June 12, 2008

Special Session Summary

Volume 34, No. 15                                   
                       

Special Session Delivers $6.35 Billion ETF Budget

The education budget sailed through the first 2008 legislative special session as the Legislature sent Gov. Riley the bill in the minimum five days needed to pass legislation.  Just one week after the Senate killed the budget because higher education wanted to add $25 million to the bottom line, senate support for universities eroded, and it passed a virtually identical budget to the one it had rejected in the regular session.

The only significant difference in the budget was a $5 million transfer in absolute dollars from higher education to K-12 transportation, an effort to offset ever-rising fuel costs.  The budget also now contains a hierarchy of conditional appropriations.  Conditional appropriations provide funding in the event additional state revenues are collected above projections.  There is no guarantee those appropriations would be released.  To be distributed, the finance director the funds are available and recommended the governor approve release of the funds.

Conditional appropriations total $131.5 million of which $34 million are marked “first priority.”  First priorities include an additional $4 million for K-12 transportation and $13 million for K-12 textbooks as well as $20 million in conditional appropriations for higher education and $10 million for first priorities.  All first priority conditionals must be funded before any remaining conditional appropriations. The Governor in his discretion, can select which, if any, first priority condition are released.

See the reverse for a K-12 budget comparison for 2007-2009.  For a copy of a full budget spreadsheet, visit www.alabamaschoolboards.org.

Quick Save for Education Rainy Day Fund

An unexpected detour came when a bill to re-establish the Education Rainy Day Fund died in the Senate, but a dead-end was averted when the House restored the proposal.  House members amended a bill establishing a rainy day fund for the General Fund to include education’s proposal to revoke and replace the current law.  H.14 proposes a constitutional amendment that must be approved on the general election ballot in November.

The Rainy Day Fund is a line-of-credit against Alabama’s oil and gas royalties.  Currently, the credit line is fixed to some $248 million.  The new proposal would set the limit to 6 ½ percent of the prior year education budget less any prior year withdrawals not yet repaid.  The borrowing capacity would further be limited to restore an amount that is the average between certified revenue projections by the state finance director and the Legislative Fiscal Office.  Only an amount that restores the budget to prevent proration may be accessed, and the loan must be repaid in six years from the ETF.

ETF Savings Mechanism Formalized

The line-of-credit is not to be confused with the Proration Prevention Account, a true statutory education savings account.  In H.63, lawmakers codified recent tradition to ensure that 75 percent of any unanticipated and unappropriated ending balance in the ETF be deposited in education savings. The statute had only required 20 percent be deposited in the account. The benefit of the account is evident this year as more than $400 million nest egg is being tapped to keep the 2008 education budget solvent.  In fact, H.64 deposits any remaining dollars from the savings account into the ETF to be accessible.  The FY’09 budget will not have the benefit of ready dollars should the state economy underperform.  If proration occurs in 2009, it will force borrowing against the Rainy Day Fund.

ETF Revenue Bills Preserve Budget Integrity

The Legislature managed the tricky task of balancing revenue impact on the ETF while addressing broader tax policy as well.  The budget’s numbers relied on the passage of the bills that either added revenue for the next fiscal year or minimized the impact of tax policy changes on the education budget.  These included:

H.62:  Referred to as the “add-back” statute, the bill addressed an earlier “fix” to a corporate loophole.  The law intends to codify the courts’ interpretation of the law.  The business community fought what they considered a retroactive change to the statute.  The bill incorporates an additional provision to address certain tax shelters known as REITS’s or Real Estate Investment Trusts.  The compromise reached increases ETF revenues by $20 million for 2008 and $54 million for 2009.

H.61: Provides small businesses and their employees a state tax deduction for health insurance coverage costs.  The bill was linked with H.62 to offset the costs of its provisions with the additional revenues generated.

H.56:   Confirms that Alabama taxpayers do not pay state taxes on their federal economic stimulus rebates.  To offset the $57 million the state will not capture, the bill uncoupled Alabama’s depreciation schedule from the federal tax code for the stimulus act.  By preventing businesses from taking advantage of an accelerated depreciation deduction, the bill then generates $59 million, making the proposal a virtual wash for the ETF.

New ETF Provisions

Legislative action has created two new provisions for the Education Trust Fund that are designed to give school boards additional budgeting flexibility. One provision gives school boards the option to transfer among line items (not to exceed 20 percent of the line item). 

However, such transfers cannot create a reduction in earned teacher units or local support personnel and do not apply to the allocations for classroom materials and supplies. The second provision allows school boards to retain at the end of the fiscal year any money that normally would revert to the ETF.

The 2008 First Special Session has ended.

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2007-2009 Education Trust Fund Budget Comparison Chart

Note - Conditional Appropriations: Theoretically, this funding is to be allocated only if and when unanticipated state revenues are collected above and beyond budget allocations. The Legislature has slated several as “first priority” conditionals to take precedence. Only the Governor can release conditional appropriations, and there is no guarantee that any will be funded. The money must be available, be recommended by the director of finance and approved by the governor.