Alabama needs a lasting solution to its General Fund shortfall

Taxes pay for important things. Services like education, health care and public safety are the backbone of economic growth, and tax dollars support them. Alabama has a long, sad history of not raising enough revenue to fund these vital services adequately, and it’s all led to this: a looming 2016 budget shortfall that could undermine our state’s future for years to come.

With just four meeting days left in the Alabama Legislature’s 2015 regular session, lawmakers still have not passed a General Fund (GF) budget to fund essential services like Medicaid, child welfare and mental health care. Alabama must have new revenue to pay its bills and meet its obligations to future generations.

Deep cuts could do real damage to Alabama’s future

Unlike most states, Alabama has two major budgets: the Education Trust Fund (ETF), which supports services related to K-12 and higher education, and the GF, which supports everything else. Taxes that grow with the economy, like individual income and sales taxes, are earmarked (or set aside) for the ETF, while the GF relies on a hodgepodge of other revenue sources, most of which grow slowly even in good times. That leaves the GF with a structural deficit, meaning revenue growth is not strong enough to keep pace with ordinary cost growth.

Alabama’s temporary solutions to the GF’s persistent shortfall are gone. Faced with flat or declining tax revenues, the GF has relied on one-time money in 11 of the last 12 years. The sources have varied widely: state property sales, legal settlements, loans from the Alabama Trust Fund, transfers from the state’s road and bridge fund, and federal stimulus money under the Recovery Act. But none of that one-time revenue is available anymore, and that leaves the Legislature facing a 2016 shortfall estimated to be between $250 million and $300 million.

Gov. Robert Bentley has proposed addressing the shortfall with several tax measures, including higher state taxes on cigarettes and automobiles and the closure of some corporate income tax loopholes. But only one of the bills has escaped committee. Instead, the House proposed a different, and much smaller, package of tax increases. The bills have not yet received a floor vote and almost surely are dead for this session.

Without new revenue, the House and the Senate’s GF budget committee have approved a budget with deep cuts to core services like Medicaid, corrections and mental health care. The cuts would hurt Alabama’s economy and devastate our state’s quality of life for decades:

  • No more Medicaid coverage for services like outpatient dialysis, prosthetics and adult eyeglasses,
  • Cuts to community mental health services for thousands of Alabamians,
  • Loss of child care supports for tens of thousands of children,
  • Even more overcrowding in a state prison system already operating at nearly twice its designed capacity,
  • Longer trial delays as hundreds of court employees are laid off,
  • Elimination of vital public safety and forensics services, and
  • Closure of 25 National Guard armories and most state parks.

Legislators have floated ideas to try to solve the GF shortfall without tax increases in recent weeks. While the proposals may sound plausible on the surface, none of them would be adequate to address the current funding crisis.

Taking more money from education is not the answer for Alabama

The Legislature recently placed a cap (called the Rolling Reserve) on the amount of education revenue that can be appropriated each year. As a result, the ETF has a surplus that cannot be spent on everyday school operations under current law.

If this is the case, some argue, what would be wrong with using that “excess” education money to plug the GF hole? Several proposals this year seek to do just that, by “un-earmarking” taxes dedicated to education, by combining the ETF and GF budgets, or by transferring a portion of the money above the Rolling Reserve cap to the GF.

But these proposals don’t account for one big fact: Alabama’s education funding is still nowhere close to recovering from massive cuts during and after the Great Recession. The 2016 ETF budget will give K-12 schools only 92 percent as much money as they received in 2008, despite higher costs and population growth.

Alabama’s recent education cuts are among the country’s worst. The state’s per-pupil K-12 spending in 2015 was 18 percent lower than in 2008, the second worst decline in the nation, according to the Center on Budget and Policy Priorities (CBPP). Alabama’s per-student higher education cuts from 2008 to 2016 are also the nation’s second worst, the CBPP found.

The lingering cuts point to a need for Alabama to revise the Rolling Reserve Act to make more ETF revenues available to schools. The Legislature still could pass a bill sponsored by Rep. Bill Poole, R-Tuscaloosa, to allow a share of the excess ETF money to be spent for critical school construction and repair needs. Even in the face of the GF’s funding woes, taking desperately needed funding from our schools is not the right way to build a stronger Alabama.

State lottery, casinos at dog tracks would not solve Alabama’s 2016 shortfall

Some legislators have proposed an expansion of gambling as a way to raise GF revenue. Proposals include creating a state lottery and developing casinos at locations already approved as dog tracks.

Regardless of one’s feelings about those proposals (on which ACPP takes no position), they would not solve the 2016 budget crisis. Any legislative measure to expand gambling would require a statewide vote on a constitutional amendment. Even if voters approve, it would be a year before regulatory structures could be put in place to allow revenue to begin coming to the state. That would be much too late to prevent devastating cuts in 2016.

A state gambling compact with the Poarch Band of Creek Indians (along with a $250 million loan that the tribe has offered) could fill the 2016 shortfall. But the loan would be one-time money and therefore not a long-term answer for the GF’s structural deficit. Bentley also has said he does not intend to negotiate a compact before legislators approve new tax revenue.

Most states reported declines in gambling revenue between 2013 and 2014, a recent study by the Rockefeller Institute found. Total state gambling revenue nationwide increased by less than 1 percent in that time, according to the study. Adjusted for inflation, revenues actually declined.

Alabama needs new tax revenue to pay for vital services

Ultimately, the surest way to solve Alabama’s GF shortfall and invest in our state’s future is with responsible tax increases, sufficient to meet our needs. Bentley’s proposals – including raising the cigarette tax and taxing automobiles at the same 4 percent rate that our state applies to food and clothing – would be a good start toward ensuring long-term funding for Medicaid, corrections, child care and other important services.

Alabama is at a crossroads. The choices that our state makes this year will help determine what kind of state our children and grandchildren will inherit. Do we raise new revenue to protect vital services like health care and public safety? Or do we erode our state’s quality of life with savage cuts to those services? Whether in the remaining days of the regular session or (more likely) in a special session, it’s up to the Legislature to decide which direction Alabama takes.

By Carol Gundlach, policy analyst. Posted May 29, 2015.