Budget discussion, State Board of Education, Nov. 12

With the General Fund facing an acute shortfall and the education budget still struggling to recover to pre-Great Recession levels, there are beginning to be conversations about new approaches to budgeting.

At a recent State Board of Education meeting, State School Superintendent Tommy Bice told board members he was in discussion with the governor’s office and representatives of the legislative leadership about formulating a budget request that was strategic and deliberate rather than “shooting the moon.”

That would be unusual. This is the season when state agencies draw up their budget requests and submit them to the governor’s office, an annual ritual that bears some resemblance to making up lists for Santa Claus. Budget requests are typically an expression of wishes or needs, without regard to what Santa can realistically deliver, and without a clear link to achievable, measurable goals.

But in this case, the State Board of Education does have goals and will have a system of measuring progress toward those goals. The current wish list is well beyond currently available resources but it does step back from an immediate demand for a full restoration of pre-Recession spending levels.

In his presentation to the Board, Bice described conversations with the governor’s office and the Legislature under which the parties would pursue a three-year plan to fully fund the Foundation Program, the mechanism the state uses to distribute most of its support to local school systems.  He also listed items requested by the State Department that would support the goals of Plan 2020, the state’s plan to raise the quantity and quality of graduates from Alabama K-12 schools. State Board Member Mary Scott Hunter said she was encouraged in her conversations with legislators who’d said they wanted to pursue an education budget built on planning and goals.

“I think it highlights the need to be deliberate and strategic,” Hunter said, “and to be working with our colleagues across the street.”

Still, there is a wide gulf between the money available and the Department’s aspirations for K-12 schools.

Under the current controls on education spending growth, the Department of Education estimates that K-12 education could have an additional $35-40 million to spend in 2016.

But the department’s draft budget request, envisions asking for an additional $228 million for K-12 education in 2016.

The largest portion of that request is $175 million to begin the process of restoring full-funding for the Foundation Program. The Foundation Program is supposed to provide enough for an adequate and equitable education at schools across the state. Since the budget problems developed, various components of the Foundation Program — operating support, technology, textbooks, professional development, classroom and library supplies, and transportation — have been cut or zeroed out. The $175 million portion of the request also includes a one percent pay increase for employees and the first installment of a plan to restore 1,066 teaching positions lost to budget reductions.

Beyond that money for local systems, the State Department is proposing an increase of $51 million in various state-level initiatives that support the strategic priorities of Plan 2020.

Those include:

1. $10 million to pay for the new suite of assessments that measure student and school academic progress.
2. $5.1 million to expand the Alabama Math and Science Initiative.
3. $5 million to meet the demand for distance learning and to establish a virtual high school.
4. $5 million for an initiative to recruit new teachers into the profession and for creating alternative routes for career advancement other than moving into administration.
5. $5 million for expanding the network of Family Resource Centers to better connect schools and students to community resources.
6. $5 million for further Career Tech expansion.
7. $5 million for a competitive grant pool to support innovation in schools.
8. $4.8 million increase needed to support systems’ assessment of learning needs in special populations of students.
9. $3.8 million for a system of online, formative assessments provided to school systems.
10. $1 million to complete the planned expansion of Advanced Placement courses.
11. $1 million to establish a competitive grant program to help schools pay for arts education with an emphasis on those systems that currently can’t afford it.

While the looming shortfall in Alabama’s ailing General Fund has received much attention, the state’s Education Trust Fund (ETF) isn’t exactly enjoying robust growth, according the recently published year-end report on receipts to the fund.

The ETF, which pays for public K-12 and higher education plus an assortment of other smaller agencies, grew just 2.1 percent over 2013. And revenue from Alabama’s income tax was practically flat in FY 2014 as compared to 2013.

The income tax provided 60 percent of the Education Trust Fund’s $5.8 billion in revenue in 2014. Sales and use taxes provided another 32 percent. A public utility tax provided 7 percent of the total. A handful of other taxes made up the remaining 3 percent.

Since it contains the income tax and most proceeds from the state sales tax, the ETF tends to grow with the economy. For example, sales tax receipts to the Education Trust Fund increased by 5 percent.

However, that number is somewhat inflated. In 2013, lawmakers sent $52 million straight to K-12 schools rather than depositing it in the Education Trust Fund first. This year, that $52 million drops into the ETF, creating the appearance of extra growth. Growth in sales tax collections were more like 2 percent.

According to analysts, this year’s income tax receipts, at least as they compare to 2013, are also skewed. Income tax collections jumped more than expected in 2013, thanks to some selling of stocks and the end of 2012. Those moves, made in anticipation of higher tax rates, produced a one-time jump in revenues in 2013. Looking at wage income alone, taxes collected through withholding increased about 2 percent in 2014 over 2013. But thanks to the inflated 2013 number, overall income receipts to the General Fund increased just 0.8 percent.

During the current fiscal year, the state is anticipated to make its final repayment of the $437 million borrowed for education from the Rainy Day Fund during the economic downtown. The state still owes $92 million that is due by Sept. 15, 2015.

