Texas Rainy Day Fund Lays Groundwork for Disaster Recovery Savings

This op-ed was originally published in the Houston Chronicle on August 26, 2019.

If Texas were a country, as it once was, its robust economy would rank among the 10 largest in the world. The state has seen its coffers surge as it benefited from the longest economic recovery in U.S. history. This good economic news has helped bring the state’s rainy day fund—money set aside during good times for less prosperous ones—to an all-time high, making it the third-largest state reserve fund in the country, behind only Alaska and Wyoming.

But while its financial standing has strengthened, Texas faces challenges from natural disasters. Over the past several years, Texans have endured multiple major floods, four of which were designated federal disasters by President Donald Trump. Of these, Hurricane Harvey caused the most notable flooding. Harvey made landfall as a Category 4 hurricane in August 2017, inundated the Houston area and surrounding counties, and caused an estimated $125 billion in damage to infrastructure and property, including more than 200,000 homes and businesses.

With the effects of Harvey and other disasters still lingering, the Texas Legislature met for its first biannual session since 2017. Lawmakers’ top concerns were how to fund ongoing Harvey recovery efforts and how to limit the damage from future floods. With those questions in mind, legislators fixed their eyes on the state’s ample rainy day fund.

The Lone Star State is more reliant than most other states on taxes related to oil and gas production—taxes with a history of volatility because oil and gas prices fluctuate in response to economic factors outside the state’s control. To safeguard against these price fluctuations—or a broader dip in the economy—Texas sets aside the portion of these taxes that exceed a certain threshold. This resulted in a record rainy day fund balance for the state of $12.5 billion at the beginning of fiscal year 2019. To get the most out of those funds while waiting for a “rainy day,” lawmakers also enacted S.B. 69 this year, which gave the comptroller the authority to more aggressively invest a portion of the balance to generate greater earnings.  

The Pew Charitable Trusts’ research suggests that rainy day funds should be targeted to one-time costs, not ongoing state expenses, so budgets will be continually balanced over time. With the devastation caused by Harvey and other recent flood disasters still fresh, Texas legislators acted in accordance with this research by dipping into the reserves to fund mitigation projects that will help prepare the state for future floods. By doing so, Texas is not only reducing the cost of future disasters—saving as much as $6 in future costs for every dollar spent upfront—but it is also following best practices for allocating reserves.

In June, Governor Greg Abbott signed Senate Bills 7 and 8, authorizing $1.7 billion for the development of mitigation plans and for funding flood control and risk reduction projects throughout the state.

S.B. 8 requires officials to develop Texas’ first statewide flood plan, using regional watershed-based strategies. This comprehensive approach across many facets of government is designed to provide communities across the state with a better understanding of how to work together to identify shared vulnerabilities to flooding and prioritize mitigation resources and projects to reduce risk. 

To support these planning efforts, S.B. 7 establishes a mitigation fund of almost $800 million—one of the most robust in the nation and almost three times the amount the federal government appropriated in fiscal 2019 for nationwide flood mitigation efforts. This fund will support projects identified as priorities in the state flood plan—such as buying repeatedly flooded properties and building flood-ready infrastructure. The fund also provides money for nature-based green mitigation projects that can absorb floodwaters—like restored wetlands, salt marshes, and streams.

The major floods that hit Texas can easily be repeated elsewhere, as recent flooding in the Midwest and Southeast has shown. And with this year’s hurricane season in full swing and the costs and frequency of natural disasters in the U.S. likely to continue growing, states could examine the Texas example. While some states might not be in a position to draw from a robust rainy day fund, every state could benefit from knowing how to better save, spend, and leverage state resources to prepare for the next disaster.

Laura Lightbody directs The Pew Charitable Trusts’ flood-prepared communities initiative, and Robert Zahradnik is the principal officer for Pew’s state fiscal health program.