Lackluster 2016 Receipts to General Fund and ETF

Both the accounts that pay for state government operations, the General Fund and the Education Trust Fund (ETF), ended the 2016 Fiscal Year basically flat when compared to the previous year, a sign that the state’s struggles to balance budgets will continue in the future.

What would have been a moderately healthy year of receipts to the Education Trust Fund was dragged down by a drop in corporate income tax collections and the shifting of some revenue into the General Fund to cover anticipated shortfalls in that account. The perpetually struggling General Fund was buoyed by that revenue shift from the ETF and by the increase of tax rates on cigarettes, but was weighed down by a drop of non-recurring revenue sources and lagging collections of taxes on oil and gas production.

For the Fiscal Year that ended Sept. 30, 2016, total receipts to the ETF were $6 billion, up only slightly from 2015. Final receipts to the General Fund, $1.8 billion, were down compared to 2015.

Those basically unchanged, bottom-line numbers from the previous year mask a titanic, behind-the-scenes struggle to balance state revenues with state spending, a struggle that is certain to continue.

Approaching Fiscal Year 2016, the scene for budget problems was set. In 2015 and for two years prior, the state propped up the General Fund, which pays for most of the state’s non-educational operations, with borrowing from the Oil and Gas Trust Fund. The Oil and Gas Trust Fund is in effect the state’s savings account.

The state borrowed approximately $146 million a year for three years. This was authorized by a constitutional amendment passed in 2012. The three years of borrowing was to give the Governor and the State Legislature time to come up with a sustainable solution for a long-running problem, a General Fund that doesn’t bring in enough revenue to support the state’s non-education agencies. The General Fund is fed by a collection of tax sources that don’t grow with the economy. As the expenses of state government grow, especially on big-ticket items like Corrections and Medicaid, the General Fund can’t keep up. The main taxes that grow with the economy – the sales tax and the income tax – are deposited in the Education Trust Fund.

After contentious debate and multiple special sessions in 2015, the Legislature increased the state cigarette tax by 25 cents a pack, which in the end yielded an additional $65 million for the General Fund. The Legislature also changed the allocation of the Use tax. The Use tax is similar to the sales tax and has historically been divided between the General Fund and the Education Trust Fund. The change in the Use tax allocation yielded an additional $100 million for the General Fund, but decreased the amount that the Education Trust Fund received in 2016. While that $165 million in new money for the General Fund would seem to make up for the anticipated hole in the General Fund, there were additional factors that hampered the performance of both the General Fund and the Education Trust Fund in 2016.

The General Fund

As mentioned above, the shift of Use tax revenue and the increase in the cigarette tax boosted the General Fund collections. Also helping the General Fund bottom line were payouts resulting from litigation over the BP oil spill lawsuit. Those settlements brought in an additional $70 million in 2016.

Also, there was some healthy growth in a few of the General Fund taxes that do grow with the economy. For example, proceeds from the tax on insurance premiums rose $10 million, an increase of 3.63 percent over 2015. Sales taxes on automobiles were up by almost $9 million, up 9.8 percent over 2015.

However, there were additional factors that weighed on the General Fund. In addition to the hole caused by the end of the borrowing from the Oil and Gas Trust Fund, the 2015 General Fund was padded by another one-time source of money. For years, the state has been in litigation over its former franchise tax, a tax that was declared unconstitutional. The state had set aside money in escrow to pay claims arising from that litigation. With those lawsuits finally winding down and in the face of 2015 budget difficulties, the state decided it was safe to release most of that money from the escrow account. That one-time revenue available in 2015 was not present in 2016. As a result, the 2016 General Fund received $115 million less from that source.

The General Fund’s problems for 2016 didn’t end there. General Fund tax receipts from oil and gas production saw a $25 million drop. That drop stems from low energy prices and declining production from the state’s oil and gas reserves. In the end, the General Fund collected $13 million less in 2016 than it did in 2015, a decline of -0.70 percent.

Entering 2017, the General Fund will have some cushion thanks to the Legislature’s decision this year to convert the long-term payout of the BP oil spill settlement to up-front cash. The move will result in $85 million in 2017 and $105 million in 2018 to support the Medicaid spending in the General Fund. But once this non-recurring infusion ends, the Legislature will face the difficulty of filling that hole.

