Presentation to the Legislature on Alabama’s Financial Condition

Kirk Fulford Deputy Director – Fiscal Division

Legislative Services Agency

March 5, 2019

www.lsa.state.al.us 

(334) 261‐0650

Presentation Overview

•Appropriation of State Funds•FY 2018 Review•Economic Conditions •Education Trust Fund Outlook•State General Fund Outlook•Budget Issues

Appropriations Structure and Revenues of the State

Two Main State Appropriations Bills• State General Fund• Education Trust Fund• Only 2 other states (Michigan and Utah) have separate education and general fund budgets

Earmarking• Alabama earmarks 84% of state revenues (FY 2017) to agencies and funds other than the State General Fund

• Earmarking can be: • general or specific

• statutory or constitutional

Earmarking ExamplesIncome Taxes (Constitutional)

• Education Trust Fund

Sales Taxes (Statutory)• Majority to the Education Trust Fund

Provider Taxes (Statutory)• Alabama Health Care Trust Fund for the Medicaid Agency

Ad Valorem Taxes (Both Constitutional and Statutory)• General Fund, Public School Fund, DHR/Veterans’ Assistance Fund

Insurance Premium Taxes (Statutory)• Education Trust Fund, Mental Health Trust Fund, General Fund

Appropriation Required to SpendSection 72 of the Alabama Constitution:

Provides that no money shall be paid from the treasury except upon appropriations made by law

• This includes the State General Fund, Education Trust Fund, and other state and federal funds

• Alabama is one of 43 states that appropriates all federal funds1

• Alabama is one of 37 states that appropriates all non‐federal funds1

• Revenues may be earmarked to a specific fund or agency, but those funds must be appropriated in order to be spent

1SOURCE: National Association of State Budget Officers, Budget Processes in the States, Spring 2015

Appropriation of All State Funds FY 2019 (As Enacted)

•General Fund = $2.0 Billion•Education Trust Fund = $6.6 Billion•Other State Funds = $3.5 Billion

•Total State Funds = $12.1 Billion

Mental Health$335.5 M2.8%

Human Resources$268.0 M2.2%

Corrections$555.3 M4.6%

Education$6.6 B54.6%

Medicaid$1.8 B14.6%

Transportation$495.4 M4.1%

Public Health$109.3 M0.9%

All Other$2.0 B16.3%

Total State Funds:$12.1 Billion

Appropriation Of All State FundsFY 2019 (As Enacted)

Numbers may not add due to rounding 

Appropriation of Education Trust FundFY 2019 (As Enacted)

All Other$380.8 M5.7%

K‐12 Program$4.6 B68.8%

Universities $1.3 B19.7%

Community Colleges$386.9 M5.8%

Total ETF:$6.6 billion

The SplitK-12: 72.97%

Higher Education: 27.03%

Numbers may not add due to rounding 

Medicaid$755.2 M37.05% Legislative

$33.0M1.62%

Mental Health$118.3 M5.81%

Judicial$127.1 M6.24%

Human Resources$65.6 M3.22%

Corrections$472.1 M 23.16%

Public Health$34.9 M 1.71%

Law Enforcement$51.8 M2.54%

All Other$380.1 M 18.65%

Total SGF:$2.0 Billion 

Appropriation of State General FundFY 2019 (As Enacted)

Numbers may not add due to rounding 

State General Fund Growth:Corrections and Medicaid Share

32.9%

41.2%

57.4%

59.7% 60.2% 60.3%60.2%

$0

$500

$1,000

$1,500

$2,000

$2,500

1994 2004 2014 2016 2017 2018 2019

Millions

Medicaid Corrections Other SGF

FY 2018 Review

Education Trust Fund Revenue Sources ‐ FY 2018

Sales Tax$1.9 B28.3%

Use Tax$159.2 M

2.4%

Income Tax$4.2 B62.3%

Utility Tax$395.4 M

5.9% Other$82.1 M

1.2%

Numbers may not add due to rounding 

Total Receipts:$6.75 Billion

• Withholding payments for FY 2018 were up by 7.37% ($244 million) ‐the highest percentage growth since FY 2006

