Conservatives in the Legislature opposed to tapping the state’s rainy day fund to make ends meet in a tight budget have argued that a high balance in the savings account is necessary to protect Texas’ sterling credit ratings.
But for Comptroller Glenn Hegar, the biggest threat to the state’s credit is a $33.5 billion and growing liability to the two major state pension systems – and the best way to solve that problem down the road might be to use money from the rainy day fund, which is the largest of its kind in the country.
“Long-term balance sheet issues don’t need to be resolved today, and ironically that’s one of the reasons they tend to get pushed a little bit further and a little bit further,” said Hegar, adding that as the “CFO of Texas” it’s his responsibility to sound the alarm about the growing pension problem.
As lawmakers jostle over whether to tap the rainy day fund this year, Hegar is pitching an ambitious restructuring of the fund that could change the debate in future years.
Hegar’s plan, which would require legislative action, is to create two tiers for the $10.2 billion fund, which gets its money from oil and gas production taxes. The first tier would be a low-risk, low-return savings account that is equal to 8 percent of the state budget. Anything above that amount would go into the second tier, a more aggressively invested fund that functions less like a savings account that lawmakers can use in a squeeze and more like an endowment that spins off earnings on an annual basis to chip away at the state’s long-term problems.
“We have an Economic Stabilization Fund that now ranks as the largest in the nation, and we’re very blessed to have that resource, but you have to question: Do we want to have it just sitting in the treasury pool?” Hegar said, using the formal name of the rainy day fund.
Meanwhile, Hegar, a Republican from Katy who served in the state House and Senate before winning his statewide office in 2014, has found himself caught in the middle of a dispute between his former colleagues in each chamber.
The House budget, adopted in a 131-16 vote two weeks ago, would take $2.5 billion from the rainy day fund to pay for the state’s border security initiative, pay down a shortfall in the retired teacher health care program and improve state assisted-living facilities and state hospitals, among other programs.
The Senate, dominated by conservatives who increasingly view the rainy day fund as sacrosanct, unanimously approved a plan that instead would rely on an accounting maneuver to delay a $2.5 billion payment to the state highway fund to the next budget cycle.
House Speaker Joe Straus, R-San Antonio, and Lt. Gov. Dan Patrick, who leads the Senate, have criticized each other’s plans — and both have looked to Hegar for ammunition for their arguments.
Hegar has helped both sides to an extent — ensuring lawmakers that there is more than enough money in the rainy day fund to withdraw from it without hurting the state’s credit; and suggesting the Senate’s transportation deferral might not be unconstitutional, as House leaders have said — but he would rather be talking about his grander plan, which he calls the Texas Legacy Fund.
“Those are their decisions. My job is to set forth all the options that are available and to come out with a budget that certifies and one that maintains a healthy balance of dealing with the credit rating issues,” he said.
The three major credit agencies have downgraded their ratings for 13 states over the past three years. For about half of them, the stated reason was their growing pension liabilities. For the others, it was an overreliance on funding tied to natural resources such as oil, gas and coal. For Alaska, it was both.
While Hegar said Texas’ top marks from the agencies are not in jeopardy in the immediate future, the Lone Star State is susceptible to problems caused by both of those issues, and the agencies have been warning state leaders to tackle them.
In 2002, the Employees Retirement System for state workers was slightly more than 100 percent funded, meaning its revenue streams and the money already in the fund were projected to be enough to cover its obligations to current and future retirees. Last year, the plan was only 75.2 percent funded. The second-biggest plan, the Teacher Retirement System, was 79.7 percent funded.
Last decade’s recession, which decimated investment portfolios around the globe, was a major reason for the decline, but the Employees Retirement System funding ratio has been steadily worsening since the early 2000s due to erratic state contribution levels and changes to assumptions about the fund’s future performance.
In the 2015 legislative session, when state coffers were flush thanks to an oil and gas boom, lawmakers made a significant cut in the Employees Retirement System deficit by increasing state and employee contribution levels and adopting across-the-board raises for state workers. The budget proposals this year do not tackle pension reform.
In an October 2016 report on Texas’ credit, S&P Global Ratings said that state leaders need to do more to safeguard Texas’ AAA rating.
“The rating could come under pressure if a downturn (occurred) in the energy sector … if state officials fail to adopt timely corrective actions to address potential future budget gaps, or if unfunded pension liabilities rise to unsustainable levels as a result of contributions falling below the actuarially determined annual required contribution,” the report said.