How budgeting changes put Alabama in ‘enviable’ situation during pandemic

How budgeting changes put Alabama in ‘enviable’ situation during pandemic

By MARY SELL, Alabama Daily News

Alabama’s gross tax revenue was up 5.3% at the end of August with one month remaining in the pandemic-affected fiscal year. 

And though some of the dozens of tax revenue streams that flow into the state’s General Fund and education budgets withered when the coronavirus came to Alabama, overall, both funds’ revenues are up in 2020 compared to 2019. 

Moreover, both budgets will end the fiscal year this week able to tuck money away into reserve accounts. And planned spending for fiscal 2021, which begins Thursday, is not only more than 2020’s allocations but the most ever, though not what state leaders envisioned when they started crafting the 2021 budgets earlier this year.

Looking at many other states more than six months into a global health crisis, Alabama’s budget situation is desirable, several state leaders told Alabama Daily News recently. 

It’s a budget situation far removed from five years ago, when it took two special sessions and a cigarette tax increase to patch together a General Fund budget and State House leaders quipped about looking for loose change under couch cushions. The General Fund had to be prorated — cut mid-year — in 2010, 2011 and 2012, but that wasn’t a threat this year. 

“We are night and day different from where we were at this point in time during the last recession,” Kirk Fulford, deputy director of the Legislative Services Agency’s fiscal division, said. “We made structural changes that put us in a very enviable position to some of our surrounding states, for sure.

“We reduced what we planned to spend (because of COVID-19), but we didn’t have to cut the budget we were operating in and there were others that had to do that.”

Moving growth revenue into the previously anemic General Fund, including a new tax on online purchases, is largely credited with that fund’s newfound soundness.

Alabama is one of just a few states that has two operating budgets, one for education and another for most everything else. Neither need growth in tax revenue to cover planned spending in 2021, $2.39 billion in the General Fund and $7.2 billion in the Education Trust Fund.

The education budget, with a long history of mid-year cuts in turbulent economies, had enough money in a rainy day fund this year to loan itself more than $300 million in March when income tax payments, the main source of revenue for education, were delayed because of the pandemic. 

The 2011 Rolling Reserve Act is credited with keeping that budget healthy during the pandemic. It was championed by then-State Rep. Greg Canfield, who now leads the state’s economic development efforts as Secretary of Commerce. 

The law was a part of Republicans’ “Handshake with Alabama” agenda promised in the 2010 elections.

“We have avoided proration for the longest period in modern history inclusive of this pandemic,” said Rep. Bill Poole, R-Tuscaloosa. He’s chairman of the House education budget committee. “As a consequence, where other states are laying off teachers, slashing higher ed budgets and trying to patch together budgets that have major revenue shortfalls, Alabama is not.”

According to media reports, the coronavirus pandemic and response led Georgia officials to cut funding to state agencies by $2.2 billion this year.

In Mississippi, the 2021 budget for public education spending is about $70 million, or 2.7% less than pre-pandemic 2020.

In Tennessee, about $1 billion in cuts were made to the 2021 budget to make up for funding shortfalls in what one state leader called the worst budget crisis he’d ever seen. 

Education Week in July reported thousands of teachers nationwide had been laid off as a result of states’ revenue losses. 

 “We have fared very well from a stability standpoint, certainly our revenues have been impacted and have been volatile,” Poole said. “But our state budgeting process, and our state budgets across the board, have been remarkably stable.”

New money in the General Fund

The nonpartisan Center on Budget and Policy Priorities estimated last month that state budget shortfalls will ultimately reach almost 10% in the 2020 fiscal year and more than 20% in fiscal 2021 based on recent economic projections. 

Most states’ budget years ended in June; Alabama’s ends Wednesday.

It’s not that the General Fund revenues weren’t impacted by COVID, Fulford said. But it’s easier to counter that slowdown when there are growth funds, he said. 

“Did it impact? Yes, it slowed down things,” Fulford said. “But did it take us negative? Absolutely not because the General Fund has a better structure now to be able to withstand some of the revenue slowing or going backwards than it did several years ago. We’re going to end the year positive.” 

Economist Keivan Deravi recently told Alabama Daily News he believes there is a “god of the General Fund” that often comes to its rescue.

