Editor's note: This story has been updated with additional information about Texas' rainy day fund.
As Texas’ savings account swelled to a record high of $12.5 billion this week, a group of state lawmakers on Friday unanimously agreed that the state should leave more than half of it untouched over the next three years.
The joint Economic Stabilization Fund Balance Select Committee voted to keep the rainy day fund’s minimum balance unchanged at $7.5 billion — the same figure they chose in 2016, ahead of their last legislative session.
The unanimous decision by the panel means that stewards of the fund can invest more money in higher-return investments, as they hope to keep it growing at a rate that is at least equal to inflation. If lawmakers had chosen to raise the account's minimum balance, it would have required more money to remain available for emergency spending, thus limiting investment potential.
The question on lawmakers’ minds Friday was whether leaving the minimum balance unchanged could affect the state’s credit rating; State officials told them that ratings agencies like to see states have a healthy amount of cash on-hand for emergencies.
"This sufficient balance will ensure the maximum transfer of resources to transportation and allow a greater return on our investment for a significant portion of the rainy day fund," state Sen. Jane Nelson, a Flower Mound Republican who co-chairs the committee, said in a statement. "It also protects our credit rating by demonstrating Texas' commitment to keeping sufficient reserves on hand to address financial challenges.
Lawmakers are preparing for a legislative session that begins in January in which the billions in the rainy day fund could potentially play a role in discussions on two major issues – overhauling the way the state and local governments fund public education, and putting together a state aid package for coastal communities still recovering from Hurricane Harvey.
Another effect of Friday’s decision is that lawmakers in 2019 can withdraw a larger amount from the fund without jeopardizing revenue for state highways.
Before 2014, most of the state’s taxes on oil and gas production went into the rainy day fund. Then Texas voters approved a plan to divert some of that tax revenue to the State Highway Fund. Friday's vote maintains the status quo, in which those automatic transfers would stop going to the state highway fund if the savings account dips below the established minimum balance ($7.5 billion). So long as there is more money in the account than that, oil and gas revenue will be split between highways and the state's savings account.
Earlier this week, Texas Comptroller Glenn Hegar announced he had transferred $1.4 billion into the rainy day fund, raising its current balance to $12.5 billion, a record high. (Phillip Ashley, an associate deputy comptroller, told lawmakers on Friday that the fund balance will fall to $11.8 billion next year as state agencies spend money on projects the Texas Legislature approved in 2017.)
Hegar has said that credit ratings agencies would like to see Texas invest more of the fund — the largest of its kind in the country — to improve the state’s long-term fiscal health, rather than letting the money depreciate.
“It is crucial that Texas use this amazing asset to maintain our strong fiscal position and our state’s AAA credit rating,” Hegar said in a Thursday statement. “That's why I have asked the Legislature to authorize me to invest a portion of the fund in a more prudent and responsible manner and use the returns to address the types of long-term liabilities that have crippled the finances of states such as Illinois and New Jersey.”
In the past, lawmakers have made hefty withdrawals from the rainy day fund, which was created in the 1980s during an oil downturn, without affecting the state’s credit rating. A representative of the Comptroller's office told lawmakers Friday that the fund’s balance is only one of many indicators credit agencies use to determine their ratings. Texas currently has a AAA rating, the highest possible.
A proposal to allow the comptroller to invest a larger portion of the fund failed during the 2017 legislative session. Backed by Hegar, the bill would have created an endowment within the rainy day fund that supporters said could boost the state's savings by billions in coming decades.
Nelson said Friday she would pursue legislation in 2019 that would increase the fund’s investment potential and end the role of the joint committee she co-chairs.