2016 Legislative Wrap Up- Part IV of V- Appropriations

dollars2Wednesday, May 4th, marked the close of the 2016 Alabama Legislature’s Regular Session.  Legislators passed the constitutionally required appropriations bills fairly early in the session which left time for debate on several high profile issues.  Many of these issues were not resolved which causes speculation that a special session may be called later in the year.

A detailed analysis of several legislative initiatives will be discussed over the next couple of days; I- Fuel Tax (see Here), II- BP Settlement (see Here), III- Prison Construction (see Here), IV- Appropriations (today), and V- Other Legislation of Interest.

Today….Appropriations

The Alabama legislature’s primary constitutional responsibility is to pass the appropriation bills necessary to fund the operations of state government for the next fiscal year.  Usually, they wait until the very last days of a session in order to accomplish this requirement, however, this year they passed the two main appropriation bills fairly quickly with the General Fund Appropriations bill passing on the 19th legislative day (out of 30 possible days) and the Education Fund Appropriations on the 25th legislative day.

Of note, once these two bills are passed by both houses and transmitted to the Governor, the Budget Isolation Resolution (“BIR”) is no longer required before addressing other legislation.  This is meaningful because to adopt the BIR, a bill must receive a vote in excess of 2/3 of the members present and voting at the time in order to receive consideration on the floor.  The Republicans hold 26 seats in the Senate and 72 seats in the House, both of which exceed the 2/3 threshold when all members are present.  This is why they are oftentimes referred to as holding a “supermajority.”  If the Republicans are working together as a caucus, the BIR is not a problem.  Absent the “supermajority”, the minority party (in this case the Democrats) could stop legislation from coming to the floor by voting against the BIR.

Enough with the parliamentary procedure lesson….

The Education Appropriations bill, HB117, sponsored by Representative Bill Poole (R- Tuscaloosa) provides $6.327 billion for FY17 education related expenditures.  This is an increase of $337 million in spending over the FY16 appropriations.  The cap imposed by the Rolling Reserve Act for FY17 was $6.432 billion (for more on the cap see this article).  The actual projected funding for FY17 is less than the cap, so therefore, all of the $337 million increase will be spent and nothing will be put into savings.

Included in the $6.327 billion in education spending is the Foundation Program for K-12 students which is funded at $4.033 billion for FY17, an increase of $192 million over the prior year.  By way of comparison, the highest funding for K-12 in the state’s history occurred in the FY08 budget at $4.15 billion and the next highest was $4.036 billion in FY09.  The Education Appropriations were subsidized in FY08 by draining a proration prevention account of $439 million and in FY09 by $437.4 million borrowed from the Alabama Trust Fund.

Though this year’s appropriation for the Foundation program would be the third highest in the state’s history, it is the largest non-subsidized amount.

The Republicans took control of the legislature in the 2010 elections.  Their first regular session in the role of leadership was in 2011 where they addressed FY12 appropriations.  Prior to this change in leadership, proration was declared in education spending in each of the 2008 through 2011 fiscal years.  Since the change of leadership, proration has not been needed.

Why?  One of the first legislative initiatives enacted by the new leadership was passage of the Rolling Reserve Act.  This act places a “cap” on education spending based on the prior 15 years of actual revenues.  Any actual revenue in excess of the “cap” is placed in a reserve account to be utilized during economic downturns and lagging revenues.

The cap has forced the legislature to budget in a fiscally responsible manner and as a result there has not been the need for proration.

The General Fund Appropriations bill, SB125 sponsored by Senator Trip Pittman (R- Montrose) provides for $1.847 billion in funding, an increase of $90.9 million over the FY16 appropriation.

By far, the largest appropriation in the General Fund Appropriations bill goes to Medicaid.  This year Medicaid funding was increased by $15.3 million to $700.4 million over the previous year’s spending authorization.

Ummm….an increase of $15.3 million, yet the media reports that Medicaid is suffering from cuts or is “experiencing a shortfall.”  The “shortfall” is derived from the department’s request of an additional $100 million this year over last year’s funding.

To put this into perspective the FY02 Medicaid appropriation was $231 million, which, when compared to this year’s $700 million, is an increase of over 200% in the last 15 years.

