Senator Pittman was Correct- Stagnant Economic Growth will Challenge Repayment of ETF Rainy Day Fund

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June 2015 is now one year away and the clock is ticking. Why is this date important? It’s the date that the Education Rainy Day Fund, housed within the Alabama Trust Fund, by constitutional mandate, must be repaid.

The Federal Reserve, this week, sharply reduced its forecast for U.S. economic growth. This year’s growth forecast is now just above 2%.

Six years ago, Governor Riley drained this account to the tune of $437.4 million in order to lessen the impact of proration on the education budget. Why did he have to do that? Frankly, because of the poor fiscal management of the prior legislative leadership. They knew when they passed that year’s education appropriations bill that there was not going to be sufficient revenue to offset the appropriations.

But they went ahead and did it anyway out of political expediency. They had gotten so used to the Federal Government bailing them out with “stimulus” money, that they couldn’t help themselves.

Thankfully, we replaced that leadership in 2010.  Unfortunately, even with good leadership, the legislature has trouble with fiscal responsibility.

Side note here. We are in the midst of an election cycle this year and the AEA has spent nearly $8 million trying to unseat the new leadership. They want us to go back to leadership that got us into this mess in the first place? At least the new leadership is trying to solve the problem, not ignore it.  Go figure….

So fast forward to today. June 2014. We have repaid $274.8 million but still owe a balance of $162.6 million which must be repaid by June 2015. One short year away.

We are currently in the FY14 fiscal year (it ends September 30, 2014). The FY14 education appropriations bill includes an absolute appropriation of $35 million to repay the fund. It also included a supplemental conditional appropriation of $65 million.

How does the supplemental conditional appropriation process work? Well, if revenues exceed absolute appropriated expenditures, and you are below the “cap” of the Rolling Reserve Act (which we are for FY14), then the difference is expended according to the conditional appropriations set forth in the bill.

The FY14 appropriation bill included three tiers of conditional appropriations. Tier One (paid first) was $66 million, which includes $65 million for ETF Rainy Day repayment and $1 million for the Insurance Information and Research Center (whatever that is). Tier Two included 19 joint conditionals that total $31.8 million. The only Tier Three conditional is $150 million for additional repayment to the Rainy Day Fund.

So how much is going to be leftover at the end of FY14? Good question.

The best case scenario, at this point, is that at the close of FY14 (September 30, 2014), we will have repaid an additional $100 million ($35 million absolute and $65 million conditional), which would leave $62 million to go.

During the debate on the FY15 education appropriations bill in the last legislative session, the Legislative Fiscal Office was estimating economic growth numbers of 3.5% and thus they were anticipating a surplus of around $100 million. If that were the case, then there would be adequate funds to pay the $65 million conditional appropriation and thus leave the need for a $62 million absolute appropriation in the FY15 bill.

However, the legislature and the Governor did not agree. They felt that growth would exceed the LFO estimates and that more surplus would be available for repayment. Therefore they only included a $35 million absolute appropriation in the FY15 appropriations bill.

pittmanAmong the 140 legislators, there was one principal voice of reason that opposed the rosy scenario. Senator Trip Pittman (R-Daphne), Chairman of the Senate’s Education Trust Fund Committee adamantly opposed anything but a $62 million absolute appropriation. He fought on the Senate floor as legislator after legislator made the argument of prosperous economic growth. The House had passed their bill with only $27.5 million. The Senate, with Senator Pittman’s prevailing leadership passed their bill with the $62 million.

Unfortunately, in conference, Senator Pittman was just one of six conferees. The result? A $35 million absolute repayment for FY15. So now, without the anticipated economic growth, we will be at least $27 million short and that’s assuming that the Tier One conditional appropriation of $65 million is fully funded. Remember LFO was anticipating a 3.5% growth rate for that to occur.

And now the Fed is projecting a 2% growth rate for the rest of the year.

June 2015. It’s coming fast. Where will the money come from? The estimates for growth within the ETF for FY15 indicate a surplus of nearly $157 million above the anticipated “cap” imposed by the Rolling Reserve Act. This is money that, by statute (Rolling Reserve Act), must be first used to repay the Rainy Day Account and then to build an additional proration prevention account. But this money will not be available until the close of FY15 (September 30, 2015).  So we can’t use that.

The Rainy Day Fund, by constitutional mandate, has to be repaid by June, 2015.

So how are they going to get around that? Most likely they will have to pass a supplemental appropriations bill in the next legislative session to repay the money. In order to do that, they will have to violate the Rolling Reserve Act.

Is this a fiscal crisis?  No.  The problem will ultimately be solved, but it will be a messy solution.

All the more reason to pass a bill to make the Rolling Reserve a constitutional provision. We will be advocating that in this next legislative session.

One thought on “Senator Pittman was Correct- Stagnant Economic Growth will Challenge Repayment of ETF Rainy Day Fund

  1. Thank you to the AFA for presenting a clear, concise and accurate statement on the challenge our Legislature has in repaying the Rainy Day Fund. The people of our state really do not understand the mess we are facing.

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