• Withholding growth only exceeded 4% twice since the Great Recession concluded (FY 2015 and FY 2017)

• Primarily driven by record employment and increased earnings

• Gross sales taxes grew by 4.4% ($100 million)• Highest annual growth rate since FY 2012• Gross sales taxes only exceeded 4% one other time since the Great Recession concluded (FY 2012)

Growth in ETF Recurring Revenues Since FY 1998

‐15%

‐10%

‐5%

0%

5%

10%

15%19

98

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

FY 2009‐11.52%

FY 2010‐.46%

Condition of the ETFFY 2017 and FY 2018

ActualFY 2017

ActualFY 2018 Difference

Beginning Balance 5,041,468 6,919,305 1,877,837

Regular Receipts 6,327,327,215 6,753,565,379 426,238,164

TOTAL AVAILABLE (beginning balance plus regular receipts) 6,332,368,683 6,760,484,684 428,116,001

TOTAL ETF EXPENDITURES 6,332,041,468 6,423,919,332 91,877,864

ENDING BALANCE BEFORE REVERSIONS AND ADJUSTMENTS 327,215 336,565,352 336,238,137

Reversions and Adjustments 6,592,090 14,441,002 7,848,912

DISTRIBUTION OF ENDING BALANCE BEFORE REVERSIONS AND ADJUSTMENTS

Budget Stabilization Fund 64,239,193 64,239,193Advancement and Technology Fund 272,326,159 272,326,159

Current Alabama ConditionLabor Market:

• December 2018 – 3.9% (December 2017 – 3.8%)

• Roughly 2,130,000 persons working in December 2018, marking seven consecutive months of record high employment

• Gain of 44,300 jobs over the past year in all industries

• Gains in construction, manufacturing, leisure and hospitality, education and health services, among others

• Average weekly earnings rose by $46.41 over the year

Source: AL Department of Labor, seasonally adjusted preliminary December 2018 figures

Top 5 Rank  2018 20171 Wilcox   8.5% Wilcox  11.4%

2 Clarke 7.1% Clarke 8.5%

3 Dallas 6.6% Lowndes 8.0%

4 Lowndes 6.5% Perry  7.9%

5 Greene  5.8% Greene   7.7%

Bottom 5 Rank  2018 2017

63 Limestone  3.0% Madison  3.8%

64 Madison  3.0% Marshall 3.8%

65 Marshall  3.0% Cullman  3.7%

66 Cullman  2.9% Elmore  3.6%

67 Shelby  2.5% Shelby  3.2%Source: AL Department of Labor; Alabama Labor Market News, January 2019 Newsletter  

Alcoholic Beverage Taxes

$116.1M5.82%

Property Tax$158.3M

7.93%

Alabama Trust Fund Transfers$96.8M4.85%

Cigarette Tax$154.6M

7.74%

Corporation Taxes$96.1M4.81%

Insurance Co. Taxes$349.4M17.50%

Sales Tax$108.4M

5.43%

Use Tax$256.3M12.84%

One-Time Receipts$87.7M4.39%

All Other$572.6M28.68%

Numbers may not add due to rounding 

Total Receipts:$2.0 Billion

State General Fund Growth 

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018Non-recurring Receipts $233,043,428 $313,347,870 $119,069,524 $95,774,912 $38,434,976Regular Receipts $1,521,529,410 $1,537,964,840 $1,726,257,311 $1,824,058,859 $1,957,682,530

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

TOTA

L SG

F RE

CEIP

TSState General Fund

Regular and Non‐Recurring Receipts:FY 2014 through FY 2018

Condition of the SGFFY 2017 and FY 2018

ActualFY 2017

Actual FY 2018 Difference

BEGINNING BALANCE 63,817,402 143,022,892 79,205,490Regular Receipts 1,869,833,771 1,996,117,505 126,283,734

BP Settlement Funds 50,000,000 -50,000,000

TOTAL RECEIPTS 1,919,833,771 1,996,117,505 76,283,734

TOTAL AVAILABLE (beginning balance plus total receipts) 1,983,651,173 2,139,140,397 155,489,224Appropriations 1,854,466,022 1,909,989,654 55,523,632