The next largest appropriation in the bill is that for Corrections which was funded at $412 million for FY17 compared to $197 million in FY02.  Again, a nearly 100% increase over the last 15 years.

Meanwhile, the Department of Agriculture & Industries was funded at $8.3 million in FY17 compared to $13.7 million in FY02, a 40% decrease.  Likewise, the Alabama Forestry Commission was funded at $6.7 million in FY17 (a $300,000 cut from last year) as compared to $14.2 million in FY02, a 53% decrease.

The General Fund appropriation for FY02 was $1.2 billion, when compared to this year’s $1.8 billion representing a 50% increase over 15 years.  Clearly, the growth in Medicaid and Corrections has swallowed all the growth in funding, and more, to the detriment of all other non-education functions of state governance.

What message does this send regarding our priorities?  Timber and Agriculture are two of the most important segments to the state’s economy.  At the rate that Medicaid and Corrections are expanding, the other General Fund agencies will soon be completely swallowed up.  To make matters worse, the other agencies are forced to adopt higher fees and earmarked taxes in order to make up their reduced budget appropriations.

State Budget Mess- Part II

trustWell…here we go again. Time to buckle the chin straps and get the ankles taped. No, it’s not football season, yet…unfortunately.

But it is time to bang a few heads and tee it up for another round of Montgomery politics. This chapter may get rough and it most certainly will be ugly.

The Governor has called the legislature back for a special session to pass an appropriations bill that will address the spending needs of the General Fund agencies. They will convene at 4 p.m. this evening and will have 30 calendar days to conduct 12 legislative work days.

The need for the special session was never in question. The timing is causing a little head scratching. Everyone had been planning that the special session would begin in mid-to-late August. The Governor surprised most everyone by moving that time-table up a month.

So here we are…starting the special session today…and there is no plan. Nada. Zip. Zero. Well, that’s not entirely correct. There are a bunch of plans/ideas, it’s just that none of them seem to have the necessary votes to get to the finish line.

The Governor has offered his solution…raise taxes.  He has reduced his desired revenue increase package from $541 million down to $350 million (Ummm….see BP Settlement), but offers no restructuring of government.

Senate President Pro Tem Del Marsh has his gaming plan. But, even with Pat Dye’s help, there doesn’t seem to be much support for it and again, no restructuring of government.

House Speaker Mike Hubbard has proposed a mixed bag of Indian gaming and targeted taxes. It appears that no one in the Senate is interested in this plan, so if the House passes tax increases they will be out on a limb all by themselves, and again, it does not include any restructuring of government.

So where does this leave us?

At the conclusion of the regular session, the legislature passed an appropriations bill that spent only the amount of current revenue anticipated for FY16, approximately $1.65 billion. The Governor vetoed it. The media and the state agencies went nuts.

The taxpaying citizens of Alabama, however, have been strangely quiet.

Perhaps they believe that government should be fiscally responsible. Perhaps they believe that plenty of revenues are being sent to Montgomery. Perhaps they believe that government should be smaller instead of continuing to grow unchecked.

Perhaps our elected leaders should listen to those that elect them.

The General Fund appropriations bill is just a small part of the fiscal picture. The reality is that Alabama will spend nearly $28 billion in FY16. The Education Fund appropriation sets forth nearly $6 billion in spending. Add General Fund and Education Fund appropriations together and you get about $7.6 billion. The difference in this amount and the $28 billion is made up with earmarked taxes, fees and federal dollars.

Perhaps we need to set some priorities in state government and see that those are funded adequately.

But that’s not easily done. Earmarked taxes preclude the legislature from moving that revenue from one spending need to another as priorities change.

Removing earmarks is just a piece of the puzzle. What is needed is a master plan.

A master plan that acknowledges that our current public pension system is not sustainable; a plan that determines priorities for the state; a plan that provides flexibility for addressing these priorities; a plan that addresses the incredible growth of Medicaid; addresses prison overcrowding, etc., etc.

The average tax paying citizen wants to see the plan. Not just the revenue side, but the spending side as well. Until that plan is developed, there will not be support for increased revenues.

The plan may materialize in the special session, but certainly will not be completed. We have been waiting for the plan since, well…forever. Certainly since we were promised in 2012 that if we allow for a raid of the Alabama Trust Fund that the political leadership would begin the process of putting a plan in place.

