AUSTIN -- Credit rating agencies have warned Texas: If the state doesn't tackle its expensive obligations to pension systems and funding problems with public education, transportation and health care, it shouldn't be surprised to see its credit downgraded.
That was the alarm Comptroller Glenn Hegar sounded at a Senate Finance Committee hearing Tuesday, where he proposed changing the state's rainy day fund to create a revenue stream for some of the state's most persistent long-term funding needs.
"I am actually very concerned ... that in the very near future, if we don’t find creative ways to address these very real pressure issues, Texas can be downgraded," Hegar said. "I want to make sure we avoid that because that is a black eye on Texas."
If the state's credit rating were to take a hit, it would cost Texas more to borrow money, which means less money would flow to the state's budget and economy.
The Texas Economic Stabilization Fund, commonly known as the rainy day fund, has about $11 billion. The account is largely funded by the state's tax on oil and natural gas production, an industry that has boomed in recent years but leaves the state open to swings in its market.
About $7.5 billion of the fund's money is in the state's Treasury Pool, which is readily available to lawmakers in case of an emergency and gathers some interest, though not enough to cover inflation. The remaining money — about $3.2 billion — is in an investment fund, which Hegar created in 2015 to allow a greater rate of return and cover some of the inflation increases.
Since then, he said, the investment fund has netted $85 million for the state — money it would not have accrued if it had remained in the Treasury Pool.
Now, Hegar is trying to do something similar with the rest of the money. Under his proposal outlined Tuesday, the bulk of the $7.5 billion in the rainy day fund would be placed in the investment fund to cover the rate of inflation. The rest would be invested in the new Texas Legacy Fund, an endowment-type fund which would have a more aggressive rate of growth.
Hegar's proposal
The rainy day fund has a "sufficient balance" threshold of $7.5 billion, a number that a committee of lawmakers sets in the fall before the beginning of a legislative session. Half of the remaining money goes to the State Highway Fund, which pays for public transportation infrastructure, and the other half to the rainy day fund.
Under Hegar's proposal, the Texas Legacy Fund would only be funded if there was enough money in the rainy day fund to meet the "sufficient balance" threshold. Then, half the money would go to the State Highway Fund and the rest would go to the Texas Legacy Fund.
The earnings from the Legacy Fund would then be available to pay for the state's long-term obligations, such as pension systems, education, transportation and health care, Hegar said.
Hegar has made this pitch before. In 2015, he asked lawmakers to let him invest the $7.5 billion in the Treasury Pool, but the bill did not pass. Had he received that authority, the comptroller's office estimates that money would have generated an additional $128 million during the current biennium and an additional $825 million over 10 years. After 20 years, the return would total $2.9 billion.
"Every two years that we wait, is two years that we don't have," Hegar said, reminding lawmakers of the credit rating agency's warnings.
Senators express doubts
But not all were convinced.
Senators including Kel Seliger, R- Amarillo, and Juan "Chuy" Hinojosa, D-McAllen, voiced skepticism of Hegar's plan and asked him to explain what he meant when saying the state had "weak funding practices" and a "structural imbalance" in the budget.
Hegar, perhaps wanting to avoid politically fraught discussions, pointed to the state pension system and added: "How much money you want to put in health care, education, transportation? Those are policy issues."
Sen. Charles Schwertner, R- Georgetown, and Paul Bettencourt, R-Houston, challenged the fiscal soundness of the proposal. Schwertner said the idea was a good one in theory, but it presented some issues when he reviewed it last session.
Investing all the money placed the state's rainy day fund at the whims of the market, Schwertner said, creating the possibility of losing public money.
Bettencourt added that once the money was invested, it would be more difficult to access in case of an emergency, especially the funds tied up in the Texas Legacy Fund, which would be more complex and require an advisory board to oversee its handling. With an all-but-guaranteed withdrawal coming in the next legislative session to help with Hurricane Harvey recovery, Bettencourt questioned how prudent that seemed.
Hegar acknowledged that the money wouldn't be immediately available once it is in a fund.
"That’s the truthful answer, so that’s what I wanted everybody to hear," Bettencourt said.
Still, Hegar said the proposal was a good option. Though the money in the Legacy Fund would be blocked, and intended to stay that way to generate revenue, the money in the investment fund would be available, though not immediately.
"It’s highly unlikely you'll need to draw a check for $7.5 billion," said Paul Ballard, chief executive and chief investment officer for the Texas Treasury Safekeeping Trust, which is under the comptroller's office. "So you'd see that train coming. If there was need, we could begin unwinding investments. I wouldn’t call them liquid, but we could plan for that."
Comptroller officials also tried to reassure lawmakers that the money would be safely invested, pointing out that Ballard oversees $60 billion in assets at the office's Trust Company. Though markets would rise and fall, Ballard said, they tend toward an upward slope.
"That's the cost of doing business," he said. "Our approach to investing is very defense-focused."
Several other committee members said they liked the idea but wanted to work out some of the details. Sen. Robert Nichols, R-Jacksonville, said he would like to see the sufficient balance in the rainy day fund determined by a formula instead of the current biannual committee decision, which becomes "political."
"I like the concept. I liked it last time, but conceptually, a few things need to be figured out," he said.
Hegar said the proposal could be implemented in different ways, but he wanted lawmakers to be aware of the proposal early so they could act in the next session.
"We’re not at a crisis," Hegar said. "We’re growing in the wrong direction. With that being said, the sooner we start to tackle the problem, over time the problem is much smaller."
