Alabama lawmakers are deciding what to do with billions of dollars of education money that, due to several years of budget decisions, isn’t going to schools.

The bulk of the state’s $11 billion in available education funding- $8.8 billion if Gov. Kay Ivey’s budget proposal sticks – will be divvied out through the regular budget process for schools, colleges, and other education-related purposes complete with the earmarks and restrictions that have been in place for years.

But a huge chunk of money – $2.8 billion in excess tax collections from last year – is dealer’s choice.

In her 2023 proposal, Ivey wants to send more than half of that money back to taxpayers and to agencies and projects outside of K-12 and higher education.

Only 25% of Ivey’s proposal goes to K-12 schools, according to Ryan Hollingsworth, who leads the School Superintendents Association. Historically, he estimates, two-thirds of education-related funding has gone to K-12 schools.

Ivey defended her proposal, which includes $25 million for a Montgomery water park and $31 million for an airport in Mobile, saying those projects are still education-related.

“All expenditures in the ETF should benefit education,” Ivey said in response to questions from AL.com, “whether those expenditures are direct or indirect investments.”

An AL.com analysis found that in addition to the $2.8 billion up for grabs this year, over the past two years, lawmakers diverted $1.5 billion away from an automatic transfer process designed to protect K-12 and higher education funding.

And lawmakers are set to try the same gambit for next year’s budget: The budget cap is $10.9 billion, but Ivey’s proposal is for $8.8 billion. If lawmakers budget even one dollar below the cap, they’ll get to control any and all excess revenue that comes to the state next year.

Reactions

Education advocates and interest organizations said that in past years, small amounts of education money shifted from one pot of the state’s budget to another.

This year, they said, is different.

“We were very disappointed in the governor’s budget and supplemental,” said Ryan Hollingsworth, with the Schools Superintendents of Alabama. “Because our share was cut tremendously.”

Ira Harvey, who helped craft a 2011 law that changed Alabama’s education budget model, questioned whether the past three years’ budgets were intentionally crafted to help lawmakers keep control over excess tax revenue.

Senate Education Budget Chair Arthur Orr defended lawmakers’ conservative budgeting and ability to direct excess revenues.

“There was nothing nefarious to end up at this point,” he said. “The motive has been trying to be conservative and not spending more than we thought we were going to bring in. And hold some back in case we had a rainy day.”

But schools have immediate needs that should be funded that aren’t included in the regular budget or supplemental proposals, Hollingsworth said.

“School safety is one of the top five priorities right now,” Hollingsworth said. “Our ask was for $100 million. I didn’t see it in the governor’s proposed budget. But I did see it in the supplemental: $10 million. For school safety for the entire state of Alabama.”

Supplemental funding should be used to fund one-time efforts to shore up Alabama facilities, technology and training, he said — not legislators’ projects.

“The money is not being spent on the kids,” Alabama Education Association Executive Director Amy Marlowe told AL.com. “The revenue coming in during the year is not being spent in the classroom on the kids that are in school at this time.”

How did education funding get diverted from the K-12 and higher education safety net?

The Rolling Reserve Act, passed by Republicans during their first legislative session as the majority party in 2011, was championed as a conservative way to prevent overspending, while promising a concrete path for excess tax receipts to stay safe and available for future education spending.

Previously, each year, budgets were passed based on officials’ expected revenues. That was fine when revenue met expectations, but every few years, the state received less revenue than it expected.

When that happened, the Governor would declare “proration.” State agencies would have to cut spending in the middle of a budget year. For schools – which were not allowed to cut salaries or benefits – that often meant big problems.

When lawmakers passed the Rolling Reserve Act, the state was in the fourth straight year of prorated education budgets. Since then, state education budgets have been stable, growing slowly as determined by the smoothed-out growth curve of a mathematical formula.

The heart of the Rolling Reserve law is the use of a mathematical formula that sets an upper limit – called the Rolling Reserve cap or fiscal year appropriation cap – on how much lawmakers are allowed to budget for the next fiscal year.

The cap is primarily set based on recurring revenue growth over 14 of the 15 past years’ growth (the lowest growth year is dropped in the calculation). One-time or nonrecurring revenues are considered separately, generally not being added to the calculation.