All in all, the Education Trust Fund has still not recovered enough to provide the level of funding for schools it provided in 2008, before the Great Recession. The final repayment and a pickup in job growth in recent months should allow for some improvement in the 2016 budget year.

The final tallies are in for fiscal year 2014 collections to the state’s General Fund. The results are, as usual, lackluster.

Collections from the assortment of taxes that feed the Fund grew by just 1.03 percent over 2013.

That’s pretty typical performance for the General Fund, and that anemic growth is the root cause of an impending problem the new Legislature will face when it convenes next year.

The General Fund supports the operation of the state’s non-education agencies. The cost to operate General Fund agencies exceeds the revenue available. The shortfall in 2016 is expected to be over $200 million.

According to the Legislative Fiscal Office, from FY 2008 to FY 2013, the Legislature has used over $1 billion of “intermittent” or temporary revenues used in balancing the General Fund.

Beyond that, the State has borrowed $599 million from the Alabama Trust Fund since 2010 to support the General Fund budget. And the law requires that this borrowing must be repaid.

For a more extensive discussion of the General Fund’s situation, see the PARCA’s October update on Alabama’s Ailing General Fund.

At the end of each month, the state publishes a report that tracks the revenue received by the General Fund from its various sources. The report generated at the end of September, the end of the fiscal year, allows you to compare yearend totals to those in the previous years. Results of a PARCA analysis of that report are presented in the table below. Below the table is a discussion of some of the major taxes and some notes on quirks you might detect in the data.

Notes on top sources of receipts

The table lists the amount from each tax that is credited to the General Fund. In many cases, that is not the total amount collected from the tax or fee. For many of the taxes and fees, the General Fund receives only a portion of the tax collected with the rest going to other state or local government accounts.

Insurance company licenses and premium tax: 16 percent of receipts in 2014, up 4 percent from 2013. These are taxes collected on the activities of insurance companies. This tax saw some growth this year. However, in both 2013 and 2014, these receipts have been supplemented by extra payments from the insurance guarantee fund, a pool that holds funds to be used in the event of insurance company failures. That extra support, which amounted to $12 million in 2014, isn’t expected to recur in 2015 or in the next couple of years.

Subtotal of sales, use, and lease taxes: 16 percent of the total for 2014, up 7 percent over 2013. This is a category of receipts PARCA created by combining sales, use, and lease taxes. This is by no means total state sales tax collections because most sales taxes are deposited in the Education Trust Fund. However, some components of sales and use taxes have been assigned to the General Fund. Individual taxes that make up this subtotal are listed individually as well. A couple of points on those: The large percentage increase in the remote sales tax (a tax on sales over the Internet) is explained by the fact that the 2013 figure is not a full year’s collection. In other words, the increase is not a huge jump in the overall collections. Instead, the 2014 total represents a full year’s collections. Also, lease tax receipts were boosted as a result of an audit that caused a taxpayer to shift payments into that category.

Alabama Trust Fund: 15 percent of receipts in 2014, down 4 percent over 2013. This revenue comes from the Alabama Trust Fund, the account that holds royalties from the oil and gas production. As in 2013, there was extra money coming from the Trust Fund, $146 million extra in 2014. That same borrowing will recur in 2015, but won’t be available going forward. Consequently, Trust Fund receipts will account for a smaller share of General Fund revenue in subsequent years. Additionally, that borrowing, plus an earlier instance of borrowing from the fund, will have to be repaid in the coming years.

Ad valorem tax: 9 percent of General Fund receipts in 2014, up 3 percent in 2014. These receipts come from 2.5 mills of the 6.5 mill state property tax.

Cigarette tax: 6 percent of General Fund receipts in 2014, down almost 3 percent in 2014. These are taxes on cigarettes, and the decline is part of a continuing downward trend in collections thanks to declining smoking rates.

ABC board taxes and profits: 5 percent of General Fund in 2014, down 5 percent. These taxes include a portion of the various taxes on alcoholic beverages, plus the profits from ABC board stores and licenses.  The main reason for the decline is that the previous year’s total was inflated thanks to extra distribution in 2013.

Oil and gas production tax: 5 percent of the General Fund in 2014, down 2.3 percent from 2013. This is a tax on the oil and gas that is produced in the state. This source of revenue has been gradually declining, primarily due to the aging of Gulf Coast gas wells.

Corporation tax: 4 percent of the General Fund in 2014, up 48 percent in 2014. This is the replacement tax for Alabama’s old franchise tax, which was ruled unconstitutional in 1999. The large increase is partially attributable to decline in the portion of this tax that has been used to pay corporations refunds on the franchise tax.

Court costs: 4 percent of the General Fund in 2014, down 7 percent. Charges collected by the courts continued to decline in 2014.

Cellular phone taxes: 3 percent of the General Fund in 2014, down 14 percent over 2013. Revenue from taxes on cellular phone calling plans dropped. Analysts say this is attributable to changes in the way cell phone service is structured and how it is taxed. Pre-paid cellular service taxed by sales tax and more customers are moving away from service plan to the pre-paid minutes. Also, the state cannot tax data service. As cellular plans charge less for voice phone service and more for data, the proceeds from this tax decline.