“The god of the General Fund this time was Simplified Sellers Use Tax,” Deravi said.

The Simplified Sellers Use Tax on online retailers took effect as a voluntary 8% tax  in 2015. The law became mandatory for most online retailers beginning in January 2019, at which point online sales tax revenue jumped significantly.

Fifty percent of the revenue goes to the state where it’s further split, 75% to the state General Fund and 25% to the Education Trust Fund. The other half is split among local governments, 40% to counties on a population basis and 60% to municipalities on a population basis. 

As of August, the SSUT was worth nearly $125 million to the General Fund, a 105% increase from 2019. 

Another source of growth in the General Fund is the use tax. In 2012 and 2015, lawmakers moved a larger percentage of the state’s use tax, a consumers’ tax on tangible property brought into the state and for which sellers didn’t collect a seller’s use tax,  from the ETF to the General Fund. 

“I had to go head-to-head with the education community to get more money for the General Fund,” said Sen. Arthur Orr, R-Decatur, who was then the General Fund budget committee chairman. 

As of last month, the use tax was up 3.68% over last year to $197.5 million.

New reserve in General Fund

In this year’s legislative session, lawmakers created a General Fund Budget Reserve Fund. Senate BIll 129, signed into law in May, will annually deposit 20% of the ending balance in the General Fund from the previous year into the new fund. Fulford expects next month the reserve fund to have about $25 million.

Per the law, the reserve fund can only be accessed if the governor signals that proration will occur, when budgets are cut mid-year because revenues fall short of expectations. Then, if the fund exceeds $50 million, lawmakers can vote to access the money to offset a reduction in estimated revenues, to fund state employee pay raises or bonuses or to provide funding for unanticipated obligations.

ETF rolling along

The Rolling Reserve Act was approved in 2011, largely by the newly elected GOP majority. It caps spending each year based on previous years’ revenue — not revenue estimates for the upcoming year. 

Previously, going back decades, the Legislature and the governor had all spent according to the revenue estimates, said Orr, now the chairman of the Senate education budget committee. 

“If the revenue projections were inaccurate due to a changing economy or different adverse impacts on the economy, then we would have to prorate the education budget, which meant that we’d have to cut it mid-year all across the state,” Orr said. “And that really put us on a rollercoaster.”

Deravi, the economist who does some work for the Legislative Services Agency, called the Rolling Reserve an “automatic brake” on annual education spending. 

The act  also created a reserve fund for the ETF that was crucial this spring. The act  allows the state finance director to transfer funds from the reserve stabilization fund into the ETF during the first six months of a fiscal year to alleviate cash flow issues. In March, $301 million was transferred from the Budget Stabilization Fund when the deadline for federal and state income tax payments were delayed from April to July. That about $301 million was paid back to the stabilization fund this month. 

“So the fact that they didn’t budget everything, and the fact that they had money to bridge over the collection drop both have helped with the budget situation,” Deravi said. “So, I would say that a lot of it had to do with the Rolling Reserve.”

Poole said the Rolling Reserve has been beneficial prior to this year, but 2020 has been the “ultimate test.”

“There are a lot of ancillary benefits of the Rolling Reserve Act, and of the stewardship of the budgets, but very clearly, this has demonstrated how vital and critical it was to help our state not only to stave off annual proration situations, but also weather economic storms that are going to cycle through.”

It’s no secret the Alabama Education Association was opposed to the Rolling Reserve Act when it passed the Legislature in 2011, AEA President Sherry Tucker said recently.

The idea that we leave desperately needed money on the table each year (or in the case of the Rolling Reserve Act – in a savings account) while education is not fully funded in all areas is hard to accept,” Tucker said in an emailed statement. “Here we are nine years later, and while we still have some issues with the structure of the Rolling Reserve Act, we can agree the act has allowed legislators the safety net needed to craft conservative budgets. However, we still take issue with so much money being placed in a savings account when education still has many needs including additional school nurses, lowering class size, resource officers, and fully funding transportation.” 

In recent years, some excess money in that reserve fund has gone back to schools in the form of Technology and Advancement Fund dollars allocated each year. But that money is not a guarantee and the amount varies. This year, the fund doled out about $177 million to K-12 schools based on student population. Some of the largest systems received several million dollars. Higher education also received about $65.5 million and another $15 million has been allocated for the first annual payment on the $1 billion school bond issue approved by lawmakers this year. 

