Perry's Rainy Day Policy Fueled by Credit Ratings

With a Rainy Day Fund projected to grow to a record $12 billion, Texas lawmakers are debating how to strike the proper balance between maintaining a sensible savings account and funding needed services like water infrastructure and new roads.

While most are talking about the issue in broad terms, Gov. Rick Perry is relying on an unusually specific figure: 7.5 percent.

That’s the portion of general revenue that Perry believes Texas needs in its Rainy Day Fund to maintain the state’s favorable bond ratings so it can continue borrowing money cheaply.

“We need to maintain an appropriate amount that will maintain our credit rating and keep us prepared for a major natural disaster,” Perry said in a tele-town hall hosted by Empower Texans earlier this month.

In a budget plan he released in January, he provided more detail.

“I believe maintaining a balance of no less than 7.5 percent of general revenue appropriations, or just over $6.9 billion … achieves the goal of a strong [Rainy Day Fund] and protects its strength for future generations,” Perry wrote. General revenue is the portion of the budget that state lawmakers have the most control over and usually makes up about half of the budget.

But not everyone puts stock in those figures — including Texas Comptroller Susan Combs.

“I have never heard there is a specific percentage of the fund which should be maintained,” Combs told The Texas Tribune on Tuesday. “I have tried several times to see if the New York rating agencies have such a number, and they do not. Instead, clearly there has to be a balance between maintaining a healthy amount in the fund for unexpected and unforeseen events and using the funds in a prudent manner for things such as infrastructure, water, etc. This is decided by the Legislature.”

Fed by production taxes on oil and gas activity, the Rainy Day Fund has just over $8 billion in it and is projected to grow to $11.8 billion by the end of the 2014-2015 biennium. It was created in 1987 with the goal of helping lawmakers address revenue shortfalls.

In recent years, states have looked more closely at the relationship between their savings accounts and their credit ratings: The better the rating, the lower the interest rate and the cheaper the debt. Texas enjoys among the highest credit ratings in the country. Perry’s concern about maintaining those ratings is what led to the specific 7.5 percent threshold, according to several people involved in the discussions.

A governor's office spokesman said that Perry has supported that threshold for several years. Yet it has drawn far more attention this session and is coloring the debate over how much lawmakers should leave in the fund.

Representatives with two of the main rating agencies, Standard & Poor’s and Moody’s Investors Service, said they look at all aspects of a state’s financial situation and its economy in setting their ratings.

"We don't have any specific ratios in our methodology,” Moody’s spokesman David Jacobson said.

Ehud Ronn, a finance professor with the McCombs School of Business at the University of Texas at Austin, said Perry’s 7.5 percent ratio may be a good “rule of thumb” but ignores how ratings agencies actually work. The level of savings a state needs to maintain a particular rating varies depending on a state’s unique characteristics and what’s going on in the rest of the world, he said.

“When the economy is stronger, we can sustain a higher level of indebtedness for a given ratings category,” Ronn said.

Perry’s metric is meeting resistance in the Legislature, as lawmakers weigh how much funding to put toward three major issues: water infrastructure, transportation projects and reversing 2011 cuts to public education. Late Tuesday, the Senate unanimously approved a package spending $5.7 billion from the Rainy Day Fund, which would leave the fund at just over $6 billion by 2015, based on current projections.

House Appropriations Chairman Jim Pitts, R-Waxahachie, said he believes keeping $5 billion to $7 billion in the fund is prudent.

“I think taking it down to much lower than that is something we probably shouldn’t do,” he said.

State Rep. Van Taylor, R-Plano, is among a group of lawmakers encouraging the Legislature to leave the Rainy Day Fund untouched this session and allow it to grow. Perry’s metric, he said, isn’t high enough if lawmakers want to both maintain the state’s bond ratings and ensure the state is prepared for the next revenue crisis.

“It’s a good minimum to keep your bond rating,” Taylor said. “It’s not a good minimum if you want to keep your bond rating and have flexibility.”