With state leaders sitting on a savings account that could soon surpass $10 billion, Texas Comptroller Glenn Hegar is urging lawmakers to consider allowing his office to invest a portion of the rainy-day fund more aggressively — but also potentially taking on a greater risk of loss.
“We have the most conservative strategy right now, and the question is should we move that slightly,” Hegar said during a speech this week at the Bond Buyer’s Texas Public Finance Conference in Austin. “If we’re going to have large dollars in our rainy-day fund, then we need to take a much more prudent look at … investing to make sure that the taxpayer ultimately is getting a return on their investment.”
While Hegar’s proposal already has the support of some lawmakers, it is also certain to draw concerns about whether it jeopardizes the future of a fund that is often described as one reserved for emergencies.
Before 2007, the rainy-day fund’s balance had never topped $1 billion. Fed almost entirely by oil and gas production taxes, its balance has soared amid a drilling boom in South and West Texas. The fund holds more than $8 billion, and even with concerns about lower oil prices, it is projected to grow to $11.1 billion by 2017 — if lawmakers choose not to use any of it this legislative session.
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While stressing the importance of maintaining a strong savings account, Hegar said the fund’s balance has grown large enough that not all of it is needed immediately in case of some unforeseen calamity. Some of the fund could be placed in investments that would draw a better rate of return.
“The Legislature needs to have that healthy discussion of what is that cash we need to have on hand if, God forbid, we have another significant hurricane or whatever disaster that hits Texas,” Hegar said.
Tapping the fund requires a vote of two-thirds of the members present in the House and Senate. Over the years, the fund has been used for a wide range of expenditures including covering the costs of natural disasters and supporting a revolving loan fund for water infrastructure projects. Lawmakers have filed bills this session to tap some of the fund to pay for healthcare for veterans and salary increases for teachers.
When the fund was created in 1988 by a voter-approved constitutional amendment, the ballot language described it as “an economic stabilization fund in the state treasury to be used to offset unforeseen shortfalls in revenue.” As the fund’s balance has grown, some have argued that the fund’s purpose has changed. During the 2013 legislative session, Gov. Rick Perry said the fund needed to maintain a healthy balance in perpetuity to protect the state’s high credit rating.
The Texas comptroller invests the fund in assets that prioritize liquidity over high returns, such as U.S. Treasury securities. In recent years, that’s drawn returns of less than 1 percent, or $24.5 million in interest in 2014, according to state records.
In 2013, a bipartisan group of lawmakers proposed a bill to give the comptroller more leeway in how to invest some of the funds. Supporters said that targeting a 5 percent return for a portion of the funds could yield $900 million over the next biennium. Critics argued that such a strategy amounted to gambling with the state’s savings, noting that an event like the 2008 market crash could impact investments that might have been viewed as relatively safe beforehand.
The bill passed the House but did not draw a vote in the Senate. State Sen. Van Taylor, R-Plano, who was a co-author of the bill last session while in the House, has filed a similar bill this session in the Senate. State Rep. Giovanni Capriglione, R-Southlake, filed a companion measure in the House.
Taylor said his bill would allow the comptroller to invest some of the fund’s balance in “high-grade bonds” and other investments over a “several-year time horizon.” The wording in his bill would mandate presently keeping about $4 billion of the fund liquid, and a larger amount liquid in the future as the budget grows, he said.
“Right now we’re leaving hundreds of millions of dollars on the table, and I don’t know how you rationalize that that makes sense,” Taylor said.
Asked about such a proposal last week, House Appropriations Chairman John Otto said he had some initial concerns about the mechanics.
“The rainy-day fund every two years is subject to call by the Legislature to appropriate that money,” Otto asked. “So how do you invest that money long term that may be called in the short term? If that money is invested long term, you could take a loss coming out of the market in order to be liquid.”
Taylor argued the way the fund has been used in the past suggests lawmakers would never need access to the entire fund immediately.
“The requirement that it be ready in a day is not consistent with how it’s been used,” Taylor said. “I can’t come up with a scenario where you have a massive one-day withdrawal.”