2015 2nd Special Session- Wrap Up

skyThe second Special Session of 2015 has finally concluded and the hay is in the barn. The Alabama Legislature passed several measures that allowed them to cobble together a FY16 $1.75 billion appropriation bill for General Fund spending on non-education state agencies.

 

This appropriation level is 4.5% less than the FY15 funding level of $1.84 billion.  According to the mainstream media, state employees and state agencies, the world is going to come to an end. “The Sky is Falling.”

What you don’t hear is that state government in FY16 will be 1.5% bigger than FY15.

sky2The State’s General Fund Appropriation represents only 6% of the total expenditures of the state. In FY16, the state will spend $29.4 billion and, by far (74%), the greatest source of funding is earmarked taxes and federal funds. That means the legislature only has control over 26% of state expenditures. That has to change, but we will address that in the future.

Back to what happened in the second special session, where the legislature essentially passed five meaningful pieces of legislation.

First was the increased tax on cigarettes which is estimated to increase revenue to the General Fund by $66 million. This bill passed in the House by a vote of 52-46. Of the 46 “no” votes, only 17 were Republicans. 48 Republicans in the House voted for the tax increase. In the Senate, the bill passed on a 21-13 vote. Of the 13 “no” votes, 9 were Republicans. 16 Republicans in the Senate voted for the tax increase. The Republican members that supported the tax increase were essentially telling the taxpayers of Alabama that no further reductions in state government were achievable.

The second and third items were referred to as Medicaid “provider” taxes that increase revenue to Medicaid (and thus the General Fund) by $17 million. An increase paid by nursing homes and pharmacies on their services were spread over the entire base of their clients. This additional revenue allows the state to match more federal dollars. Ahem…federal dollars are tax dollars as well, aren’t they?

Pharmacists will pay a “supplemental fee” of $0.15 for every prescription they fill in Alabama. In return, they will receive an increase in the amount of reimbursement they get through dispensing fees approved for Medicaid recipients. According to testimony before the legislature, a pharmacist will need to be serving a clientele composed of 8% Medicaid recipients in order to “break even.” So if they serve over 8%, they will make more money than before. Medicaid beneficiaries are estimated to be 25% of Alabama’s population. No wonder they agreed to this tax increase. The losers will be Alabama’s tax payers that pay federal taxes. Uhhh….isn’t that most of us?

The fourth major item was the transfer of part of revenues derived from the use tax to the General Fund. Previously earmarked for the Education Trust Fund, the use tax is a tax that is put on products purchased out of state to make up for the loss in sales tax from in-state purchases. Prior to the passage of this legislation, the use tax was distributed 25% to the General Fund and 75% to the Education Trust Fund. Now it will be 53% to the General Fund and 47% to the Education Trust Fund. This results in $80 million more to the General Fund and, of course, $80 million less to the Education Trust Fund.  But don’t worry, the education community has been well taken care of.

The fifth and final important item was a change made to the Rolling Reserve Act which sets a cap on education spending. At the end of each fiscal year, any “excess” between actual revenue the state receives and the cap is placed in a “stabilization” account. Prior to the change, all the excess transferred to the stabilization account was to be put into a proration prevention account, up to 20% of the prior year’s education appropriation (approximately $1.2 billion). Once that was filled up, any further excess could be used for any education related non-recurring capital related expense. This legislation changes the cap formula (takes out the lowest year of the prior 15 years appropriations, thus raises the cap allowing more spending) and also changes the distribution to the proration account (instead of 20% and $1.2 billion in protection, it’s now 7.5% or $450 million in protection) and also changes the rate of distribution to the proration account (unlimited previously, now its, for the first year, 2% of prior year education appropriations or an estimated $120 million and 1% each year thereafter).

So what does this mean? Well at the end of this fiscal year (September 30, 2015), there will be an estimated $150 million surplus. Previously, this surplus would have completely gone to fill the proration account. With this legislation, $120 million will go to the proration account and $30 million will be increased spending set forth in a supplemental appropriation that will come in the next Regular Session.

During the special session, education interests were screaming bloody murder about the “raid” to prop up the General Fund. Here’s the truth…after all is said and done, education expenditures increased by 1.42% for FY16. This does not even take into the account what will occur in future years with an increased cap, immediate spending from the surplus and, oh yeah…bills were passed during the 2015 Regular Session that resulted in increases to the ETF of approximately $40 million.

The drumbeat for raising revenue has already begun in anticipation of the 2016 Regular Session which begins next February where work will begin on the FY17 appropriations. We will continue to hear that the state will shut down, state parks will close, troopers will be off the roads and on and on and on….

By the way…did you know that the Alabama Law Enforcement Agency got an increase of 39% for FY16? Hmmm….wonder why they don’t tell us that?

Stay tuned…..

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