Alabama’s Ailing General Fund

When the new legislature convenes in 2015, it will face an old problem: a shortfall in the state’s $1.8 billion General Fund account. This time, state leaders are expecting as much as a $200 million gap between revenues available for fiscal 2016 and the appropriations needed to maintain services. Any such imbalance between revenues and expenditures must be eliminated when the Fund’s budget is adopted next spring.

This is a persistent problem.

For example, in Fiscal Year 2013 General Fund expenditures totaled over $1.7 billion, but the Fund’s continuing revenue sources brought in less than $1.5 billion, leaving a gap of $245 million that had to be supported in extraordinary ways.

On the revenue side, the FY 2013 gap was closed by enacting a law transferring $77 million of use tax revenue formerly earmarked to the Education Trust Fund, adopting temporary measures to produce another $23 million, and borrowing $146 million from the Alabama Trust Fund that will have to be repaid in later years.

These kinds of revenue strategies have been used repeatedly in recent years. For instance, in 2001 a number of sales-type taxes were transferred from the Education Trust Fund to the General Fund. The Legislative Fiscal Office counted over $1 billion of “intermittent” or temporary revenues used in balancing the General Fund from FY 2008 to FY 2013. And since FY 2010 the State has borrowed $599 million from the Alabama Trust Fund to support the General Fund budget. These borrowings must be repaid, and repayment schedules run to FY 2026.

On the spending side, the FY 2013 General Fund budget had to accommodate Medicaid and the Department of Corrections, which accounted for 56 percent of General Fund outlays. Ten years earlier, these two programs had required only 36 percent of the Fund’s expenditures.

corrections medicaid double whammy

The growth of Medicaid and Corrections has led to the crowding-out of other services that historically have been supported by the General Fund. A good example is support for the Unified Judicial System (UJS), which includes the state’s trial courts. Historically the UJS has received about 10 percent of General Fund appropriations, but by FY 2013 the percentage of the General Fund supporting the courts had been cut in half, to 5 percent.

The UJS is also a good example of how the Legislature has tried to cope with the General Fund cash shortage. In an attempt to make up for cuts from the General Fund, the Legislature increased fees charged to those who come before the courts. However, collection rates for court fees are low, in part no doubt due to the fact that the burden of paying the fees is high in some cases. This limits the effectiveness of the fee approach to increasing support for court operations.

What should be done?

There appears to be a growing consensus that something should be done to end the need for constant tinkering with the State’s General Fund. The solution is not likely to come from a top-down approach that focuses only on the total amount of the Fund’s revenues or expenditures. Rather, the General Fund must be analyzed in terms of what the state wishes to accomplish through the services that the General Fund supports.

The General Fund is an accounting entity that in most cases provides only some of the support for the programs to which it contributes. Establishing control over the General Fund’s finances requires an evaluation of the goals, strategies, and cost-effectiveness of the agencies themselves, and then providing them with stable support to achieve their purposes. Otherwise, there is no bottom line to determine what is an adequate level of General Fund revenue, and no way to measure the cost-effectiveness of General Fund spending. The General Fund can be structured to do its part only after this evaluation is done.

Alabama’s Budget Management Act calls for building the state’s budget in this way, from the bottom up. However, the Smart Budgeting System intended to implement this law was allowed to lapse a few years ago. Most other states have continued to work on tightening the connection between funding and results. Long-term, returning to the principles in the Budget Management Act is a must. Alabama’s state government cannot be successful without systematically measuring what is being accomplished with the tax dollars invested.

In the short term, the governor and the Legislature have launched efforts to think more strategically about our approach to managing the two largest and fastest-growing components of the General Fund, Medicaid and Corrections. In the Fall 2014 PARCA Quarterly, we describe those efforts.

gen fund pie