But no difficult decisions have been made and now we find ourselves in another “crisis.” For goodness sake, they couldn’t even make the decision to get the state out of the retail alcohol business; much less address the systemic issues that are driving the state into an economic disaster.

Please…no more band-aids. Please don’t fall victim to the promise of a BP windfall. Please don’t enact “targeted” tax increases.

Let’s start the process of fixing this mess.

Senator Paul Sanford: “To Heck with Sausage, Laws should be made like Barbeque”

We have all heard the saying “Laws are like sausages, it is better not to see them being made,” which is widely attributed to Otto von Bismarck, a German Prussian politician (1815-1898). A little research indicates that there is some controversy over its actual origin.

A competing theory indicates that the phrase actually originated in the United States from an unknown member of the Illinois legislature in the 1870’s who is reported as stating…”I have come to the conclusion that the making of laws is like the making of sausages- the less you know about the process the more you respect the result.”

porkRegardless of the origin, perhaps a better analogy for lawmaking can be drawn from the making of good southern style barbeque.

Tasty barbeque is derived from slowly cooking pork until it literally falls apart. In the same manner, good laws require the slow test of time and need to be pulled apart to the point that all potential inadvertent consequences can be evaluated.

Who better to guide the lawmaking process than the only master barbeque chef in the Alabama legislature?

sanford2Senator Paul Sanford (R-Huntsville) was born in 1967, graduated from Huntsville High School and the prestigious Culinary Institute of America in Hyde Park, New York. He was first elected to the Alabama Senate’s District 7 in a special election in 2009 to determine the replacement for Parker Griffith who resigned after being elected to Congress. He was re-elected in 2010 and again in 2014.

He is the great-grandson of “Big Bob” Gibson the famous barbeque pioneer from Decatur. Big Bob Gibson Barbeque is nationally known for its award winning white sauce and barbeque. Four generations of Gibson’s have now carried on the family tradition. Sanford’s grandparents moved to Huntsville from Decatur and brought with them the well-known name and recipes.

littlepaulsUpon his return to Huntsville after Culinary school, Sanford desired to carry on the family business but also wanted to chart his own course. He stayed in the barbeque business but founded Little Paul’s Barbeque to distinguish himself from his roots.

 

Distinguishing himself from others has become his trademark in the Alabama Senate as well. Considered somewhat of a maverick, Sanford has developed a reputation for not necessarily going along with the crowd. “Sometimes ‘no” is the best vote that I cast,” says Sanford.

He approaches every piece of proposed legislation from the standpoint of his strict adherence to constitutional principles. “I believe that our founding fathers intended for government to be limited, so I am going to be opposed to growing government…both in size and services. I am also going to make sure that the money we send to Montgomery is used wisely.”

The recently concluded 2015 General Session of the Alabama Legislature proved to be particularly irritating to Senator Sanford. He does not necessarily agree that there is a “short fall” in the General Fund. “We don’t have a revenue problem, we have a spending problem.”

The revenues available for the FY16 General Fund Appropriation are $200 million less than the amount appropriated for FY15. However, that’s primarily because the legislature no longer has the $145 million per year that was created by taking money from the corpus of the Alabama Trust Fund.

“I was opposed to taking that money when that legislation passed, and just because we no longer have access to it, I certainly don’t think we need to be raising taxes to cover the difference. We should have made some hard decisions then, but that did not occur and the can was kicked down the road.”

“There are lots of alternatives to reducing the size of government. I can’t believe we didn’t pass the bill to remove the ABC Board from retail sales. Who in their right mind would even think about putting Government into the liquor business today? That was $20 million right there. I just don’t think our guys are ready to take on all the lobbyists and former legislators yet. Ironically, some would rather raise taxes than irritate the government sector. Is that really what Conservative Principles and the Republican Party are about today?”

In this past session, he introduced legislation that would have combined all tax revenues into one pot and then redistributed the proceeds on a percentage basis to education and general fund needs. This distribution plan would have kept education appropriations at their current levels but would have proportionally split the “growth” of the tax revenue for future years. Currently, education gets the benefit of the state’s “growth” taxes.

