Alabama legislators told to be cautious with record-breaking budget revenues

State Finance Director Bill Poole wondered Tuesday if it was the best of times or the worst of times. 

On the former, the Legislative Fiscal Office estimates that the state’s two budgets are seeing huge influxes of cash, thanks to income and sales tax receipts from historically low unemployment rates and a growth in the state’s GDP. Income tax revenues grew 22% in the fiscal year that ended Sept. 30, and sales taxes grew 7.6%.

That could allow state officials to be generous. Poole said Gov. Kay Ivey’s State of the State Tuesday would address compensation for teachers and state workers; tax rebates, and one-time spending on capital projects.   

But Kirk Fulford, deputy director of the Fiscal Division of the Legislative Services Agency, said that growth is slowing down. While he does not know if there will be a recession or what that will look like, he said to legislators that they should exercise caution in appropriating these funds.

Fulford quoted recent comments from House Ways and Means Education Committee chair Danny Garrett, R-Trussville that “in his private world, sometimes they made the worst decisions when things were going great.”

“That’s the challenge that all of you are going to be faced in this session in dealing with the excess revenue as well as trying to figure out what a normal situation looks like going forward, because this isn’t normal,” Fulford said.

The office estimates that total receipts into Alabama’s General Fund, which pays for most noneducation services in the state, will be about $3.37 billion in the 2024 fiscal year, which begins Oct. 1.The office estimates that next year’s Education Trust Fund budget (ETF) could reach $10.3 billion. 

Both figures would reflect major growth in the state’s two budgets. The current ETF is about $8.26 billion; the current General Fund is $3.37 billion. Both those numbers include unspent state funds expected to roll over into the next fiscal year; Fulford said the numbers could decline if legislators decide to appropriate that money this year. 

But Fulford also said that legislators need to prepare for major changes, particularly as federal relief money from the COVID epidemic begins to wind down. The federal government will reduce pandemic-era Medicaid funding, meaning the state will have to look to its own resources to maintain funding there. 

Both Fulford and Poole said more recent tax revenue figures had shown growth slowing month to month. 

“There’s a slowdown coming, so I caution you to take that into consideration when you talk about what you want to spend in the coming fiscal year and addressing the needs in education as well as your general fund agencies,” Fulford said.

Other challenges include rising inflation and staffing shortages at state agencies, including the Alabama Department of Corrections.  

Fulford also said inflation will be a factor in dealing with the ETF. The ETF also has ongoing costs to education investments, such as the Literacy Act and Numeracy Act. Teacher and staffing shortages will also be an issue in the upcoming fiscal year, Fulford said.

Poole said Ivey would propose a 6.5% increase to the ETF, and an 8.42% increase to the General Fund budget. The finance director did not spell out specifics but said the governor would address “compensation” for teachers and state employees; sustainable increases in agency budgets; funding for education programs like the Literacy and Numeracy acts; and funding for Medicaid and Corrections. 

The Alabama Legislature has the final say on the budgets, and legislators said afterward that they wanted to be cautious with the funds they have.  

“Nothing presented today was a surprise – they were part of our ongoing discussions and I think reflect the thinking of the Legislature in terms of the broad picture,” said Garrett.

He said the state is heavily dependent on “volatile” sales tax, and he wants to make sure they maintain the “one of the lowest income taxes” in the country while sustaining the education system.

He said there have been discussions in the House about how to best move forward with the tax rebate. Garrett said he neither supports nor opposes it. 

Sen. Greg Albritton, R-Atmore, said that in terms of priorities, they will try to use the excess funding to “fund capital projects and those that are non-recurring to fill in the gaps, so that we’ll have a boost in the future.”

Carla Crowder, executive director of Alabama Appleseed, said that the state should continue to look at the “extraordinary” amount of money that is being put into the state prison system and said that the state should invest this money in “smarter ways.”

“As we look at possible recession or changes in the economy, I hope they will be careful and not overinvest in this broken system when we could invest in the community and services and mental health care and drug treatment and all the things that would actually make our state safer and more robust,” Crowder said.

Robyn Hyden, executive director of Alabama Arise, said that discussions on job training are good, but that alone won’t fix the staffing shortages. 

“We’re talking a lot about tax incentives for businesses to locate here,” she said. “What about incentives for workers to actually stay employed? Wages are not keeping up with the cost of inflation, and we’ve got to address that if we want our state to be healthy.”

Staff writer Ralph Chapoco contributed to this report. 

This story was updated at 9:47 a.m. on Wednesday to correct the name spelling of Robyn Hyden and Carla Crowder.