Does the Right Hand know what the Left Hand is Doing?

As the financial problems of the state mount, the Legislature and Governor hold out hope that a solution will literally fall in their lap (or better yet, wash up on shore).

As we drill (sorry, I promise I will quit with the puns) into these problems, you will discover that there is an irony here that is quite disturbing.

Before we get into that however, lets first list some of the things the Governor and Legislature would spend money on if they had it:

The General Fund expenditure wish list includes raises for state employees (each 1% equals approximately $20 million), payback the ATF General Fund Rainy Day Fund ($161 million), payback the ATF for GF operating budget ($437 million), build new prisons ($600 million+), expand Medicaid (bottomless pit), hire more troopers, and hire more prison guards, etc.

The Education Fund expenditures wish list includes reducing classroom size, pay raises for teachers (each 1% equals $34 million), more funding for pre-Kindergarten program, more funding for AMSTI, expand technology to the classroom, etc.

So with no desire to increase taxes, how are we going to pay for all this?

Ask our leaders and they will tell you that they hold out hope that financial salvation is on its way in the form of the BP oil spill settlement.

The BP settlement is extremely complex.  In an effort to make it as simplistic as possible, imagine that there are three “pots of money” involved. 

The first pot is the civil penalties that must be paid to the federal government.  Congress, through the July 6, 2012 Restore Act, set up the Gulf Coast Restoration Trust Fund for the coastal states that were affected.  80% of the civil penalties will be deposited in the trust fund and invested.  Alabama, as one of these states impacted, is due its portion.  These funds, however, are to be used only in the coastal region for cleanup, restoration, etc.  It is from this “pot” that the Governor is planning to build the hotel/resort at the Gulf State Park.

The second pot is the economic damages incurred by individuals on a case by case basis for economic damages caused to them by the economy being influenced negatively by the oil spill.  This fund has received much media attention of late as BP has now returned to court asking that the settlement that they had previously agreed to be set aside.  Not only did they agree to it, but they were responsible for drafting it.  These funds go to individuals and companies, not to the state.

The third pot is the “honey hole” for the Governor and Legislators.  This money will come as either a settlement or as a result of a trial between the State and BP over lost tax revenues the state’s economy incurred due to the spill.  If it comes to a trial, Alabama will be the first state (of five) to take their shot.  The amount at issue is being estimated to be potentially in excess of $1 billion.  That’s right…$1 billion.

AFA had the temerity to suggest (and actually introduced legislation) that the money from the third pot be put into the Alabama Trust Fund and protected and utilized for the benefit of our citizens in perpetuity.  Not so fast….we were told by legislators and the Governor that our idea was not a good one and that it was dead on arrival.

But I digress…we can discuss the merits of what to do with the money at a later date (and I assure you, we will).  The purpose of this article is to point out the troubling irony associated with this pot of gold.

You see…who is responsible for getting us this gold?   The Attorney General is the state’s lawyer and he has been diligently working to see that the state gets its fair share.  He is actually the lead attorney for all the states negotiating with BP.  Because of Luther Strange’s professional and competent management, Alabama is situated better than any other state regarding these negotiations.

Wait a second….something doesn’t make sense here.  Careful evaluation of the proposed FY15 General Fund appropriations bill shows that the Office of the Attorney General has been “zeroed out.”

 If the State’s plan for funding its wish list is being controlled by the success of the Attorney General, wouldn’t we want to make sure his office is fully funded in order to have the resources to do the best job possible?

There seems to be a conflict between the constitutional office of Attorney General and other state leaders.  These state leaders believe that the Attorney General has the capability to “self fund” the office through “future settlements.”  What happens if these prospective settlements fail to materialize?  Good question…and one that we will continue to look into.

Stay tuned…I don’t think this drama is near from over…..

The Rolling Reserve Act- Part III- Leave it Alone

This article is the third of a three part series evaluating the Rolling Reserve Act and its importance to the fiscally responsible management of the state’s education appropriation process…..

As mentioned in Parts I & II (see: www.alaforestrygovtaffairs.org/the-rolling-reserve-act-part-i-whats-the-big-deal/ and www.alaforestrygovtaffairs.org/the-rolling-reserve-act-part-ii-its-working-just-fine/), the Rolling Reserve Act is an integral part of the state’s budgeting process for education appropriations.  There is, however, a move afoot to tinker with the Act.  Let’s take a closer look at that….

