Part I of TCCRI's recently published State Budget & Taxation Task Force Report provided an overview of the fiscal condition of the state and addressed the possibility that the constitutional limit on transfers to the Economic Stabilization Fund (ESF), the state’s “rainy day” fund, will come into effect during the 2024-2025 biennium. What follows is an excerpt from the Report on that topic.
The Economic Stabilization (Rainy Day) Fund (ESF) was created after its approval by voters in the November 1988 constitutional amendment election. Article III, Section 49-g of the Texas Constitution establishes four sources of revenue for the ESF:
50 percent of any unencumbered general revenue (GR) balances on the last day of a biennium;
37.5 percent of oil and natural gas production tax revenues in excess of what those taxes generated in the fiscal year ending August 31, 1987 ($531.9 million for oil and $599.8 million for gas[i]);
Interest earned on the balance of the Fund; and
Any additional amounts appropriated directly to the ESF by the Legislature.
The Constitution directs the Comptroller to calculate and deposit these revenues into the ESF; however, deposits to the ESF balance in a given biennium do not take place if the ESF balance reaches a figure that is equal to ten percent of deposits (subject to certain exclusions) to general revenue in the previous biennium.[ii] In this case, the funds that otherwise would be deposited to the ESF instead remain in the general revenue fund. The limit for the 2024-2025 biennium is $26.38 billion,[iii] up from the limit of $20.26 billion in the 2022-23 biennium.[iv]
The forecast for the state’s rainy day fund has never been rosier. After a COVID-related decline in deposits to the ESF, the oil and gas industry has come roaring back: the BRE indicates that a deposit of more than $3.6 billion was made to the ESF in November 2022, which was attributable to FY 2022 oil and gas activity. This is a vast improvement over the $1.46 billion that was deposited in November 2021.[v]
The projected ending balance of the ESF for the 2022-23 biennium is $13.72 billion. By the end of FY 2024, just one year later, the balance is projected to soar to $23.52 billion. This projection is of course due in large part to expectations of strong oil and gas activity. But in addition, the Comptroller anticipates that a full $5.7 billion in unencumbered general revenue at the end of the 2022-2023 biennium will be deposited to the ESF in early FY 2024.
The Comptroller projects that the constitutional limit on transfers to the ESF will be reached in FY 2025 due to the fund’s balance reaching $26.38 billion (assuming that no appropriations are made from the ESF). As a result, the projected transfer of funds to the ESF in FY 2025 (which is attributable to tax collections in 2024) will be reduced by $689 million, which will remain in general revenue. Due to investment income generated by the ESF balance, which is not relevant to the constitutional limit on transfers of severance tax revenue to the ESF, the ESF balance is projected to reach $27.13 billion by the end of the 2024-25 biennium.
The Comptroller notes that the constitutional limit will again likely limit transfers to the ESF in FY 2026 (i.e., the 2026-2027 biennium), but to an even greater extent: $3.79 billion that would otherwise flow to the ESF in FY 2026 would instead remain in general revenue. Of course, all of these ESF projections do not take into account appropriations the Legislature might make from the ESF the corresponding reduction in the ESF balance.
Policy Recommendation: Dedicate all funds that would otherwise flow to the ESF but for its balance reaching the constitutional limit to property tax relief.
When the ESF balance swells to such a figure that the constitutional limit on transfers to it applies, that is a sure sign that the state’s taxpayers are overfunding government. Given the unpredictability of oil and gas prices, it is possible that the limit will not be reached. If it is, however, the Legislature should dedicate any such excess revenue to tax relief, preferably to the reduction of school M&O taxes.
You can read this and the rest of the report here.
Bills filed to date in the 88th Legisative Session: If the limit on transfers to the ESF is reached in the 2024-2025 biennium, the funds that would otherwise be transferred to the ESF will remain in general revenue. So far in the current legislative session, several bills have been filed that would dedicate significant future surplus general revenue to the Property Tax Relief Fund, including House Bill 1030 (Schaefer); House Bill 379 (Bell, C.); House Bill 174 (Oliverson); House Bill 612 (Shaheen); House Bill 629 (Troxclair); House Bill 985 (Cain); and House Bill 1325 (Isaac). Each of these bills would help return funds to taxpayers if they cannot be constitutionally transferred to the ESF.
Notes:  For this purpose, “general revenue” includes a significant amount of the federal income received by the state. [i] T. J. Costello, et al., Comptroller, “The Texas Economic Stabilization Fund,” Fiscal Notes (September 2016), https://comptroller.texas.gov/economy/fiscal-notes/2016/september/rainy-day.php. [ii] Article 3, Section 49-g(g) of the Texas Constitution. [iii] Comptroller, Biennial Revenue Estimate for the 2024-2025 Biennium (January 2023). [iv] Comptroller, 2022-2023 Certification Revenue Estimate (Revised July 2022). [v] https://comptroller.texas.gov/about/media-center/news/20211130-texas-comptroller-glenn-hegar-announces-transfer-of-29-billion-to-state-highway-and-rainy-day-funds-1638213764784