Moves in recent years to shift additional growth taxes, like the Use tax, into the General Fund should increase the General Fund’s capacity to grow. The bump generated by the cigarette tax increase helped in 2016, but in the long-term, cigarette tax collections have been trending down as tobacco use decreases. It remains doubtful that General Fund revenue growth has the ability to keep up with the rising costs of the agencies it supports.

The Education Trust Fund

Meanwhile, on the Education Trust side of the ledger, what would have been a healthy growth year turned out to be anemic.

Individual income taxes were up $144 million, a respectable 3.68 percent. Sales tax collections climbed 4 percent, $87 million more than last year. Another bonus for the ETF was the end of the multi-year effort to pay off the ETF’s debt to its Rainy Day Fund. Having completed that repayment, The ETF got to keep an additional $57.5 million that in prior years was applied to that repayment.

But dig deeper and the ETF took some significant hits. The shift of the Use tax receipts to the General Fund decreased the amount of that tax flowing to the ETF. Though overall Use tax collections were up, the net amount sent to the Education Trust Fund fell by $66 million

The biggest hit to the ETF was a decline of $150 million in corporate income tax collections. That drop effectively wiped out the increase in individual income tax collections. Some of that drop was anticipated. The 2015 corporate income tax total was padded with about $90 million in one-time receipts, resulting from audit findings from past years. However, forecasters were surprised by the additional $60 million drop in corporate income taxes and are unsure what caused it. Since much of the decline happened in the latter part of the fiscal year, it may be due to a general decline in corporate profits during that time period. Revenue officials in other states saw similar declines.

Also down were utility tax collections, dropping $25 million, a fact that may be attributable to the warmer winter of 2015-2016.

When other incremental adjustments and smaller taxes are considered, the ETF in 2016 took in just 0.4 percent more than is in 2015.

Going into 2017, the Education Trust Fund should be poised for healthier growth. It will need it. The 2017 Budget, approved earlier this year, includes a 4 percent raise for teachers. In the meantime, the weakness in corporate income tax receipts bears watching.

No doubt, the Legislature will face fiscal challenges in the upcoming session.  PARCA will continue to follow these important issues.

Constitutional Amendments on the November Ballot

When Alabama voters go to the polls on November 8, they will be asked to consider adding 35 more amendments to the Alabama Constitution. PARCA has compiled a summary of each of the 14 amendments that will appear on the ballot statewide.

Alabama already has the nation’s longest constitution — about 12 times longer than the national average. Since its adoption in 1901, the Alabama Constitution has been amended 895 times.

In principle, constitutions are meant to lay out the fundamental powers of government and establish a statewide framework for its operation, leaving the state legislature and local legislative bodies the task of carrying out work within those limits. Alabama’s Constitution, by contrast, is minutely detailed with a multitude of amendments that create local exceptions that apply to individual jurisdictions, as well as provisions that apply statewide.

The problem stems from the constitution strictly limiting the powers of local governments. Almost immediately after its adoption, the constitution began to accumulate amendments, most of which created local exceptions to state constitutional principles. November’s ballot continues that practice. Of the 35 amendments proposed, 25 apply to a single jurisdiction. Of the total, 14 amendments will be voted on statewide. Of those, 10 will affect the state as a whole, and four pertain to an individual locality but are being voted on by voters throughout the state.

Of those local amendments being considered statewide, one is a proposal to raise the maximum age of the probate judge in Pickens County to 75. Voters statewide will also decide whether the citizens of Etowah County can create a personnel board for employees of its sheriff’s department.

Four statewide amendments, Amendments 3, 4, 5 and 6, make a modest effort to clean up some of the problems with the Constitution. These amendments are the result of the work of a nonpartisan commission chaired by former Governor Albert Brewer, PARCA’s founder and chairman emeritus.

In addition to PARCA’s summary, more information on the proposed amendments can be found on the Secretary of State’s website including summaries and explanations compiled by the state’s Fair Ballot Commission.

Read PARCA’s analysis of the proposed amendments.

New College-Going Rates by High School

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What percentage of the graduates from your local high school go on to college?

Where do they go? To four-year universities or two-year colleges? In-state or out-of-state? Private or public?