His frustration with his colleagues is evident. “My bill did not get the consideration it deserved. It was killed in committee without any legitimate debate. I have serious doubts that, when the Governor calls a special session, we will take up anything that could be considered controversial, unless of course it is to extract more tax dollars from the Alabama economy.”

“I know one thing…if they try to just pass some targeted taxes, I am going to do everything I can to stop it. We don’t need more taxes; we need more flexibility to do what we are supposed to do as legislators. We need to prioritize the spending, but right now our hands are tied with all the earmarks.”

pork2Perhaps, like good barbeque, some ideas just take some time to be evaluated until they are ready to be served.

Representative Mike Holmes to Release State Budget Alternative

panicFirst there was the Governor’s plan which would increase taxes in targeted areas by $541 million, then there was Senator Del Marsh’s broad gaming solution and after that came Speaker Mike Hubbard’s plan raising taxes and giving exclusive gaming rights to the Poarch Creek Indians.

A fourth plan is about to be publicly released…and it’s certainly representative of thinking “outside the box.”

Representative Mike Holmes (R- Wetumpka) is offering the “Bold Tax Reform for Alabama” as a conservative alternative to previously released plans. Whether one supports it or not, it certainly is bold…

Holmes plan would require a constitutional amendment and would include repealing the state income tax. In return, the state sales tax would be expanded to include services, increased from 4% to 6.5% and most exemptions would be removed. The result is an increase of an estimated $475 million to the state.

Yes, it would be a tax increase. But before anyone goes nuts, the plan has much, much more to it.

First, the two main appropriations bills would be capped at FY15 baseline levels ($5.9 billion for the ETF and $1.85 billion for the GF) and would change annually based on changes with the Consumer’s Price Index.

Second, within the General Fund appropriation’s bill, Medicaid and Corrections would be capped relative to a percentage of total expenditures.

Third, immediate needs such as repayment to Alabama Trust Fund for the General Fund Rainy Day Account, funding the prison reform initiative and funding for $60 million bond for prison capital construction needs are all addressed.

Fourth, sales taxes would be removed from groceries. At an annual estimate of $330 million, this would reduce the burden on lower income taxpayers.

Finally, any excess funds left over cannot be used for recurring expenses. Excess funds are estimated to be $197 million the first year the plan is implemented.

With the Holmes’ plan the excess will be distributed; 10% to the Alabama Trust Fund increasing the amount available for General Fund Rainy Day Account, 25% to the Alabama Trust Fund increasing the amount available for the Education Fund Rainy Day Account, 25% to an Education Capital Project Fund, and 40% will be available annually for critical non-recurring needs appropriated by the Legislature. To the extent there is a remainder, the excess would go into the general corpus of the Alabama Trust Fund.

So, in essence, the plan will raise revenue (translation: raise taxes), but in return the state’s taxpayers are assured that growth in government is contained, priorities can be addressed and a fiscally responsible plan to grow savings is adopted so that the state will be prepared for another inevitable economic downturn.

The most intriguing part of it? It will be in the state’s Constitution. Future legislative bodies will not be able to simply ignore it when tough choices have to be made.

So what does the Alabama Forestry Association think about it?

“Obviously, when you are talking about change this dramatic, we will need to look carefully at the details. Clearly, we are not interested in the Band-Aid approaches that have been discussed and we certainly are not interested in raising revenue without some substantial reform measures being adopted. Representative Holmes’ plan appears to offer a thoughtful and meaningful approach,” said AFA Executive Vice President Chris Isaacson.

He went further to say, “I like the limits on growth, the required savings and the fact that all of it will be protected in the Constitution. We are interested to see what the economists predict the dynamic impact will be of putting $3.7 billion (income taxes not being paid) back into the state’s economy. Replacing a required income tax with a voluntary broadened consumption tax has a certain appeal to it. We look forward to seeing the plan in the form of legislation and we will make a decision at that point.”

Representative Holmes, on whether the plan would have a chance for serious consideration by the legislature, stated, “we have all been talking about really addressing systemic change, now is the time to have that discussion. It appears we will have a couple of months to get all the details out before a potential special session. We’ll see whether the state’s leadership is serious about truly fixing this mess we are in.”

Holmes is a member of a conservative group of House legislators that have been clamoring for meaningful reform to the way government is currently funded.