LFO is estimating that FY15 receipts will exceed the Rolling Reserve Act cap by $157 million.  The ETF Rainy Day fund housed in the Alabama Trust Fund will be fully repaid by its constitutionally mandated time period (fingers crossed!).  So legislators and special interests are now beginning to question whether it’s necessary to continue the restraints imposed by the Rolling Reserve Act.  They argue that $157 million could be spent in numerous ways (teacher pay raise) that are better than putting it away for protection against future proration.

We would argue that the Act is working just fine and should be left alone.  The ATF Rainy Day Fund protects just 6.5% of the total ETF expenditures.  A fully funded Education Trust Fund Stabilization Fund will protect another 20%.  Combining these two funds results in a proration protection plan equal to 26.5%.  That is sound fiscal management.

Once the Education Trust Fund Stabilization Fund is fully funded, the Rolling Reserve Act surpluses then go toward building a trust fund to be used for capital projects for schools.  That is sound fiscal management.  And, the beginnings of (heaven forbid!) a responsible approach to long range planning.

This three part series has focused on the Rolling Reserve Act and its impact toward repaying the ETF Rainy Day Fund.  Keep in mind however that in 2009, the legislature also drained the ATF General Fund Rainy Day Fund of $181 million.  There is no Rolling Reserve planning tool for the General Fund appropriations process and guess what?  Not one thin dime has been repaid to replenish the amount borrowed, which by constitutional mandate, must occur by 2020.

One mistake made in the process of developing the Rolling Reserve Act is that the Act is set forth in the Alabama Code as opposed to having been done as a constitutional amendment.  As the hysteria builds to try to work around the Act, efforts will increase to repeal it.  If it were embodied in the Constitution, it would be much harder to make it go away. 

Speaking of the hysteria…there are also continual efforts to “work around” the Act’s cap requirements.  The cap for FY15 is set at $5,899,655,878.  At this point the FY15 ETF appropriations bill has passed the Senate and the House and now is likely headed a conference committee.  The House version provides spending at $5,931,782,878 (exceeds cap by $32 million) and the Senate version has spending at $5,915,987,426 (exceeds cap by $16 million).  How is this possible?

Good question…and one that seems to trouble a lot of folks.  When asked, most legislators have no good answer and frankly seem surprised to learn of this.  It appears that revenues are “diverted” and spent before they are placed in the Education Trust Fund. 

Where do they get the authority to do this?  Another good question.  It appears that it is a conflicts of law question.  On the one hand we have one statute, the Rolling Reserve Act, that sets forth the cap by a formula and requires any revenues in excess of the cap to be used for proration protection.  On the other hand, there is a second statute, the Education Trust Fund appropriation bill, passed annually, that appears to just ignore the Rolling Reserve Act statute.  The legislative leadership does appear to be “trying” to comply with the cap, but when they don’t make it, they don’t let its requirements impede their appropriations.

Again, if the Rolling Reserve Act was a constitutional amendment, rather than just a statute, then the ETF appropriation bill could not trump its requirements. 

So if we are going to change or tinker with anything in conjunction with the Rolling Reserve Act, lets pass it again, but this time as a constitutional amendment.

The Rolling Reserve Act- Part II- It’s Working Just Fine

This article is the second of a three part series evaluating the Rolling Reserve Act and its importance to the fiscally responsible management of the state’s education appropriation process…..

As mentioned in Part I (see:  www.alaforestrygovtaffairs.org/the-rolling-reserve-act-part-i-whats-the-big-deal/), the Rolling Reserve Act is an integral part of the state’s budgeting process for education appropriations.  Let’s now take a look at what has happened since its inception.

Taking a look back….

The ETF appropriations for FY2009 exceeded actual revenues and thus the Governor had to declare proration.  The ETF Rainy Day Account was drawn down completely with a transfer of $437.4 million.  This transfer triggered a constitutionally mandated repayment date of June 2015 (3/4 of the way through the FY15 budget cycle).

Prior to FY14 (starting October 1, 2013), the state had repaid $274.8 million, leaving a balance of $162.6 million.  Where did the repaid amount come from?

First, FY12 (the first budget cycle for the new leadership) resulted in actual revenues exceeding appropriations which allowed for the transfer of $14.4 million.  Second, in FY13 (the first budget cycle with the Rolling Reserve requirements) there was a total repayment of $260.4 million which came as a result of the Rolling Reserve Act where actual revenues ($5,703,241,423) exceeded the capped expenditure level ($5,442,852,452) resulting in the surplus being transferred for repayment.

