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

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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.

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