It will be interesting to see whether this group will coalesce around the Holmes’ Plan and whether the legislative leadership gives the alternative legitimate consideration.

Stay tuned…..

Proposed Bill Will Delay Payback to Alabama Trust Fund

trustYou may recall, in 2012, the legislature, facing a revenue shortfall in the general fund, passed a constitutional amendment that the voters ratified allowing a “raid” of the Alabama Trust Fund to the tune of $145 million a year for three years, or $435 million in total.

 

You might also recall that there was not a repayment provision for the money taken from the Trust Fund.

AFA was opposed to the idea of taking money from the Trust Fund. Our position was that the state’s leaders should be focusing on addressing the systemic issues in state governance, not taking the easy way out.

AFA also believed that the money should be paid back.

Our primary legislative initiative in 2013 was legislation that provided a “payback” of the Trust Fund. Sponsored by then Senator Bryan Taylor, the legislation was the first bill passed in the legislative session and required repayment over a 12 year period. The first payment of $5 million was paid in the FY14 fiscal year (which ended 9/30/14). The second payment of $15 million is due this fiscal year. The legislature is now working on the FY16 budget and the law requires a payment of $30 million.

We were concerned at the time that the “payback” legislation was a statute and not a constitutional amendment. In other words, future legislatures could change the law as priorities changed (and they thought the voters might forget).

It appears that we were correct.

Yesterday, HB490 was introduced by Representative Steve Clouse. HB490 eliminates the payment requirement for the FY16 budget year and extends the repayment plan through the year 2027.

Clouse, powerful Chairman of the House Ways & Means General Fund Budget Committee, obviously feels that there are more pressing needs for the $30 million than paying back the Trust Fund. HB490 has been assigned to his committee.

AFA opposes HB490.

 

Senator Pittman Introduces AFA Priority Bill

pittman2Senator Trip Pittman (R-Daphne) has introduced SB248 which sets forth a proposed amendment to the constitution incorporating the current Rolling Reserve Act. The proposed legislation requires that education appropriations each year be limited by a cap that is determined by an average of the actual revenues of the highest 14 years in the prior 15 years.

Any actual revenues received in the Educational Trust Fund for the year in excess of the cap will be distributed first to pay back the Education Rainy Fund housed in the Alabama Trust Fund (which should be fully repaid within this fiscal year) and then the remainder will be allocated 70% to a new proration prevention account and 30% to a capital account to be used for school construction.

pig

The bill was co-sponsored by 21 members of the Senate and is being regarded as a Senate Republican Caucus priority bill. The bill has been assigned to the Senate Finance & Taxation Education Fund Committee chaired by Senator Pittman.

Senator Pittman continues to demonstrate his capable leadership, especially in the area of fiscal responsibility. AFA characterizes the Rolling Reserve Act as one of the three most important fiscally responsible initiatives ever instituted by the State of Alabama (along with the balanced budget requirement in the constitution and the formation of the Alabama Trust Fund that theoretically protects oil & gas royalty income in perpetuity).

The Rolling Reserve Act cap is in peril in the development of the FY16 Education Appropriation. Because it is currently only a statute, it only serves as a planning tool until the next legislature decides to override its requirements.

Putting it in the constitution will preclude this override. The Governor’s proposed FY16 Education appropriations, if enacted, would override the cap.

Representative Ed Henry (R-Hartselle) is expected to carry the legislation in the House.

Please contact your legislators and ask them to support this legislation.

Good Job Governor- State makes $70 million Repayment to Alabama Trust Fund

bentley

 

Caught up in the news last week was a small tidbit of information that is quite important to the fiscal matters of the State. Governor Robert Bentley announced that $70 million has been repaid to the Alabama Trust Fund’s Education Rainy Day Fund. This leaves approximately $92 million that must be repaid by June 2015. (See the press release here)

Governor Bentley should be commended for focusing on this matter.  It’s for reasons such as this that we need him around for another four years.

The $70 million repayment was a result of a $35 million absolute appropriation contained in the FY14 (which just concluded on September 30th) Education Appropriations bill and another $35 million that was a “conditional” appropriation in that same bill.

