Texas State Government and Long-Term Obligations Investing to Address Long-Term Obligations

As we’ve seen in this special report, Texas’ long-term obligations must be addressed, but most of the available strategies — raising member contributions, reducing benefits and increasing state debt, for example — create their own problems and may be unpalatable for many policymakers. And in tight budget times such as these, using general revenue to quickly mitigate these obligations often isn’t feasible.

One option is to set aside some state Treasury balances to address long-term obligations, either by creating a new permanent fund or by reserving a portion of the existing Economic Stabilization Fund (ESF, or “rainy day fund”), to function much like an endowment, creating investment earnings to address long-term obligations. Texas already has many permanent funds, including the Permanent School Fund, which produces earnings to fund public education, and the Permanent University Fund, which supports public higher education.

This approach would differ from a one-time ESF expenditure in that the goal would be to generate earnings for annual spending, leaving the corpus of the fund untouched.

The investment objectives would be to provide predictable, stable funding from earnings; ensure that the inflation-adjusted value of this funding is maintained over time; and to preserve the inflation-adjusted value of the principal, after distributions and fund expenses.

Seven states (Alaska, Montana, New Mexico, North Dakota, Utah, West Virginia and Wyoming) currently use an approach similar to this, making long-term investments with severance tax revenue. Such funds provide a more consistent revenue stream than volatile tax revenues from oil, gas and other natural resources. Most of these states, however, appropriate some fund earnings to general revenue, and four allow withdrawals from the principal, which can seriously damage their long-term revenue potential.⁵¹

If it adopts this approach, the Texas Legislature would develop guidelines for the fund’s purpose, its initial funding and the amounts available for appropriation. Lawmakers would prioritize needs to be addressed by the fund, such as deferred maintenance, pensions or other long-term obligations.

One potential way to increase this investment balance would be to lower the cap on the ESF and dedicate any revenue above the cap for this purpose.

This could provide a permanent, additional stream of income to help address long-term debt obligations without increasing taxes. Taking positive action to further address the state’s long-term obligations, moreover, would benefit Texas’ standing with credit agencies. FN

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