Alabama’s funds that fuel education and government agencies ended fiscal year 2025 in good shape, and in the case of the General Fund, better than expected.
The General Fund, which supports most non-education state agencies, increased by $120.1 million, or 3.47%, over last year to nearly $3.6 billion.
The Education Trust Fund ended fiscal year ’25 at $10.9 billion and up 2.49% or $265.6 million.
Both funds more than met their obligations for the fiscal year that ended last week, and legislative leaders say that, due to conservative spending plans, they feel good about fiscal 2026’s commitments. The education and General Fund budgets for fiscal 2026, which began Wednesday, are nearly $10 billion and $3.7 billion, respectively.
But crafting the fiscal 2027 spending plans, which lawmakers will begin doing soon, will have challenges.
General Fund
Interests on state deposits decreased in 2025, but not as much as anticipated and were still the No. 2 earner in the fund at $510 million.
Interests on state deposits brought in $10 million to $60 million each year between 2015 and 2022, but an influx of COVID-19 federal relief funds and higher-than-normal interest rates took that revenue to $404 million in 2023 and $557 million in 2024.
Budget leaders had anticipated a sharper decrease, based on expected drops in interest rates.
“The General Fund ended the year in much better shape than we anticipated,” Legislative Services Agency Deputy Director Kirk Fulford told Alabama Daily News. “Based on what we knew at the time and the plans announced by the Federal Reserve regarding interest rate cuts in 2025, we had assumed a much larger reduction to interest on state deposits than what we saw. Still, the receipts for that source were down by $47 million, -8.43%, for the year, although the average decline over the last quarter of the fiscal year was much larger than that — over 15%.
“That source will bear watching in the coming months to see if the Federal Reserve reduces rates again, which most expect to happen again before the end of the year) and what happens when Chairman Jerome Powell’s term expires, and a new chair is appointed in June 2026.”
Meanwhile, Alabama has until the end of 2026 to spend all of the $2.12 billion in federal American Rescue Plan money it received during the pandemic. Some of that money is still collecting interest in state accounts.
“We continue to monitor the interest rates, but regardless of the rates, all the ARPA funds will be out of the accounts by the end of December 2026,” Rep. Rex Reynolds, R-Hazel Green. “And monthly (balances) are coming down now.”
In the General Fund, there are financial question marks about 2027, Reynolds, the chairman of the House General Fund budget committee, said.
We still have not seen final prices on the men’s prison planned for Escambia County, nor have we seen the Medicaid, Department of Human Resources, or Department of Corrections 2027 budget requests, he said.
“We will see what the Executive Budget Office decides on and work together to build a strong but conservative budget,” Reynolds said.
Meanwhile, legislative leaders are watching for the ongoing federal shutdown’s potential impact.
“That could have a greater effect on our first quarter than we know,” Sen. Greg Albritton, R-Range, said. “The feeling is the money will come in, the question is when.”
Education Trust Fund
House education budget committee chairman Rep. Danny Garrett, R-Trussville, said good planning is key to managing the ETF’s growth and demands.
“The Legislature will continue implementing fiscally conservative budget practices,” Garrett said. “This approach has allowed us to build reserves, support new innovative education programs and to reduce taxes on a consistent and measured basis.”
In September, the state sales tax on most grocery items dropped 1 percentage point to 2%, the second cut in two years. It’s expected to reduce revenue to the ETF by about $122 million per year.
Sen. Arthur Orr, R-Decatur, agreed that fiscal 2026 isn’t a concern. But 2027 has a growing list of expensive needs.
The state’s health insurance plan for educators is facing a $380 million shortfall. Teachers did not get a raise in this year’s budget and an increase in ’27 would cost about $90 million, Orr said. Providing education retirees a bonus would cost about $50 million, he said.
“And we’ve not even mentioned higher education,” Orr said. The community colleges and universities have their own health care costs and other challenges.
The 2026 legislative session starts Jan. 13 and Gov. Kay Ivey will give lawmakers her 2027 spending plans that week.