The Education Rainy Day Fund was initially established in 2002 by constitutional amendment setting forth an account within the Alabama Trust Fund to be used by the state to stave off the effects of proration. In 2009, then Governor Riley drained the account of $437.4 million. The Constitution requires repayment of these funds within six years, which occurs in June 2015.

After this latest $70 million repayment, $92 million is now left to be repaid. Of that, $35 million is set aside in the FY15 education appropriations bill as an absolute appropriation, which leaves $57 million left to be dealt with in the next legislative session that begins next March.

Clearly the legislature has to pass an appropriation in the next session that will repay the Rainy Day Fund. They are required to because the state’s constitution requires it.

Here is where it gets interesting.

This amount, $57 million, will be spent in FY15 because of the June 2015 trigger date. Thus, the repayment amount will need to come out of the FY15 Education Appropriations (it’s got to come from somewhere).

During the last legislative session, the legislature passed a FY15 appropriations bill that limited spending utilizing a “cap” determined by the Legislative Fiscal Office based on an average of spending for the prior 15 years. Pursuant to the Rolling Reserve Act (Acts 2011, No. 11-3), the legislature is precluded from spending education dollars above this “cap”.

The Rolling Reserve Act also requires that if any actual revenue comes to the state that exceeds the “cap,” this additional revenue must first go to pay back the Education Rainy Day Fund. Unfortunately, the state will not be able to access this additional money in time to make the June 2015 payment requirement; because it’s unknown how much actual revenue will be available above the “cap” until the end of the fiscal year (September 30, 2015).

So how will this work? When they appropriate this $57 million, will they simultaneously reduce the amount they spend in other areas of the FY15 Education Budget by an equal amount? That would be logical, right? Because, based on the Rolling Reserve Act, they aren’t supposed to spend above the “cap” for FY15 appropriations.

That’s going to be an interesting question and one that we will follow closely. If they don’t reduce the appropriations elsewhere, then they will be effectively ignoring the “cap” and thus ignoring the requirements of the Rolling Reserve Act.

The Rolling Reserve Act is a shining example of fiscal responsibility and is one of the most important laws ever passed in the state’s history. Unfortunately, it was passed as a statute. Any subsequent act by the Legislature can override the requirements of the statute (like ignoring the “cap”).

As part of AFA’s legislative agenda for the 2015 legislative session, we will be advocating that the requirements of the Rolling Reserve Act be placed in the state’s Constitution, thus protecting it and forcing future legislatures to follow its fiscally responsible requirements.

A further note on the Rolling Reserve Act; once the Education Rainy Day Fund (within the Alabama Trust Fund) is repaid, the next available amount goes to fund a second Rainy Day Fund (called the Education Trust Fund Budget Stabilization Fund housed within the State Treasury, not the Alabama Trust Fund) which itself is capped at 20% of the previous year’s total education appropriation. Once this fund is completely full, any further additional revenues above the “cap” will be placed in a fund to be used for capital education projects (placed in the Education Trust Fund Capital Fund, again, housed within the State Treasury, not the Alabama Trust Fund).

Wow. That is responsible budgetary planning. Passage of the Rolling Reserve Act was important. Protecting it in the Constitution is even more important.

The Hen is Comin’ Home to Roost

hens

Seven Days.  The 2014 Fiscal Year ends in seven days, and guess what?  Alabama’s economy is not booming.  In fact, surprise…it’s stagnant.

In June, we posted that the State was not experiencing the dynamic growth in tax revenue anticipated by some of our public policy leaders.  At that time, we praised Senator Pittman for his foresight (even though he was on the losing end of the battle) in taking the prudently fiscally responsible approach towards the education appropriations process and paying back the ETF debt to the Alabama Trust Fund.  (See:  http://www.alaforestrygovtaffairs.org/senator-pittman-was-correct-stagnant-economic-growth-will-challenge-repayment-of-etf-rainy-day-fund/).

He suspected then what we now know to be the case.  The mainstream media is also now beginning to take note.  (see:  Mike Cason’s article on al.com).

According to Cason’s report, the state’s education related receipts are up 1.6% or $83 million over last year.  Though the article doesn’t provide much depth, it does raise the question of how the legislature will repay the remaining $162 million due the Alabama Trust Fund (the amount still owed from the $437 million borrowed in 2009) in June 2015.  Even though receipts are up over last year, where are they in comparison to what the legislature used to prepare their budget?

