 percent, that would mean $300 million a year in revenue. This could mean real and substantial income divided equally among transportation, water and education. For water in particular, it would mean a 174 percent increase in funding over the current proposed House budget.

Constitutionally dedicating a revenue stream out of the ESF would create constituencies that would have an interest in keeping the ESF full — something the ESF has never had. This would stabilize the fund and preserve it for the future, so that we can both keep our bond rating and the flexibility to respond to a revenue shortfall.

Van Taylor is a Republican member of the Texas House from Plano.

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