Lawmakers typically used the lower of the calculated formula or the estimate as the cap, though the budget cap was exceeded in early years after its passage.

From 2013 through 2020, lawmakers passed budgets that reached or exceeded the formula-based cap. But lawmakers set budgets under the cap for the past three years.

Here’s a look at the cap and the budget. Click here if you are unable to see the chart below.

When tax revenue exceeds expectations

When more tax revenue is collected in the Education Trust Fund than is budgeted to be spent, the Rolling Reserve Act prescribed a clear waterfall for the excess,

• paying back money borrowed from ETF Rainy Day fund during the Recession,
• then putting money into the ETF Budget and Stabilization Fund for future economic downturns, and
• finally, into the ETF Advancement and Technology fund for K-12 and higher education to use on one-time expenses.

Lawmakers have tweaked the bill here and there, changing what that excess can be used for – such as paying for $516 million in PACT program liabilities from 2014 until 2022, for example.

Cascading the excess revenue has achieved the law’s initial goals: The Rainy Day Fund has been fully paid back and has a balance of $505 million according to state financial reports.

The Budget Stabilization Fund – which can only be accessed if the Governor declares proration – gets 1% of the previous year’s budget amount each year until it reaches 7.5% of the previous year’s budget. The balance currently is $265 million according to state financial reports.

Whatever is left after those transfers goes to the Advancement and Technology Fund, which lawmakers then have to appropriate, or create a spending bill, to split between higher education and K-12 education.

Lawmakers typically distribute all of the money in the A&T Fund the same year it was received.

Schools and higher education institutions can use that money for specified purposes (which have expanded over the years). K-12 schools have used that money to fund the uncovered portion of transportation and purchase of computers, among other types of expenditures. The balance of the A&T Fund is currently $750 million.

But the automatic transfers into the cascade of accounts ceased beginning in 2021.

Why did automatic transfers stop?

AL.com questioned state finance officials about whether – prior to a 2022 change in the Rolling Reserve Act – lawmakers had the authority to divert excess revenue away from the automatic transfer process.

Finance Director Bill Poole and Fiscal Division Deputy Director Kirk Fulford told AL.com the automatic transfers aren’t required unless the education budget equaled the appropriation cap. Because the statute wasn’t clear, Fulford said, SB331 was enacted in 2022 to put that into the law.

That change made it crystal clear that legislators have full control over excess tax collections if they set the education budget below the formula-based cap.

Which they have now done three years in a row and are set to do again this year.

Budgeting under the cap and taking control of the excess revenue essentially functions as an “escape clause,” school finance expert Ira Harvey said, and allows Ivey and lawmakers to choose projects they want to fund outside of the regular budget process.

Prior to the 2021 legislative session, supplemental bills typically redistributed money not spent the previous year and amounts were generally less than $10 million. Hollingsworth and other education officials said no one paid much attention to supplemental bills when those amounts were small.

The supplemental bills grew to $213 million in 2021, $1.3 billion in 2022, and $2.8 billion this year.

The rule change came in the middle of a dynamic and initially unpredictable economic situation due to the pandemic and subsequent federal COVID relief.

Schools were flooded with $3 billion in federal aid – with certain restrictions on how that money could be spent and with deadlines on spending it.

At the same time, the state’s income and sales tax receipts – the two main sources of tax revenue for the Education Trust Fund – skyrocketed. State funding and families’ bank accounts changed dramatically due to the billions in relief that was available for everything from saving jobs to providing rental assistance to direct stimulus payments.

Those changes meant that much more money flooded into – and stayed within – state coffers.

“I don’t think that 10 years ago, anyone could have foreseen the amount of available revenue that we’ve got in the [Education Trust Fund] right now,” Marlowe said. “Especially when you consider that we’ve come out of a worldwide pandemic.”

Hollingsworth and Marlowe said they hope lawmakers scrap Ivey’s proposal and focus the bulk of the windfall on school needs.

Both the education budget and the $2.8 billion supplemental bill are under review by the legislature and likely will go through a lot of changes before heading back to Ivey for her signature.The new budget year starts Oct. 1.

The flowchart below was part of the Legislative Fiscal Services Agency presentation to lawmakers through 2021. It illustrates how excess revenue was required to flow prior to a 2022 change in the law. Click here if you are unable to see the document.