AFA Legislative Wrap Up- Week 10

dollars1The Alabama Legislature re-convened on Tuesday, May 12th for its 10th week of work for the 2015 Legislative Regular Session. Meeting on Tuesday and Thursday, the Legislature has now used up 22 of its allotted 30 legislative days. The House has introduced 669 bills and the Senate has introduced 481 bills. The Legislature plans to re-convene Tuesday, May 12th and is supposed to work a normal two day week.

As we have discussed previously, the Legislature is mired in the midst of determining what to do about its main responsibility- passing a balanced budget for the state. This is accomplished by passing appropriations bills that set forth spending based on projections on what the anticipated revenues will be for the year.

Alabama, in FY14 (which is the latest full year of data available, as we are currently in FY15), spent $28.9 billion in total. The revenue to offset that spending comes from a variety of sources including state taxes and fees and federal funds.

The Legislature focuses on two primary appropriations bills; the $6 billion education fund that allocates for education related expenses and the $1.85 billion general fund (FY15 appropriation…more on this later) that allocates for all other state agencies.

Almost all of the remaining revenue is already dedicated to certain spending through statutory or constitutional “earmarks.” The practice of earmarking was adopted historically, frankly, because the citizens didn’t trust their lawmakers to spend their dollars wisely. Earmarks ensure that revenues are spent in the manner that the voters desire.

Tax revenue for the state is made up of numerous types of taxes.

Among these various taxes, “Growth” taxes are those revenue streams that increase during improving economic times. Calling them “growth” taxes is probably a misnomer because they also rapidly diminish during weak economies. Alabama’s “growth” taxes are its income and sales taxes.

The Education Fund bill’s expenditures are offset by revenues generated by earmarks of the growth taxes. The General Fund bill’s expenditures are offset by revenues generated by non-growth taxes.

Because of this dynamic, two things occur.

First, during periods of economic growth, revenue for education expenditures grow, while funds for state agencies remain stagnant.

Second, during periods of economic downturn, revenues for education expenditures rapidly disappear, while funds for state agencies remain stagnant. The rapid disappearance of revenues for education is exactly why the legislature implemented the Rolling Reserve Act. This legislation creates a reserve fund that protects against the dramatic loss of revenue during economic downturns.

The General Fund remains stagnant, regardless of the state of the economy, and thus is always gasping for more revenue if their expenses increase.

Last week, the Senate’s Finance & Taxation Education Fund Committee considered a bill, SB12, introduced by Senator Paul Sanford (R-Huntsville). This legislation would put all revenues attributed to the Education Fund and the General Fund into a newly created “Recurring Revenue Fund” and then would re-distribute 78% for education appropriations and 22% for state agency appropriations.

The legislation would allow the General Fund to grow as it would allow it to obtain a percentage of the growth taxes.

The bill was not favorably received as it died on an 8-5 vote on a motion to indefinitely postpone the bill, forwarded by Senator Gerald Dial and seconded by Senator Quinton Ross.

During committee discussion, two things were apparent.

First, a majority on the committee would prefer raising taxes or finding other sources of revenues to support the General Fund rather than take away any “growth” revenues for education. In fact, one member, Senator Vivian Figures, advocated expanding Medicaid as a way to properly fund the General Fund. Huh?

Second, there appears to be no desire on behalf of the majority of this legislature to address systemic issues affecting the way the state allocates its resources.

So what’s the next step?

As set forth above, the FY15 General Fund appropriations bill allocated $1.85 billion for all non-education state agencies.

This past week, the House Ways & Means General Fund committee passed a FY16 General Fund appropriations bill of $1.65 billion, $200 million less than last year. This bill is scheduled for consideration this Tuesday before the full House of Representatives.

Many legislators are concerned that this reduction in spending will result in catastrophic consequences and that the public will react in a negative manner. So they are still considering tax increases. Many tax increase proposals are pending in the House (see Governor’s $451 million package and the House’s $150 million package) and yet others are being discussed (taxes on soft drinks, etc.).

So it will be interesting to watch this week to see what action the Legislature takes on moving the appropriations bills. The Education Fund bill has passed the Senate and is scheduled for consideration in the House Ways & Means Education Committee on Tuesday. It is expected to pass with no material changes from the Senate version. It may come to the full House as early as this Thursday.

Because the Senate has made it fairly clear that they are not inclined to increase taxes, the General Fund bill is expected to be passed by the House and taken up in committee in the Senate this week with little change anticipated from the bill passed out of committee. The Governor has said that he will veto the bill in its current form.

Stay tuned….

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