So good, we have paid back $274.8 million, but we still owe the balance of $162.6 million which has to be paid by June 2015 (more on the significance of that date in a second).  So where will the rest come from?

For FY14 (concluding September 30, 2014), the cap was set at $6,014,101,843.  As the FY14 appropriations bill was being developed, the Legislative Fiscal Office (LFO) estimated that revenues would be $5,730,396,233, which is less than the cap.  The estimated revenues figure is what the legislature passed as an appropriated amount, not the cap. Because actual revenues were estimated to be below the cap, the Rolling Reserve Act did not come into play.  As deliberations began on the FY15 appropriation bill, LFO modified its previous FY14 estimates and now estimates that actual receipts will be $5,831,500,000 which would leave a surplus of $101,103,767 over what was appropriated.  The FY14 appropriations bill includes an absolute appropriation of $35 million for repayment.  Combining the surplus and absolute appropriation would be $136,103,767.  Right? 

Nope.  Hold the phone…since this is all occurring below the cap, the Rolling Reserve Act doesn’t kick in and so this surplus is not required to go to payback the Rainy Day Fund and now is available for conditional appropriations that were in the FY14 appropriation bill. 

Taking a look at those conditionals, there were two joint first priority conditionals that total $66 million ($65 for Rainy Day payback and $1 million for the Insurance Information and Research Center).  So reducing the surplus by that amount leaves approximately $36 million for second priority conditionals.  Looking again at the FY14 appropriation bill, there are 19 joint second priority conditionals totaling $31.8 million, which would then leave approximately $4.2 million in surplus available for the third priority conditional.  The only third priority conditional is a $150 million repayment of the Rainy Day Fund.

So in reality, what we can be sure of from the FY14 fiscal year, as far as paying back the Rainy Day Fund, is the $35 million appropriation.  If LFO’s revised estimates are indeed correct, then another $65 million (the first priority conditional) and possibly another $4.2 million (the third priority conditional) could materialize.

Assuming that LFO is close to being correct (actual indications at this point in time indicate the LFO might be overestimating the FY14 revenues), it would appear that there might be $100 million in payback from FY14’s budget cycle ($35 million absolute and $65 million conditional).  This would then leave $62 million that needs to be paid back as an absolute appropriation in the FY15 appropriation bill. 

There is currently a heated debate between the Governor’s office, the Senate and the House of Representatives as to what the Rainy Day Fund repayment appropriation should be in the FY15 appropriations bill.  The Governor and the House makes the assumption that LFO’s revised FY14 revenue estimates are lower than what will actually materialize.  They project that the FY14 repayment will be $135 million and thus they only include $27 million, as an absolute appropriation, in the recommendation for the FY15 appropriations bill. 

The Senate, however, has taken a more conservative and fiscally responsible route and includes $62 million, fearing that the economic projections made by LFO will not materialize for FY14.

An important date to keep in mind for FY15 is June, 2015.  This is the date that the constitution mandates that the ETF Rainy Day Fund be fully replenished.  The surplus available in FY15 due to the Rolling Reserve Act will not be available for repayment until the close of the fiscal year, therefore will not be available in June.  Thus, whatever amount chosen for repayment, the payment must occur as an absolute appropriation in the FY15 appropriation bill.

Regardless, the clear conclusion to be drawn from all this analysis is that the Rolling Reserve Act is working as intended.  Because of its requirements, arguably over $260 million was available for repayment that might not have occurred if the Legislature were to have had flexibility to spend it as it desired (can you say, teacher pay raise in an election year?).

Taking a look forward….

LFO has estimated for FY15 that revenues will exceed the cap by $157 million.  Assuming this is indeed the case, this will be money that will be transferred into the new Education Trust Fund Stabilization Fund (because the Rainy Day Account would have been fully repaid), which is limited to 20% of the prior year’s ETF appropriation (20% of this year’s ETF would be an amount of $1,146,079,247) which would make it about 12% full.  If that occurs, the Rolling Reserve Act will have created funds available in excess of $600 million for preparation for proration in the future.  If the Rolling Reserve Act creates similar surpluses over the next 8-10 years, the ETF Stabilization Fund will be completely full and that combined with the ETF Rainy Day fund would mean the state would have over $1.5 billion in reserves for the ETF to avoid proration in the event of another economic downturn.

Now that’s what I call being fiscally responsible and planning for the future.

Thank you Republican Legislative Leadership and thank you Rolling Reserve Act.