Texas’ historic $44 billion fund balance: How to leverage It

2 years ago

The largest fund balance in Texas’ history — $44 billion — is projected for the state by the end of fiscal year 2023, according to the Comptroller’s revised revenue estimate.

This historic fund balance, which is the amount of money the state has remaining in its treasury after all expenses have been paid for this current budget cycle, presents an opportunity for the incoming Legislature to positively impact the state’s future prosperity for generations to come and provide relief to those Texans experiencing economic challenges.

Here are the funds that make up the $44 billion balance:

Texas’ General Revenue Fund: $27 billion;
Remaining State Fiscal Recovery Funds from the American Rescue Plan Act: $3 billion; and
Economic Stabilization Fund, the state’s savings account commonly known as the “Rainy Day Fund”: $14 billion.

State leadership and budget writers have already indicated a portion of these funds will go towards specific initiatives, such as property tax relief, addressing deferred Medicaid costs and assisting state agencies with inflationary pressures. The remaining funds should be strategically invested in areas that will resolve long-term problems and assist Texans negatively impacted by the pandemic and economic pressures.

While state budget writers await agency budget requests and election season is still underway, it’s never too early to start thinking about some of the options legislators will have when they return to the Texas Capitol in January.

Texas 2036 principles

The state is projected to start with a $44 billion balance, but not all of this money should be spent.

Some spending from the Economic Stabilization Fund may be appropriate for one-time expenditures or seeding the creation of new funds, but it is important to maintain a sufficient balance to ensure the state is prepared to weather future economic challenges.

In deciding how to deploy the remaining balance, Texas 2036 encourages the state to consider the following guiding principles:

Target Long-Term Solutions: Pursue prudent, data-driven investments that will positively impact our state for decades to come, particularly those that will improve quality of life for all Texans, allow greater prosperity and reduce future costs.
Seek Financial Sustainability: The fund balance represents an extraordinary circumstance and is unlikely to repeat in the near future, so the primary focus should be on one-time costs or investments that will either generate future revenues or offset future costs.
Track Spending with Accurate Performance Measures: Investments of public funds must be accurately tracked and measured to assess the performance associated with these dollars.

Opportunities for investment

The unprecedented projected fund balance provides the incoming Legislature an opportunity to achieve generational change by addressing major challenges that could impact our state’s long-term prosperity.

For example, consider the actions of the Legislature over 150 years ago, investing millions of dollars to create the Permanent School Fund. Today that investment has grown to a multi-billion dollar fund for public education, generating nearly $2 billion annually for our schools. Texas leaders should think on this scale. Investments and long-term policy changes at this scale can positively impact the future of our state, bolster our state government’s performance and invest robustly in rural communities.

As state leaders begin discussing and developing the 2024-25 State Budget, Texas 2036 offers the following investment opportunities for consideration:

Invest in our students and future workforce

The Legislature has taken bold steps to improve the state’s education-to-workforce pipeline. HB 3 (86-R) employed interventions to improve young Texans’ educational outcomes, while HB 3767 (87-R) is aligning the state’s education and workforce systems and the $110 billion spent annually around unified goals and strategies.

However, Texans’ completing their education or training must be able to secure a fulfilling career with a self-sufficient, family-sustaining wage.

The Legislature should consider building on legislative improvements with strategic investments that will ensure Texans are equipped with the career skills required by good-paying jobs. This includes investments to expand virtual education, which will provide students, especially our rural students, with additional opportunities to obtain career skills through courses they otherwise wouldn’t have been able to access.

Additionally, Texas community colleges already offer programs serving young students, adult learners and incumbent workers alike that provide them with a path to employment with a self-sufficient wage. Investments for a high-quality workforce should align Texas community colleges’ programs with state and regional workforce needs – with a focus on colleges improving students’ abilities to earn a workforce-aligned credential of value.

Address unfunded liabilities to preserve financial sustainability

Over the past several legislative sessions, the Legislature has made great strides on addressing our unfunded liabilities. Last session, they passed SB 321 (87-R), which helped sustain our Employee Retirement System of Texas pension system. Texas should continue its efforts with addressing our state’s long-term liabilities by focusing on other post-employment benefits, specifically retiree health benefits.

