Lawmakers are wrestling once again with the question of how much Texas should squirrel away in its rainy day fund as they consider redirecting some of the tax dollars meant for the reserve to transportation needs.
Budget experts say political factors rather than financial considerations will dictate the final outcome.
“There is no right or wrong answer,” said Scott Pattison, executive director of the National Association of State Budget Officers. “The political system has to come down to a decision.”
It wasn’t until two years ago that the rainy day fund became this “religious object,” said Billy Hamilton, a former state deputy comptroller.
For years, legislators didn’t blink an eye at using the fund for everything from hurricane recovery to the creation of Gov. Rick Perry’s business recruitment fund. In 2005, it had only $6.9 million.
Beginning in 2007, billions started flowing into the fund as the oil and natural gas industry experienced a renaissance. New technologies have allowed energy companies to open up new areas for exploration while also reviving long-dormant wells in the oil patch.
The geology should support that same high levelof production for another 30 years, said James LeBas, a fiscal consultant for the oil and gas industry.
“It appears to be an ongoing source of revenue that’s not going to go away,” LeBas said.
Absent any spending, the rainy day fund is projected to have nearly $12 billion by the end of the upcoming two-year budget. Right now, it has about $8 billion.
On Monday, Perry opened up the limited agenda for the special legislative session to transportation funding. That breathed new life into a proposal from leading Republican senators who want to ask voters to split in half the amount of oil and gas production taxes that now goes into the rainy day fund so that an estimated $900 million a year would go into the state’s highway fund.
An equal amount would still flow into the rainy day fund, but its expected balance would be reduced to about $10 billion under this plan, which is set for a committee vote Friday. The full Senate will probably take it up early next week.
Lawmakers have also earmarked two chunks of potential spending that would total $3.75 billion. One piece, a $2 billion water infrastructure bank, must be authorized by voters while the other covers a deferral of school payments from 2011. It is pending approval by Perry.
All told, that is more spending from the rainy day fund than Perry has said is prudent but leaves about $1.25 billion more in reserve than the 5 percent of state spending — $5 billion — that many budget analysts recommend.
State Sen. Dan Patrick, R-Houston, cautioned that voters would not look kindly on legislators if they spent down too much of the rainy day fund, though he could not say how much would be too much.
“The general public has gotten to a point where they believe we need a certain amount in reserve,” Patrick said Wednesday as the Senate Finance Committee considered the plan. “The voters now understand the rainy day fund, and I think they want a minimum balance there to protect themselves, as well as the (state’s) credit rating.”
But Senate Finance Chairman Tommy Williams, R-The Woodlands, said setting a minimum balance could backfirewith regard to the state’s credit rating.
“It could actually harm the state’s fiscal standing by making it more difficult to get money out of the rainy day fund in the event that there is a shortfall,” Williams said at the committee hearing.
Texas’ credit rating is based on a lot more than the size of the rainy day fund, Hamilton said. Credit rating agencies examine the state’s overall economy, tax revenues, expenditures, pension funding and several other factors.
While it has become gospel that the state’s credit rating hinges upon a hefty reserve fund, the state’s past experience does not completely bear that out.
In 2009, Texas received an upgrade from one of the three major ratings agencies based on the state’s diversified economy and its projected $9 billion in the rainy day fund.
But the state’s Bond Review Board noted that the bump had little effect on Texas’ borrowing costs because it had long been highly rated by the other two agencies, which had given Texas the same top grades even in 2005 when there was only $6.9 million in the rainy day fund.