Answers to those questions can be found in new data provided by the Alabama Commission on Higher Education. The data, drawn by ACHE from the National Student Clearinghouse, provides college-going data both for the state as a whole and for all Alabama public high schools. It’s just the second year this comprehensive set of data has been available. Previously, ACHE’s college-going statistics could only report on high school graduates entering public colleges and universities in Alabama. The more comprehensive data captures enrolling in public and private colleges throughout the country.

Alabama’s high school graduation rate reached 89 percent in 2015, and thanks in part to that, the state’s public high schools produced more graduates who entered higher education at both two-year colleges and four-year schools. The number of students who graduated but did not enroll in college the year after graduation also increased.

Of the students in the graduating class of 2015, 64 percent enrolled in higher education: 32 percent at a two-year college, 32 percent at a 4-year institution. Meanwhile, 36 percent did not enroll in that first year after graduation.

Of those that graduates who went on to college, 91 percent went to college in the state of Alabama and 9 percent enrolled in out-of-state institutions; 7 percent of graduates enrolled in private colleges and 93 percent went to public colleges and university. Using the selection boxes below you can look at the statistics for any high school in the state.

When making comparisons of college-going rates, it’s important to keep the socio-economic composition of the various schools and systems in mind. Students from families with higher incomes and whose parents went to college are more likely to go on to higher education. Those students tend to have great exposure and access to higher education and also have greater ability to afford college. The National Student Clearinghouse annually publishes a report on college-going rates and persistence through college. The report includes comparisons of the results from schools with varying demographic compositions. The Student Clearinghouse study looks at enrollment in the fall after graduation, while the ACHE data looks at enrollment at any time in the first year after graduation from high school. Regardless, the Student Clearinghouse data shows clear differences in the college-going rates between high-poverty and low-poverty school systems. The chart below represents college enrollment rates in the first fall after high school graduation for the U.S. national class of 2014, from public non-charter Schools, by poverty level. Further discussion can be found in the Clearinghouse report: High School Benchmarks 2015: National College Progression Rates.

With those distinctions in mind, the comparative data from Alabama shows striking differences in college-going rates and the destination of students after graduation.

Systems with low poverty rates, like Mountain Brook and Vestavia Hills, send most of their graduates on to four-year colleges and universities. Other systems with somewhat higher poverty percentages still send a large percentage of graduates off to college. However, more of those graduates start at a community college.

When comparing individual high schools, it is also important to keep in mind that some high schools, like Loveless Academic Magnet Program (LAMP) in Montgomery or Ramsay High School in the Birmingham City System, are academic magnets. Those magnet schools also tend to send a higher percentage of students on to higher education. In fact, the top four Alabama high schools in terms of college-going rate are magnets: three Montgomery magnets — LAMP at 98 percent, Booker T. Washington at 94 percent, and Brewbaker Technology Magnet at 93 percent — plus Birmingham’s Ramsay at 93 percent.

With two years of data from ACHE, it is now possible to note year-over-year changes in the percentage of students going on to higher education from various schools. When looking at those year-to-year changes, it is important to keep in mind that smaller high schools will see bigger fluctuations because a few more students going on to college can make a bigger change in the percentage of graduates going on to college. Comparing the graduating classes of 2014 and 2015, the biggest change in college-going rates occurred at Sunshine High School in Hale County. Because Hale County has now closed Sunshine, its 2015 graduating class will be its last. But that class showed a remarkable jump in college-going. In 2014, Sunshine produced 14 graduates, and half of them went on to higher education. In 2015, the school produced 23 graduates and 85 percent of those graduates enrolled in higher education the year after graduation. According to Hale County Superintendent Osie Pickens, the Hale County High School counseling staff made an extra effort to place that last class of graduating students from Sunshine resulting in the jump in college-going rate.

The tool below presents five different views of the data. The first tab contains a graph that presents each high school’s college-going rate along with the percentage of its students from households in poverty. The second tab is a chart that presents college-going at the system level, including the percentages of graduates going to four-year colleges, two-year schools, and the percentage that didn’t enroll. The third tab presents the same information at the school level. The fourth tab presents system-level statistics for the numbers of graduates, the percentage of graduates going on to higher education, and the percentage point change in college-going for that system between 2014 and 2015. The fifth tab presents the same statistics at the school level.