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January/February 2011

DECEMBER REVENUE (in millions): SALES TAX: $1,813.6 OIL PRODUCTION: $105.2 NATURAL GAS: $93.3 MOTOR FUELS: $265.3 MOTOR VEHICLE SALES: $224.1 TOBACCO: $117.5

Rainy Day Fund 101 - A Look at the Basics

Texas’ rainy day fund is generated largely by oil and gas production taxes.

Rainy Day Fund 101 - A Look at the Basics

By Gerard MacCrossan

Don’t spend more than you have — that’s wise financial advice for anyone, but it’s a budgeting rule that Texas state government can’t break.

Right now, Texas lawmakers are grappling with the next state budget, for 2012 and 2013. They will consider how to spend revenues available from various taxes, fees and, perhaps, the Economic Stabilization Fund (ESF), Texas’ so-called rainy day fund.

This fund may provide some good news in tight budgetary times, as our state attempts to provide ever more-expensive services to a growing population. But the ESF isn’t a cure-all.

Rainy Day Fund 101

The 2011 Legislature has nearly —

8.2 billion dollars

available in the Rainy Day Fund


Texas’ Plus Alaska’s Rainy day Funds Exceed all other states Combined




Votes Needed to Access ESF

three fifths

of Legislative Votes Needed to close a deficit Caused by a Revenue Decline

two thirds

of Legislative Votes Needed for other Appropriations


States with Rainy Day Funds that have Balances of at least 15 percent of fiscal 2011 Budgeted Expenditures

State%notused
West Virginia15%
Texas18.2%
North Dakota19.6%
Wyoming28.1%
Alaska237%

Source: National Association of State Budget Officers

Be Prepared

Forty-eight U.S. states have some kind of rainy day fund, according to the National Association of State Budget Officers (NASBO). NASBO also reports that two states — Texas and Alaska — have rainy day fund balances exceeding those of all other states combined.

In November, “we transferred another $451.5 million into the ESF,” says the Comptroller’s Chief Revenue Estimator John Heleman.

That increased the Texas rainy day fund to about $8.2 billion, the highest balance since the fund’s establishment in 1988.

Unusually among the states, Texas’ rainy day fund is generated largely by oil and gas production taxes. Appropriations from the fund to close a budget deficit caused by declining revenues require three-fifths approval by legislators; all other appropriations would require a two-thirds majority vote.

7.2 billion dollars

Natural gas taxes have contributed almost $7.2 billion to the rainy day fund.

Putting Something Away

The ESF was born at a time when the state’s 1986 economic slump was still fresh in mind. Texas voters approved a constitutional amendment creating the fund in the November 1988 general election.

The ESF receives most of its funding based on a formula involving the base year of 1987. If the state’s annual oil and/or gas production tax collections exceed those collected in fiscal 1987, 75 percent of the amount above that level is transferred into the fund. The Comptroller’s office typically makes these transfers in November of each year.

“Natural gas tax and oil production tax revenue transfers were made in 17 of the last 22 years,” says Mark Bures, a Comptroller fiscal analyst. “Oil production tax revenue has been transferred in seven of the last 22 years.”

The rainy day fund also receives half of any “unencumbered” general revenue — that is, unspent and not reserved for a specific purpose — left at the end of each biennium. The fund also retains interest earned on its fund balance. The Legislature also may make direct appropriations to the fund, but has never done so.

The ESF received its first funds in 1990, with a transfer of $18.5 million. Deposits and withdrawals directed by the Legislature usually kept the ESF balance below $100 million until 2001.

In 2002, however, ESF deposits and interest exceeded $700 million, pushing the fund’s balance above $900 million — a definite plus for the 2003 Legislature, which was grappling with a $10 billion budget gap. In that session, the Legislature appropriated virtually all of the fund’s revenues.

The 2003 and 2005 Legislatures appropriated ESF funds to purposes including the Teacher Retirement System, state health and human services, the Governor’s Office and the Texas Education Agency.

