SHOULD THE STATE USE THE ALABAMA TRUST FUND TO BALANCE THE GENERAL FUND BUDGET FOR THE NEXT THREE YEARS?
By Elois Zeanah, President, Alabama Federation of Republican Women
SYNOPSIS: The proposed Constitutional Amendment would take $437 million from the Alabama Trust Fund. The State General Fund (GF) budget for FY 2012-2013 of $1.67 billion is short $145.8 million. The State must either cut more spending or find funds to cover this deficiency.
The Leigslature voted to balance the 2013 GF by taking money from the Alabama Trust Fund (ATF), CONTINGENT on voters passing a Constitutional Amendment (CA) on September 18, 2012. The CA has become controversial for several reasons:
(1) It takes money from the principal but there is no legal obligation to repay it.
(2) It asks voters to approve using ATF funds to balance the GF budget for the next THREE years, not just for 2013 — by $145.8 million each year.
(3) The $437.8 million effectively redirects the repayment of $437.8 million owed by the Education Trust Fund to the ETF Rainy Day fund within the ATF. This ETF debt must be repaid over the next three years.
The Governor has stated that if the CA fails, he will likely call a special session of the Legislature to find additional cuts to balance the 2013 budget.
CONSTITUTIONAL AMENDMENT Q & A
Why is the State spending scarce money for a special election in September to approve a Constitutional Amendment since there is a November general election? The State is required by its Constitution to balance the budget and the 2013 budget year begins October 1.
Why is the State asking to withdraw money from the Alabama Trust Fund for THREE YEARS? The General Fund budget has had shortfalls in recent years and shortfalls are expected to continue. The State wants enough to bail out the GF budgets for the next three years since revenues from traditional funding sources are either unreliable or dwindling, the GF funding structure needs to be reformed, and three years would give the State time to find permanent solutions.
Why does the State want to raid the principal of the ATF since the ATF has a General Fund Rainy Day Account? This account is depleted due to borrowing to bail out General Fund budgets in past years, and these funds have not been repaid.
Why is a Constitutional Amendment necessary? To change the formula for distributing ATF funds and to amend the Constitution which currently requires repayment when Rainy Day Funds are transferred to the GF. This CA allows the State to transfer $437.8 million WITHOUT repaying the money.
PROs and CONs for the CONSTITUTIONAL AMENDMENT:
* Rainy Day funds have been drained to prop up past GF budgets, leaving no cushion for this year’s budget crisis.
* Without the CA which would provide $145.8 million of the $1.67 billion GF budget for the fiscal year that starts October 1, more cuts to state agencies’ budgets and services will be necessary.
* Some state agencies’ budgets have already been cut between 25-40% in the past two years.
* Draconian cuts to state agencies don’t have to be made when the ATF investment account has $2.4 billion.
* A short-term fix to the GF budget is attractive when you consider the potential impact of additioanl cuts. The impact could be widespread for the Department of Corrections and Medicaid. Cuts in Medicaid would hurt 90,000 lower-income/disabled recipients and nursing home residents as well as hospitals, doctors, and nursing homes.
* Some of these arguments for another CA short-term fix include some of the same arguments and scare tactics made for Amendment One; but we must keep in mind that this only a short-term fix since it won’t solve the underlying problems. The can will only be kicked down the road once more.
— Medicaid expenses are expected to increase faster than revenue for the GF in future years. GF revenue sources must be re-structured or services cut in the long run.
— It’s not wise to draw down the principal of the $2.4 billion ATF account any time, but especially when inflows from royalties are slowing to a trickle.
— Interest income and capital gains from the ATF are one of the largest revenue sources for the GF.
— Cutting the principal reduces the yearly income for the GF from earnings. This means there will be less future revenue for the GF, which will require new taxes or a new funding source.
* It’s the State’s responsibility to pass a balanced budget on realistic revenue projections — not to continually siphon savings accounts to balance the budget until Rainy Day funds are depleted, then to raid the principal.
* Taking one-fifth of the principal of the State’s $2.4 billion investment/savings account without paying it back is irresponsible, and sets a bad precedent.
* The first sentence in the bill which authorizes the CA sets a new formula to distribute ATF funds. This formula could deplete the entire ATF in a decade or two.
* A permanent fix is needed, not another bailout for a broken system for another three years. It’s now or later.
* It isn’t lost on the public that THREE YEARS GET ELECTED OFFICIALS PAST THE NEXT ELECTION.
NOTE: The Governor tried to engage legislators in discussion about his ideas of structural reforms of the GF during the 2012 legislative session. Since, several additional ideas have come forth. Solutions will be hard, some politically toxic, and will require sacrifices, but a permanent fix must be found.
THE ALABAMA TRUST FUND (ATF)
What is the ATF? This is a “savings account” fund created in 1985 to capture/invest money received from offshore drilling rights and from royalties on oil and gas production. IT WAS APPROVED BY VOTERS AS AN IRREVOCABLE, PERMANENT TRUST FUND. 10% of income is invested/reinvested each year. The bulk of the remaining income goes to the State General Fund each year.
What is the General Fund Rainy Day Account within the ATF? In 2008, voters approved a CA that established a General Fund Rainy Day Account whithin the ATF which acts like a line of credit. THE PURPOSE WAS TO PROVIDE ADDITIONAL (EMERGENCY) FUNDING TO SHORE UP THE GF IN TIMES OF PRORATION. This authorized a line of credit of up to 10% of the previous year’s GF budget. It also built in protections to prevent depletion of the ATF, including: (1) Money borrowed from this rainy day account must be repaid within 10 years. (2) The rainy day fund could be tapped only when proration was declared.
Why not borrow money from the ATF General Fund Rainy Day Account instead of raiding the principal? This account held about $180 million in 2010 before the State withdrew $180 million in 2010 before the State withdrew $161.6 million to prop up the GF, leaving too little to plug the $145 million needed this year to balance the GF budget.
Is there a concern about the ATF being depleted? According to a Birmingham News editorial on July 8, 2011, “This pot of money that would be raided to bail out the General Fund” is in threat of being depleted in future years.
— ATF assets fell from $3.3 billion in 2007 to $2.3 billion in s012.
— Annual royalties inflow fell from a high of $373 million in 2006 to just under $120 million in 2011.
— Royalties are expected to total a little more than $72 million in the current budget year which ends September 30.
— Annual royalties are expected to be only $32 million by 2025.
How does the CA change the annual distribution formula for ATF funds? The annual ATF contribution to the GF would no longer be based on earnings to the Fund, but wuld be a 33% share of royalties flowing in, plus a reduction of assets equal to 5% of the average market value of assets over the previous three fiscal years.
What happens if voters don’t approve the Constitutional Amendment? A failed CA would bring hardships but it would force all parties to make necessary and long overdue reforms now instead of continuing to postone permanent fixes.
PROPOSED STATEWIDE AMENDMENT:
Proposing an amendment for the Constitution of Alabama of 1901, to provide adequate funding for the State General Fund budget, to prevent the mass release of prisoners from Alabama prisons, and to protect critical health services to Alabama children, elderly, and mothers by transferring funds from the Alabama Trust Fund to the State General Fund beginning with the state’s 2012-2013 fiscal year and concluding with the state’s 2014-2015 fiscal year; to provide a new procedure for distributions made from the Alabama Trust Fund beginning 2012-2013 fiscal year; to create a County and Municipal Government Capital Improvement Trust Fund. (Proposed by Act No. 2012-49)