Reversions Reappropriated 48,549,920 56,944,348 8,394,428

TOTAL APPROPRIATIONS AND OBLIGATIONS 1,903,015,942 1,966,948,178 63,932,236Reversions and Adjustments -62,387,661 -69,881,997 -7,494,336TOTAL ENDING BALANCE 143,022,892 242,088,392 99,065,500

Education Trust Fund Outlook

• Effective beginning in FY 2013

• Caps the annual appropriations from the ETF

• tied to the percentage growth in recurring revenues to the ETF over the last 15 years, dropping the lowest year.

• Limits ETF expenditures to the average of the estimated available revenues when such estimates are less than the ETF appropriations cap

• Prepaid Affordable College Tuition (PACT) appropriations are added to the cap

• Prescribes how excess funds are distributed when actual ETF receipts exceed the cap, including:

• the Budget Stabilization Fund: an additional reserve fund accessible only in the event of proration or for temporary transfers to public schools/higher ed due to natural disasters

• the Advancement and Technology Fund: funding available for supplemental appropriation to K‐12 & higher ed for certain allowable expenses

• No ETF proration since the ETF Rolling Reserve Act became effective

ETF Rolling Reserve Act:FY 2020 Cap

FY 2018 Net Recurring Revenues $6,753,565,379

PLUS:Average growth for the 14 highest years out of the last 15 (4.70%) $317,417,573

New recurring revenue measures -5,826,000PACT appropriation for FY 2020 $60,738,300

FY 2020 ETF Appropriations Cap $7,125,895,252

Current ETF Appropriations for FY 2019 $6,643,358,015

Difference: FY 2020 vs. FY 2019 $482,537,237

ETF Rolling Reserve Act:Advancement and Technology Fund:

• Must be appropriated through an independent supplemental appropriation bill. 

• Allowable expenses: Repairs/deferred 

maintenance of facilities classroom instructional 

support for insuring facilities; for 

transportation school security measures as 

a part of a system wide security plan

educational technology and equipment

Budget Stabilization Fund:

Allowable Withdrawals: Proration prevention temporary transfers for damages from 

natural disasters

Higher Education: 

$ 73.6 Million

K‐12: $198.7 Million

Higher Education: 

$ 73.6 Million

K‐12: $198.7 Million

FY 2018

ETF Ending Balance: $336.5 Million 

1% of funds appropriated in previous fiscal year :

$64.2 Million 

Budget Stabilization Fund:

Current Balance: $ 232.0 Million

Remaining balance after the allocation of  the BSF:

$ 272.3 Million

Advancement and Technology Fund:

Current Balance: $ 272.3 Million 

Distribution of Funds based upon Prior Year ETF Split

FY 2019

K‐12: 72.97%

Higher Ed: 27.03%

Condition of the ETFFY 2019 and FY 2020

Estimated FY 2019

Estimated FY 2020 Difference

Beginning Balance 14,441,002 -14,441,002

Regular Receipts (Fiscal Division estimates) 7,017,675,000 7,218,500,000 200,825,000

TOTAL AVAILABLE (beginning balance plus regular receipts) 7,032,116,002 7,218,500,000 186,383,998

TOTAL ETF EXPENDITURES, ESTIMATED 6,643,358,015 7,125,895,252 482,537,237

ENDING BALANCE BEFORE REVERSIONS AND ADJUSTMENTS 388,757,987 92,604,748 -296,153,239

ESTIMATED DISTRIBUTION OF ENDING BALANCEBudget Stabilization Fund 66,433,580 71,258,952 4,825,372

Advancement and Technology Fund 322,324,407 21,345,796 -300,978,611

ETF SummaryFY 2020

• The largest ETF budget prior to FY 2019 was $6.73 Billion in FY 

2008

o The FY 2008 ETF budget required a transfer of $439.4 million from the 

Proration Prevention Account in order to offset proration

• The ETF fiscal year appropriation cap for FY 2020 exceeds FY 2008 expenditures by $431.2 million

• PEEHIP did not request an increase in funding for FY 2020

• Small increase in TRS rate for Tier I (.02%)

• Small decrease in TRS rate for Tier II (‐.01%)

• Will ETF revenue growth continue?

