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Alabama May Divert Millions from Education and Cap Increases

State lawmakers are considering legislation that would reallocate hundreds of millions of dollars from K-12 and higher education into a new savings account and would cap future education budget increases to no more than 5 percent.

The Alabama State House in May 2023
The Alabama State House in May 2023. (Trisha Powell Crain |
Alabama lawmakers will consider a bill that will divert hundreds of millions of dollars that have previously gone directly to K-12 and higher education into a new savings account and cap future education budget increases to not more than 5 percent by 2027.

The Senate has already passed the measure. The House Education Budget Committee is expected to vote on the bill as part of the education budget package on Wednesday. The full House could take a vote as early as Thursday.

The bill, along with a record $8.8 billion education budget and a $2.8 billion supplemental appropriation will be up for discussion Wednesday morning in the House Education Budget Committee.

Senate Education Budget Chair Arthur Orr, R- Decatur, who sponsored SB101, said he wants to change the Rolling Reserve Act to create the new savings account, called the Educational Opportunities Reserve Fund. The new fund is designed to hold on to Alabama’s unprecedented revenue surpluses which can be used to ensure recent education initiatives like the Literacy Act and the Numeracy Act can continue to expand and grow.

Support for the Literacy and Numeracy Acts, which should improve foundational reading and math skills, will eventually cost about $100 million each to keep up and running, he said.

A New Savings Account - the Educational Opportunities Reserve Fund

The new savings account would be there in case the economy stagnates or takes a downturn, Orr said. “To have that money to draw down to be able to continue these initiatives that require ever-increasing funding until we get to a point - that’s several years out - till we’re at capacity.”

The Senate has already approved a $500 million allocation for the new savings account out of the $2.8 billion supplemental bill.

Another reason to create the new bucket, Orr said, is because the Budget Stabilization Fund - another savings account already in place - can only be accessed if the Governor declares proration, meaning budgets have to be cut because revenue predictions aren’t holding true. Putting money into the Educational Opportunities Reserve Fund is a way to stash excess revenue that can be more easily accessed, he said.

The new savings account sounds good to Alabama Association of School Boards Executive Director Sally Smith, as long as it’s spent on traditional Education Trust Fund expenditures. “We worked with Sen. Orr to help improve the language to ensure that it would go to ETF expenditures,” she said.

The bill allows money to be withdrawn from the Educational Opportunities Reserve Fund to provide one-time funding under two conditions:

  • When a 2 percent reduction in revenue is expected,
  • To “provide funding for existing ETF obligations” or for support for “initiatives that provide access to enhanced educational opportunities” to students in K-12 and higher education.

And while the new fund does divert money from K-12 schools being able to use it immediately, Smith said she is more concerned about how this action combined with other actions lawmakers are considering will impact education funding overall.

“We’re looking at a number of tax credits. We’re looking at a number of tax cuts. We’re looking at perhaps some new programs in addition to this policy,” Smith said. “All impact available revenue, and how they work with each other or against each other in what many anticipate is an economic downturn is concerning.”

Lawmakers are still grappling with what type of tax cuts and rebates they might pass before the session ends.

Capping Future Budget Increases

The other big change proposed by SB101 in how education is funded is that it caps budget increases to not more than 6 ½ percent for the current budget, and drops the percentage by half a point each year until it stops at not more than a 5 percent increase by fiscal year 2027.

Budget increases for the past five years have ranged from 1 percent in 2018 and 2021 to 8 percent for the current budget year.

There are already two caps to keep lawmakers in check:

  • A fiscal year appropriation cap that takes into account changes in yearly revenues for the prior 15 years and
  • An estimate calculated by the Executive Budget Office and the Legislative Fiscal Office.

Currently, the yearly cap is the lesser of those two figures. Caps were put in place after multiple years of the legislature budgeting more money than taxes brought in, triggering proration, meaning education and other state agencies had to cut budgets mid-year. Proration has not occurred since the Rolling Reserve Act became law.

Orr said a third cap - called the secondary spending limit - is needed because the extraordinary increases in revenue in recent years have pushed the 2024 cap to $10.9 billion - a 32 percent increase over the current year’s budget. Orr has said previously he isn’t comfortable budgeting anywhere near that amount. The Senate has approved an $8.8 billion budget.

Since 2021, lawmakers have budgeted under the calculated cap, which has created another issue that is being addressed in SB101.

Excess Revenues - The “Waterfall”

In addition to setting a budget cap, the law prescribes what happens to excess tax revenue that comes in beyond what was budgeted. The excess revenue currently flows into a series of accounts - the Rainy Day Fund, the Budget Stabilization Fund and the Advancement and Technology Fund, in that order - when lawmakers budget to the cap.

But if lawmakers budget below the cap, which they have done for the three most recent budget years, the excess revenue goes into a bucket for lawmakers to spend at will. That’s why lawmakers are currently considering how to spend $2.8 billion in excess revenue.

SB101 removes the exception for budgeting below the cap and sets up a new flow, or “waterfall” for excess revenue that looks like this:

  • First, excess revenue fills the Rainy Day Fund until it is fully repaid from the last round of proration, which it is fully repaid,
  • Next, the Budget Stabilization Fund gets an amount equal to 1 percent of the current year’s budget until the balance equals 10 percent of the current year’s budget,
  • After that, here’s how the remainder is divided:

The big change in that flow from how it works currently is that the Advancement and Technology Fund, which is split between K-12 and higher education, will get only half as much as it currently receives. Schools use that money for non-recurring expenditures such as repairs and maintenance, school security measures and for technology, among other uses.

Smith said she would like more money to flow to the Advancement and Technology Fund, but she’s waiting to see what happens in the House.

“The good thing,” Smith said, “is the money’s never lost. And if it misses its mark or if it does not operate as the sponsor intends, we will certainly come back to the legislature and work on changes.”

Orr said he’s willing to consider tweaks down the road if those percentages need changing.

“If it proves to be too much, too little whatever,” Orr said, “we can always revisit that. But right now, I think it gives us the flexibility to address one-time needs.”

©2023 Advance Local Media LLC. Distributed by Tribune Content Agency, LLC.
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