The blog of the Urban Institute
October 5, 2017

How much rainier does it need to get for Texas to use its rainy day fund?

October 5, 2017

In the aftermath of Hurricane Harvey, Houston mayor Sylvester Turner wants the state to tap its rainy day fund to help pay for recovery efforts. But Texas governor Greg Abbott has been hesitant, arguing the state has enough funding to pay for recovery efforts without accessing its $10 billion rainy day fund, the largest reserve fund in the country.

In 2011, during the aftermath of the Great Recession, Texas governor Rick Perry touted his refusal to aggressively tap Texas’s rainy day fund as fiscally responsible, referring to the fund as the state’s “insurance policy against a major natural disaster.” Although Texas withdrew several billion dollars from its fund that session, it wasn’t enough to avoid $5.4 billion in cuts to public education in the 2012–13 budget.

With Hurricane Harvey devastating Texas’s largest city and towns along the Gulf Coast, when is it time to use the state’s rainy day fund if not now?

Texas’s hesitation to use its rainy day fund obscures the fund’s purpose and prevents the state from funding critical services during emergencies.

Here are a few facts on how and why states use their reserves during emergencies:

1. Rainy day funds are for natural and economic emergencies.

Texas’s rainy day fund was not created specifically for natural disaster relief, but for fiscal and economic emergencies. This is the purpose of most state budget stabilization funds (the technical name for rainy day funds), as states, unlike the federal government, must balance their budgets. When revenues fall unexpectedly, states can tap the funds instead of making spending cuts or raising taxes.

But weather-related events often cause economic shocks. One study found states with strict balanced budget requirements were more likely to cut spending and take on debt in response to severe weather events.

2. Although some states can use rainy day funds to pay for natural disasters, most don’t.

Twenty-five states, including Texas, can access their rainy day funds for disaster- and emergency-related expenses. But, as Texas is demonstrating, states don’t always use these funds during disasters.

Some officials say general revenue and spending reductions are typically sufficient to get through a disaster. That is Abbott’s argument.

States also expect the federal government to pick up most of the tab for disaster relief, as the federal government typically pays 75 percent of the costs. Governor Abbott recently negotiated a 90/10 split between the federal government’s and Texas’ share of Harvey-related costs. States often then pass some, or all, remaining costs on to local governments.

For example, even though West Virginia amended its Revenue Shortfall Reserve Fund in 1996 to allow for withdrawals during natural disasters, it only accessed that fund once for a disaster-related expense between 2005 and 2015, and once in 2016 to cover emergency flooding costs, despite 19 Federal Emergency Management Agency (FEMA) disaster declarations during that time. And Florida, despite 13 FEMA disaster declarations, only accessed its Budget Stabilization Fund for natural disasters once in that same period to cover expenses related to the 2004–05 hurricane season. Florida officials haven’t mentioned using those funds for Irma recovery efforts.

Of the nearly $10.7 billion that Texas expended from its rainy day fund between 1990 and 2016, only 2 percent went to disaster relief, despite Hurricanes Ike and Dolly devastating the Gulf Coast in 2008. The remainder went toward other costs and services, including education, general deficit reduction, economic development, health and human services, and corrections.

3. Most states have separate disaster relief funds, but only half save for disasters ahead of time.

Thirty-six states, including Texas, have separate disaster relief funds. But most don’t fund them. This can put states in a tough bind during emergencies if they have to wait on a federal disaster declaration or special legislative session to get the necessary funds.

States that allocate money to their funds before disasters, such as North Dakota, report that it has allowed them to respond more quickly to natural disasters.

Texas is one of the few states that provides relief funding in advance, and it recently agreed to give Houston $50 million out of this fund.

Should Texas use its rainy day fund for Harvey relief?

In short, yes. Harvey is both a natural and economic disaster, exactly what the fund was created for. Texas should use its fund to pay for critical services and could replenish it with federal funds.

Texas should also reconsider its refusal to use the fund during difficult economic times.

Whether a state is experiencing a hurricane or a recession, rainy day funds keep budgets above water and buoy state spending on critical public services.

In this Tuesday, Aug. 29, 2017, file photo, water from Addicks Reservoir flows into neighborhoods as floodwaters from Tropical Storm Harvey rise in Houston. Photo by David J. Phillip/AP.