Something for a Rainy Day

Texas’ Economic Stabilization Fund has been a valuable tool for state budget crunchers over the years. At the beginning of the 2011 legislative session, the fund contained nearly $8.2 billion.

Economic Stabilization Fund History (in millions)
Fiscal YearDepositsInterestNet Transfers/
Expenditures
Ending Balance
1990$18.5$0.8-$19.3
1991$7.8$1.9-$29.0-
1992$156.6$6.8-$163.4
1993-$7.4-$119.0$51.7
1994$31.0$3.0-$56.6$29.1
1995-$0.6-$21.5$8.1
1996-$0.4-$0.5$8.0
1997-$0.4-$8.5
1998$47.5$2.3-$ 58.3
1999$17.9$3.8-$ 80.0
2000-$4.7-$ 84.7
2001$103.1$8.7-$ 196.5
2002$685.8$21.6-$ 903.9
2003$83.6$19.4-$446.5$560.5
2004$352.6$5.5-$553.0$365.6
2005$594.5$17.3-$970.5$6.9
2006$905.0$21.5-$528.3$405.2
2007$1,551.9$65.8-$691.5$1,331.4
2008$2,978.5$136.0-$90.5$4,355.4
2009$2,241.9$128.8-$0.4$6,725.7
2010$869.9$97.0$ 7,692.6
2011$451.5$26.5*
Total$11,097.7$580.2-$3,507.4$8,170.6

* Estimated interest income for the first four months of fiscal 2010 (September, October, November and December).

Source: Texas Comptroller of Public Accounts

Bountiful Years

The ESF grew rapidly in the last decade, although revenues slowed when oil and gas prices plunged in 2008.

This growth was due largely to substantial increases in collections from the state’s natural gas tax. Over the years, natural gas taxes have contributed almost $7.3 billion to the rainy day fund. Oil tax transfers accounted for $2 billion and unencumbered balances transferred in 1992 and 2008 added another $1.8 billion.

Most other states rely on appropriations and surpluses to fill their rainy day funds. These funds generally are equal to only a few percent of their annual expenditures. According to NASBO’s fiscal survey, only five states have rainy day funds with balances equal to at least 15 percent of fiscal 2011 budgeted expenditures — West Virginia (15 percent), Texas (18.2 percent), North Dakota (19.6 percent), Wyoming (28.1 percent) and Alaska (237 percent).

The fund certainly has performed as designed — when times are good, the fund grows.

But no one can predict with certainty how much the fund will receive from energy taxes over time, given the continuing volatility of these markets.

Is it Raining Yet?

Will the lingering effects of the recession force Texas to dip into the fund? That answer, of course, will come from the 2011 Legislature.

According to NASBO, 19 states tapped their funds in fiscal 2010. Texas wasn’t one of them.

But it’s up to the lawmakers who write the state’s budget to decide if they’ll use those savings and appropriate the money they’ve been setting aside for a rainy day. FN

The National Association of State Budget Officers’ Fiscal Survey of States 2010 examines the fiscal situation facing Texas and other states, including rainy day fund projections for fiscal 2011.

NATURAL GAS FUELS RAINY DAY FUND

Much of the recent growth in Texas’ Economic Stabilization Fund is due to sharp increases in the price of natural gas, which drove up contributions from the state’s natural gas production tax.

Source: U.S. Energy Information Administration

NATURAL GAS FUELS RAINY DAY FUND U.S. NATURAL GAS WELL HEAD PRICE

(DOLLARS PER THOUSAND CUBIC FEET)

data in following table
U.S. Natural Gas Wellhead Price
(Dollars per Thousand Cubic Feet)
Year Dollars per
Thousand Cubic Feet
1995 $1.55
1996 $2.17
1997 $2.32
1998 $1.96
1999 $2.19
2000 $3.68
2001 $4.00
2002 $2.95
2003 $4.88
2004 $5.46
2005 $7.33
2006 $6.39
2007 $6.25
2008 $7.97
2009 $3.67
2010 $4.16
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