The Alabama Trust Fund is under attack….again.
SB260, passed during the 2013 Regular Legislative Session, has the best of motives. The legislation sets forth a constitutional amendment allowing the issuance of $50 million in bonds to rehabilitate the National Guard armories around the state. This $50 million will go directly to the Armory Commission of Alabama for its sole discretion on how it is doled out.
The additional debt will be issued through the Bond Commission set up with the passage of Amendment 666 (and later Amendments 796, 856 and 880) which currently has a bonded authority of $750 million (which is mostly tapped out already in the name of economic development- more on this at a later date). So the authorized debt limit will now increase to $800 million with the passage of this constitutional amendment.
Let’s have a quick history lesson regarding the Alabama Trust Fund….
In the beginning, in 1978, Governor Fob James instituted one of the three most important fiscally responsible measures in this state’s history. Natural gas was discovered in off-shore Alabama waters and the state was due a windfall of lease proceeds and royalty payments on the production of the natural gas.
Governor James, rather than allowing the legislature to spend it like drunken sailors (note- see Louisiana- their money is all gone), instead formed the Heritage Trust Fund which later became the Alabama Trust Fund to protect this money in perpetuity. The plan was for 100% of the natural gas lease and royalty payments (revenue) to go into the Alabama Trust Fund and 90% of the income off the Fund went to support the General Fund (10% of the income went back into the corpus (as revenue) of the Fund to promote additional savings).
But whoa Nellie! This was way too much money and the temptation to spend it became too much. Soon, we adopted the Forever Wild program. That took the 10% of the revenue going back to the Trust Fund. Next came the cities and counties (10% each) and then another 1% went to Senior Services. Now, the general fund was only getting 69% of the income from the Trust Fund.
Next, the legislature noticed they were getting less in the general fund (Hmmm….). So they tried to increase the income coming out of the Fund…by changing the definition. They wanted to include capital gains in the definition of income, thus being allowed to suck more out of the Trust Fund.
Then Attorney General Charlie Graddick nipped that effort in the bud. He issued an opinion that said trust law was well settled and that capital gains inure to the benefit of the corpus (or the principal beneficiary as opposed to the income beneficiary).
So the legislature said “Dang, what do we do now?”
Then, in 2001, along comes Don Siegleman and his gang. They duped us into the passage of Amendment 666 that, frankly, began the desecration of the Trust Fund and all of Governor James’ best efforts.
Amendment 666 set forth authority to pass $250 million in new bonds for road construction, capital projects and economic development. The payment for the bonds would come from diverting 28% of the oil and gas payments (revenue) from the Trust Fund. Bad enough…but Amendment 666 also provided a new definition of income (the amount that can be drawn from the Fund annually) to include ordinary income, capital gains and unrealized capital gains.
At this point, only 72% of the oil and gas payments (revenue) were now going as originally intended.
In 2007, Amendment 796 expanded the debt limit from $250 million to $750 million. Wow!
In 2010, we passed Amendment 856 that allowed for another raid of the Alabama Trust Fund to the tune of $145.8 million per year for a period of 3 years ($437.4 total) with no payback provision. After we screamed bloody murder, they did pass a statute during the next legislative session to payback the Trust over a period of 12 years.
Not necessarily on point with this discussion, but just so you know, the first installment on repayment is $5 million and is due on September 30th of this year. The second installment of $15 million is due on September 30th, 2015. The second installment was included in the FY15 appropriation bill as a “conditional” appropriation. (We will address more on that issue at a later date).
Perhaps far worse than the 2010 raid (because we might get that paid back), Amendment 856 also once again provided a new definition of “income” out of the Fund which now provided a formula that is the sum of 33% of the oil and gas payments (used to be revenue) plus 5% of the average value of the assets in the Trust. Because this is now diverting money from going into the Trust corpus, the cities and counties insisted on getting 7% of the oil and gas payments (further diverting revenue) because the Trust wouldn’t be as large as it would have been and their 10% cuts on the back end (out of the income) would have been diminished.
Are you following all this? At this point, only 32% of the oil and gas payments (revenue) are going into the Trust as originally intended and we have a leak the size of the Mississippi River on what’s coming out (income). Poor Governor James…he must be going nuts…..
In 2012, we passed yet another constitutional amendment (Amendment 880) which allows the bond debt of $750 million to survive in perpetuity!
So what happens if the bond payment stream exceeds the 28% oil and gas payment stream? You guessed it, the General Fund has to pay the difference (and we are already seeing that).
So, fast forward to November 4th. Another constitutional amendment (which will be on the ballot as Amendment Two). Another raid on the Trust Fund.
This time, if the additional $50 million (added to the existing bond authority of $750 million) does not have adequate debt service from the 28% of the oil and gas payments (and we don’t already), then who pays for it?
The General Fund? Nope.
The constitutional amendment allows them to take even more oil and gas payment money to make up the difference. These are set up to be 20 year bonds, which are estimated to require $3.7 million to repay annually. In FY13, we only received $83 million total in oil and gas payments, so the amount actually going into the Trust corpus is now down to approximately $26.5 million. The proposed debt service of $3.7 million is going to remove another 15% of all that we have left going in (revenue).
If this passes, we would have over time reduced the amount going in from 100% down to approximately 27% of the oil and gas payments (revenue).
So there you have it. Notwithstanding the best of intentions, we certainly support our Guardsmen, we are well on our way to putting the final touches on killing the goose that is laying the golden egg and protecting our future…..The Big Bad Wolf can’t wait until November 4th.