Liabilities associated with other post-employment benefits, or OPEBs, are continuing to rise and pose a risk to future credit ratings. Among these, the not-yet-funded costs of health benefits for retired state employees ($36 billion) and teachers ($39 billion) contribute $75 billion in long-term liabilities to our state’s long-term balance sheet. Other post-employment benefits account for one-third of the state’s total long-term liabilities. With the large balances available, the Legislature should consider all available options to reduce the state’s long-term OPEB liability, which in turn could save the state billions of dollars in the long-term.

Invest in our Infrastructure to keep up with population and spur economic growth

Continued investment in our infrastructure is vital to our economy, directly benefits Texans and ensures we’re a place people want to live and work through the bicentennial. The recently passed Infrastructure Investment and Jobs Act, or IIJA, provides a key opportunity for Texas to improve state energy, water, transportation and broadband infrastructure. But while the IIJA provides a baseline of financial support, it alone will not solve the large structural challenges facing our state.

Strategically braiding federal funding — using funds from multiple funding streams to support the total costs for a specific goal — with a large-scale state investment will help Texas bolster our infrastructure for the next generation. For example, the Legislature should consider capitalizing a multi-billion dollar revolving fund to finance the repair, rehabilitation and modernization of aging, depreciating water and wastewater systems. The Legislature could also appropriate state funding to meet the matching requirements of federal broadband funding.

Increase salaries for public employees to attract top tier talent for state government

The Legislature should consider a pay increase for state employees to ensure Texas is able to attract, recruit and retain a qualified workforce.

State agency employee turnover is at a 20-year high of 21.5% and even higher for those employees working in agencies for health and human services and public safety. This includes the Texas Juvenile Justice Department, which announced in July 2022 that they would not be able to intake any further juveniles due to severe understaffing. The Health and Human Services Commission is having challenges filling positions to help manage the Supplemental Nutrition Assistance Program that helps Texans put food on their table. And state agencies, such as the Public Utility Commission, are having challenges with attracting top tier talent with non-competitive salaries for highly-specialized positions.

For agencies to follow through on the Legislature’s vision and capably implement major regulatory reforms, agencies need highly-skilled professionals. State agency staffing challenges risk becoming a crisis for the state, with ripple effects beyond underperformance. Investing in our public sector workforce is a necessary component to address the challenges faced by the state government and essential to ensure agencies can properly implement state laws.

Modernize and update information technology infrastructure within state government

The previous Legislature made progress on modernizing the state’s information technology, or IT, systems with key investments and the passage of HB 4018 (87-R). This bill is a pivotal policy framework for improving the future of the state’s use of IT because it establishes a dedicated fund and a legislative oversight committee, as well as directs state agencies to develop five-year strategic plans. The plans are due to the legislative oversight committee in the fall of 2022 and are to provide a roadmap for investing in our state’s IT systems.

By funding these long-term strategic plans, efforts to bolster our state’s IT systems will improve government efficiency and performance for taxpayers. Additionally, the Legislature should consider assisting local IT systems at courts and law enforcement agencies that are required to report justice-related data to the state.

Invest in new state parks

Parks represent a significant economic development opportunity for rural Texas. Rural counties with state parks have higher GDP growth, population growth and employment growth compared to those without state parks. The current membership rate for state parks and recreational sites exceeds their existing capacity. This problem was magnified during the COVID-19 pandemic as thousands of Texans sought outdoor recreational opportunities near their homes.

Texas needs to expand its state park inventory to meet the growing demands of a growing state and meet the needs of Texans who count on them for economic opportunities and recreation. The Legislature should consider investing in the development of new state parks to help meet the needs of Texans and communities.

As we embark on crafting the 2024-25 biennial budget, Texas 2036 stands ready to assist with making generational change. The items provided above are a starting point. We will be providing additional ideas as we continue to explore opportunities. And we look forward to working with the incoming Legislature, staff and all stakeholders interested in ensuring Texas remains the best place to live and work though 2036 and beyond.