With the institution of the Rolling Reserve Act, most year’s appropriation level will be limited by the cap imposed by the Act.  For FY14, however, the legislature did not think revenues would reach the cap, so they limited themselves to an estimate of what those actual revenues would be.  So what was that number?  Cason reports that the receipts to the ETF were “about what the Legislature projected when it passed the budget in 2013.”

If that’s the case, then there is no excess receipts over expenditures.  Right?

The FY14 ETF appropriation includes a $35 million absolute appropriation and a $65 million conditional appropriation for repayment to the Alabama Trust Fund.  A conditional appropriation only kicks in when there are receipts in excess of revenues.  So, it looks like only $35 million will be paid towards the debt at the expiration of the fiscal year in seven days.

That will then leave $127.6 million to pay by June 2015.  FY15’s ETF appropriations bill includes another $35 million, so when that is paid, it will still leave $92.6 million to be paid.

As noted in previous posts, the June 2015 repayment date is the challenge.  The legislature will convene in March next year and one of the first items they need to focus on will be the passage of a supplemental appropriations bill to address this repayment requirement.  This will be money that will come out of the “cap” imposed by the Rolling Reserve Act and thus not available for FY16 educational expenditures.

Get ready for the usual suspects to scream bloody murder about this payment, the “cap” and the Rolling Reserve Act itself.  There will be enormous pressure to ignore the Act’s requirements.

All the more reason to pass a bill to make the Rolling Reserve Act a part of our constitution.  AFA will be advocating just that in the coming legislative session.

 

 

 

 

 

 

The Big Bad Wolf is Lickin His Chops waiting for November 4th

wolf

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.

Stay tuned….

 

No Assembly Required

Isn’t it nice to receive a gift and see that there is no assembly required?  You open the package and its ready to go…you get the immediate benefit….

 Well that is the very reason that the Alabama Forestry Association and ForestPAC is supporting Steve French for the Alabama House of Representatives.

 Steve is a former legislator, having served in Alabama Senate for 12 years, and was recognized at the time as being one of the Senate’s most fiscally conservative members.  Unfortunately, as a Republican, Steve served in the minority at the time and his efforts were not appreciated.

 Steve is ready to govern from day one…let me remind you of some of his past actions…

 In the 2004 legislative session he sponsored a bill (SB424) to create a responsible budgeting process (the precursor to the Rolling Reserve Act) six years prior to its eventual passage.  Two important parts of this bill did not survive ultimate enactment; first it applied to the General Fund as well as the Education Trust Fund and second, it was intended to be enacted in conjunction with a constitutional amendment to lock in the requirements and avoid the conflict of laws issue we have today.

 In 2005, he sponsored a bill (SB25) that would prohibit the legislature to use non-recurring income to fund ongoing expenses.  Still a good idea…still an initiative that needs to be enacted and certainly one that AFA would aggressively support.

 In 2006, he sponsored a bill (SB202) that would have created a constitutional amendment that would have significantly limited the use of eminent domain.  Legislation was ultimately passed, but not nearly as helpful to private property owners as SB202 would have been.

 In 2008, he sponsored a bill (SB367) to change the auditing function of the state by abolishing the Office of Examiners of Public Accounts.  In the recent 2014 session, AFA strongly supported similar legislation, but it still has not been enacted.

 Finally, in the first special session of the 2009 legislative session, Steve introduced and passed a bill (SB14) setting forth a constitutional amendment (later ratified by general vote of the people) to create the proration prevention accounts within the Alabama Trust Fund to assist the budgets during challenging economic times.  These accounts were drained the very next fiscal year to allow the state to survive during one of the worst recessions in our country’s history.

 Some of his ideas have been implemented since the Republicans have gained the majority, but several have not.  These are good ideas that need to be enacted.

 Steve faces three opponents in the June Republican Primary for House District 46 (Birmingham area- mainly Mountain Brook, Homewood and Hoover) and he needs our help to get elected. 

 We need a powerful voice in the House of Representatives that will be the champion for initiatives that address fiscal responsibility, accountability and transparency.  Steve French is ready to serve, and there will be no on the job training required…

 There is much left to do and he will be ready to go day one…..with no assembly required.