Alabama’s education budget begins to rebuild, but General Fund struggles put Medicaid at risk

The usual contrast between Alabama’s starving General Fund (GF) budget and its slightly healthier but still inadequate Education Trust Fund (ETF) budget is exceptionally stark this year. Nearly halfway through the Legislature’s 2016 regular session, both major state budgets have begun to move – in one case toward a predictable conclusion, and in the other with no settled end in sight.

State education support just now approaching return to 2008 level

The path forward looks easier for the ETF, which finally is beginning to recover from deep cuts during and after the Great Recession. The House ETF budget committee Wednesday approved an education budget that would bring K-12 funding nearly back to its 2008 peak. The committee’s budget includes a 4 percent teacher pay raise, a 3 percent increase for transportation, a 2.5 percent increase for universities, and a nearly 5 percent increase for two-year colleges.

Alabama’s K-12 cuts have been the nation’s second worst since 2008, and its higher education cuts have been the fourth worst. Even a return to 2008 funding levels would not be enough to account for the many needs that were still unmet then, especially in low-income rural schools.

The ETF has two primary sources of state revenue: income taxes (earmarked for teacher salaries) and sales taxes. Both are considered “growth taxes” because their revenues tend to increase during good economic times. As Alabama climbs slowly out of the recession, taxes that support the ETF are inching up. The Legislative Fiscal Office (LFO) projects the ETF will have $187 million more in available revenue in 2017 than in 2016.

Proposed Medicaid cuts would be disastrous for Alabama’s health care system

The picture is much bleaker and more uncertain for Alabama’s non-education services like health care, child care and public safety. All of the “big four” state agencies – Medicaid, the Department of Human Resources (DHR), mental health and corrections – would receive essentially the same amount of GF money next year as this year under the budget that the Senate passed last week. But “level funding” at the 2016 level would follow years of steady declines and failure to keep up with ordinary cost growth. Mental health and DHR, in particular, would find it difficult to serve the children, seniors, and people with disabilities who depend on their services.

For Medicaid, level funding would be a disaster. It would end the regional care organization (RCO) reforms designed to keep patients healthier by emphasizing preventive care and reducing the number of costly emergency room visits. Failure to implement the RCOs could cost Alabama more than $700 million in new federal money set aside for the changes. Without significant new revenue, Medicaid will be unable to launch the RCOs or maintain many vital services for the most vulnerable patients.

Level funding for Medicaid also would eliminate coverage of outpatient dialysis, hospice, and adult eyeglass services, and would reduce payments to physicians, Medicaid commissioner Stephanie Azar said. Advocates fear that lower Medicaid physician payments would lead many doctors, especially pediatricians, to leave the program – or possibly to leave Alabama entirely.

With no new money available and no new revenue measures on the move, Senate GF budget committee chairman Sen. Trip Pittman, R-Montrose, concentrated all GF reductions in one agency: Medicaid. Almost all other GF services would be level-funded under the plan. Public health, facing a tuberculosis outbreak and other potential infectious disease crises, is one of the rare services that, after years of cuts, would see an increase ($10 million, or 45 percent).

The GF has more than a dozen revenue sources, mostly small taxes that don’t grow with the economy. Nearly 8 percent of 2015 GF revenue was one-time money borrowed from the Alabama Trust Fund, which receives state revenues from oil and gas drilling. That money dried up for the 2016 budget year, fueling a funding crisis that took three legislative sessions to resolve.

The GF will have $95 million less available next year than it did in 2016, the LFO projects. Lost revenue includes the end of the borrowed money, lower oil and gas lease income, and lower interest on state deposits. Last year’s cigarette tax increase was not large enough to offset those revenue declines.

What lies ahead for Alabama’s 2017 budgets

Inadequate though they are, both budgets are moving forward in the Legislature. The GF budget passed the Senate last week. During the debate, Pittman said he would withdraw the budget if it returned to the Senate in the same form it passed. He predicted that “all-star” lobbyists representing health care providers would succeed in urging the House to find the revenue necessary to save Medicaid services while funding other vital functions like child protection, mental health and courts.

House action on both budgets is expected soon. The House could vote on the ETF budget as early as Tuesday. And House GF budget committee chairman Rep. Steve Clouse, R-Ozark, plans to unveil a substitute GF budget for the committee’s consideration this Wednesday.

By Carol Gundlach, policy analyst. Posted March 4, 2016.