“Some people didn’t like (the Rolling Reserve Act) when it was originally passed because it was going to curtail the amount of growth year-to-year in spending,” Fulford said. “Fast forward and the same people love the Rolling Reserve Act because we’re not in proration.”

Less than expected

There have been budget sacrifices. Educators and state employees saw their planned 2021 raises evaporate when COVID-19 came to the state in the spring and lawmakers worried about future spending.

The state significantly reduced a 2021 increase in funding for its lauded pre-K education program and higher education did not see the increases they’d requested. In the General Fund,  because payments were ahead by one year, the state is skipping a repayment to the Alabama Trust Fund for money borrowed to prop up the General Fund in 2013, 2014 and 2015.

“Those two things (the state employees’ raise and the trust fund repayment) by themselves were about $25 million,” Rep. Steve Clouse, R-Ozark, said. He’s chairman of the House General Fund budget committee. 

Agencies will get increases in 2021, but less than what was expected earlier this year.

“They still got increases from last year but not as much as we had hoped to get everybody back closer to where we were before things really took a dive back in 2008,” Clouse said.

Mac McArthur, executive director of the Alabama State Employees Association, commended state leaders, including Gov. Kay Ivey’s administration, for a budget situation that didn’t require mid-year cuts.

“The bad news is that in this last session, a much deserved (cost of living adjustment), which there was overwhelming support for, failed,” McArthur said.

McArthur said the ASEA will advocate next year for a larger raise, “north of 2%,” in fiscal 2022. 

Meanwhile, AEA leadership said the organization expects to see support for a teachers’ raise in the 2021 session.

“The ETF had more than $400 million in new dollars to allocate in the 2020-21 budget, of that the Legislature only allocated about $198 million,” Tucker said. “And the education budget projections for the 2021-22 fiscal year are showing 3.9% growth which is pretty incredible considering we’re in the middle of a pandemic. And if this pandemic has done nothing else, it has opened the eyes of parents and state officials to the value of educators, the difficulty of their jobs, and how vital all educators are to this state and this nation.”

State House leaders this month said it’s too early to talk about raises. 

Outside factors

Sam Addy, associate dean for economic development outreach at the University of Alabama’s Culverhouse College of Business, said there were several other factors that contributed to Alabama’s current situation.

COVID-19 rolled into the state later than in many states, delaying the impact here while Ivey and others took actions to keep people home and lessen the spread of the virus. 

He said Alabama’s economy has also become more diversified in the last decade, able to better absorb some downturns.

“In this case, there’s a lot of credit to go around,” Addy said.

Meanwhile, billions of dollars in CARES Act funding, including business loans and increased unemployment benefits, poured into the state. The additional $600 a week in unemployment benefits largely went directly into the economy, Addy said. He said people receiving unemployment benefits generally can’t afford to save that money.

As far as future impacts, Addy said influences outside of Alabama will be a large factor.

“What I’m looking for lately is what Congress does,” Addy said.

Looking ahead

There are still unknown budget factors related to COVID. 

The state saw record-high unemployment in the spring as businesses slowed or closed. That inactivity will be reflected next year in income tax collections. Income tax revenue is the largest source of income for the education budget, followed by sales tax. Both have increased slightly so far this year to about $4.5 billion and $2.3 billion.

Meanwhile, the General Fund’s two largest expenses — prisons and Medicaid — continue to grow.

“On the General Fund side, we’ve got some real issues on the horizon as far as the expenditure side, particularly with prisons,” Clouse said.

Medicaid enrollment increases and that cost are another worry, Clouse said.

Clouse also said more funding is needed for mental health treatment in the state.

Orr said he expects that Alabama has seen the worst of COVID-19’s impact on the economy.  

“I think we’ve also learned that we do not need to shut down the state again, to the extent that we did, along with many other states in the spring,” Orr said. “The people are more aware of the virus and the precautions that they need to individually take. But just locking the door on numerous businesses is not the avenue we need to go down again. So that gives me some consolation, that our economy, even if the virus has a spike, our economy will not be as hampered by a lockdown.”