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NOTES FROM THE SENATE
BY SENATOR JACK HILL,
4th DISTRICT
September 9, 2014

Examining Alabama’s separate education budget

There are some benefits to having Alabama’s two budget earmarked revenue model including the certainty of the amount of revenue that can be used to fund education and only education.  However, this also presents a drawback to the two-budget structure:  if multiple revenue streams decrease, as occurred in the recession, the Education budget will have to undergo cuts and, by design, cannot utilize revenue earmarked for the General Budget.  In Alabama, these reductions are done in the form of “proration” cuts and are done across all expenditures based on their earmarked revenue stream.  In comparison, Georgia had some flexibility in the reductions that occurred during the recession.  This can be seen in FY2009 when Alabama authorized an 18 percent proration cut to the Education budget (which incorporates K-12 education and higher education), causing the state to cover 11 percent of the reduction with the Education budget’s rainy day funds.  Georgia had a lesser decrease in funds of roughly 5 percent from FY2008 to FY2009 for Education and Higher Education.
Alabama’s Revenue Structure
Alabama has two major funding components:  the State General Fund (SGF) and the Education Trust Fund (ETF).  The Education Trust Fund makes up, reportedly, 51 percent of Alabama’s budget and exclusively funds their Education budget.  The ETF funds consist of earmarked revenue sources (or a percentage of revenue sources) of twelve different taxes.  These taxes include the beer tax, hydroelectric tax, income tax, sales tax, use tax, and utility tax.  Any other tax or fee outside of these specific earmarks goes to the general fund.  In comparison, Georgia earmarks only 12% of revenue for specific expenditures, consisting mostly of lottery revenue for the HOPE and Pre-K programs and the 75% of the motor fuel sales tax designated for transportation projects.

When revenues fall short of planned expenditures, the Alabama Governor is not allowed to borrow funds from other sources.  Instead, proration cuts are performed or legislation is passed to change the earmarks.  Both courses of actions have occurred in Alabama over the last five years.  According to the Alabama Policy Institute, these proration cuts have occurred six times in the past 13 years with the last cut to the Education budget in FY2011.  In FY2013 (2012 legislative session) legislative action was taken to adjust the use tax earmark of the previous 100 percent of tax revenue going towards the Education budget to 75 percent, with the remaining 25 percent going to the General Budget.  According to Alabama, if a remote sales tax is enacted, the revenue is expected to go into the Education budget to assist with the loss of revenue from use tax earmark changes.  Since Georgia does not have as many specific earmarks for expenditures, the state has much more budgetary flexibility.
Preventing Revenue Shortfall in Education
Alabama has a separate rainy day fund for education.  In an attempt to prevent a revenue shortfall in the education budget, the Alabama legislature created the ETF Rainy Day Account in 2002.  The account can utilize funds from the Alabama Trust Fund (a State investment revenue fund).  As a provision of the Account, any borrowed funds must be repaid within six years.  Since 2003, the Legislature has borrowed $1.06 billion.  The ETF must fully repay the ETF Rainy Day Account the current remaining balance of $128 million by the end of FY2015.  This is likely to occur with the $300 million that was placed in the rainy day account in FY2014 due to cap placed by the ERRA.   Of course, this amounts to borrowing to pay operating costs and those funds must be repaid in the future, which decreases the uses of future revenue.
Education as a Percent of Budget
Georgia’s appropriation for Education and Higher Education consists of roughly 51 percent (53 percent if Pre-K is included) of the state budget which matches Alabama, despite our differences in budget structure.
Specifically, Alabama’s Education (K-12) budget, was comprised of 38 percent of total state funds in FY2014, while Georgia’s was 37 percent.  Non-University postsecondary education was 3 percent in Alabama, in comparison Georgia’s Technical College and Student Finance Spending was 5 percent.  Alabama’s universities were at 10.12 percent while the University System of Georgia was at 9 percent of state funds.  
Capital Outlay
As is the case in Georgia, most of the capital outlay projects in Alabama are for education and higher education.  In Alabama, these projects do not have to be funded with ETF dollars and can utilize general fund dollars.  According to Alabama, generally most of the ETF budget goes towards expenditures associated with operations.  When we mention education as a percent of Georgia’s budget, it does not include debt service and funding that goes to K-12 Capital Construction.  In FY2015 funding for K-12 Capital Construction is $269,485,000 and $26,344,716 in debt service.



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