Concerns 

Longest Post Recession Recovery Period • Economic conditions point to potential recession:Rising labor cost  Inflation Tight Labor Market  Interest Rates Yield Curve 

• National economist predict weakening in economic activity, onset signs of a downturn:Trade tensions Further tightening of financial conditions

State General Fund Outlook

Condition of the SGFFY 2019 and FY 2020

EstimatedFY 2019

EstimatedFY 2020 Difference

BEGINNING BALANCE 242,088,392 189,686,649 -52,401,743

Regular Receipts 2,025,168, 000 2,043,786,000 18,618,000Agency Transfers and One-time Receipts 41,832,000 41,214,000 -618,000TOTAL RECEIPTS (Fiscal Division estimates) 2,067,000,000 2,085,000,000 18,000,000

TOTAL AVAILABLE (beginning balance plus total receipts) 2,309,088,392 2,274,686,649 -34,401,743Regular Appropriations (as of 2/28/2019) 2,039,082,620

Reversions Reappropriated (as of 2/28/2019) 65,819,123TOTAL APPROPRIATIONS AND OBLIGATIONS 2,119,401,743ESTIMATED ENDING BALANCE 189,686,649

SourceBudgeted Amount

Public Road and Bridge Fund - transfer to theUnified Judicial System and ALEA

63,500,000

Revenue, Department of 17,041,429Public Service Commission $9,000,000Securities Commission 1,500,000

TOTAL $91,041,429

Non‐General Fund Transfersfor SGF Purposes ‐ FY 2019

Amendment 354“No moneys derived from any fees, excises, or license taxes, levied by the state, relating to registration, operation, or use of vehicles upon the public highways except a vehicle‐use tax imposed in lieu of a sales tax, ‐and no moneys derived from any fee, excises, or license taxes, levied by the state, relating to fuels used for propelling such vehicles except pump taxes, shall be expended for other than cost of administering such laws, statutory refunds and adjustments allowed therein, cost of construction, reconstruction, maintenance and repair of public highways and bridges, costs of highway rights‐of way, payment ‐of highway obligations, the cost of traffic regulation, and the expense of enforcing state traffic and motor vehicle laws…”  (Amendment  93, as amended by Amendment 354.)

FY 2020 SGF Funding IssuesFY 2020 SGF Requested Budget IncreasesOver FY 2019 Enacted:

• Corrections ‐ $41.7 million

• Public Health ‐ $35.5 million

$23.4 million for CHIP

• Mental Health ‐ $31.9 million

• Human Resources ‐ $22.9 million

• Law Enforcement Agency ‐ $8.7 million

• Senior Services ‐ $1 million

• Medicaid – ($40.5 million)

FY 2020 Total of $101.2 million more than budgeted in FY 2019

Corrections Requested $41.7 million increase explained:• $26 million increase in personnel costs

• Merit and Probational Raises• 20% pay raise for security staff• 500 additional corrections officers for half year• 20% pay raise for new hire corrections officers

• $7.8 million increase for employee benefits• $6.1 million increase for professional fees and services

• Increase in inmate healthcare cost• 20 additional medical and mental health FTEs

• $4.7 million increase for ADA and medical and mental health renovations• $1.8 million increase for vehicle replacement

•The 23% CHIP enhanced federal matching rate was continued through FY 2019100% federally funded through the end of FY 2019

•States required to provide matching funds again beginning in FY 2020, phased‐in over two years•Department of Public Health requested $23.4 million for CHIP in FY 2020, estimated to increase to $64 million in FY 2021•Medicaid request includes $15 million for CHIP in FY 2020

MedicaidTotal Projected Need FY 2020 $ 821 Million

Less:

Anticipated Carry Forward FY 2018 $ 53 Million

Drug Rebates $ 14 Million

Tobacco Revenue $ 6 Million

Additional savings and expenditure deferrals $ 33 Million

Total Carry Forward $ 106 Million

SGF Budget Request for FY 2020 $ 715 Million

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Q&A