By MARY SELL and ALEXANDER WILLIS, Alabama DAILY NEWS
MONTGOMERY, Ala. – Alabamians won’t see another decrease in the state sales tax on grocery items this year as growth in many of the state’s revenue streams decline.
The “sugar high” of record state revenues and federal COVID-19 cash infusions is ending and growth is returning to more normal patterns, Alabama lawmakers were told Tuesday, the first day of the annual legislative session.
“The flattening is underway,” said State Finance Director Bill Poole about state revenues.
The Education Trust Fund is expected to grow by less than 2% in 2025, Kirk Fulford, deputy director of the Legislative Fiscal Office, told legislators.
In the ETF, one of the largest sources of income is the state sales tax. Lawmakers and Ivey shaved the tax on most store-bought food items from 4% to 3% this past fall. They also said the tax would be reduced to 2% in September 2024 “if the average of estimated growth” for total ETF revenues for fiscal year 2025 is at least 3.5% higher than fiscal 2024.
Poole also agreed the second cut won’t happen this year, but could in subsequent years if revenues in the ETF increase.
Meanwhile, in the General Fund, which supports non-education state entities, revenue growth is expected to flatten later this fiscal year and potentially decline in 2025.
That’s because the General Fund in the last year has relied on income from high-interest rates on state deposits. Meanwhile, the state has had more American Rescue Plan Act money in the bank as it doles it out to various projects. When federal interest rates drop, likely later this year, and that ARPA money is spent, that revenue pool dries up.
“It’s keeping me up at night,” Fulford told lawmakers about the pending decrease in the fund that has accounted for all the 7.5% growth in the General Fund so far this year.
Gov. Kay Ivey is proposing a $3.3 billion General Fund for 2025, an 8.16% increase. Her education spending proposal is $9.3 billion, a 6% increase. It’s Ivey’s proposals lawmakers will modify during the 15-week session.
Those increases are possible because lawmakers previously haven’t spent all available funds, giving themselves an economic cushion going into 2025. Supplemental spending bills, which are one-time spending appropriations, are expected for both budgets this year.
Poole said Ivey’s spending priorities in the General Fund include one-time capital needs, state employee compensation, Medicaid and the Alabama Department of Corrections. On the education side, priorities include education savings accounts, the expansion of which would allow more families to take public funding to private schools, and school security.
Outside of the education budget, about $1.7 billion in one-time spending is available in the Advancement and Technology Fund. Allocated based on school and college population size, the money can be used for a limited list of expenses, including capital and technology projects, insurance and security improvements. The money can’t be spent on personnel.
Fulford also warned lawmakers that they’ll likely hear from schools in their districts as federal COVID funding they received during the pandemic runs out.
“You can’t replace $3 billion in federal money,” he said.
Both Poole and Fulford discussed Alabama’s labor participation rate, which at 57.2% is well below the national average. Increasing it is one of the Legislature’s goals of the session.
“We have more jobs than people,” Poole said. “The opposite of that problem is not the problem you want to have.”
Many lawmakers expressed the need to approach the state’s 2025 budget conservatively, not only due to the end of federal pandemic assistance, but falling federal matching rates for programs like Medicaid, which saw rates drop significantly last year.
Some see a yet-to-be-announced gambling bill as a potential new revenue source for the state as it looks at increasing costs.
“We don’t have revenue, we’ve cut taxes, and with the reduction of federal (money), we have more gaps; we don’t have new revenue to fill those gaps,” Senate General Fund committee chairman Sen. Greg Albritton, R-Atmore, told Alabama Daily News.
“Now, the House is going to drop the gaming bill, that will provide some new revenue that we don’t have. Even with that, that’s not going to cover all the bases, but that’s the last opportunity I think we’ll have in a generation of getting new revenue in.”
The importance of creating new revenue streams for the state was of equal importance to Rep. Pebblin Warren, D-Tuskegee, who told ADN that not only was she “fully on board with a proper gaming bill,” but that lawmakers should pursue other ways to generate more revenue for the state to keep its agencies running.
“With the federal dollars gone, we’re going to have to find ways to supplement that,” Warren said.
“If we’re seeing this for what I see it for, the reality is we have got to find a new source of revenue. Whatever it is, I don’t know, but there is a need to find a new source of revenue to supplement all the (lost federal funding).”
As to what should be prioritized in the budgeting process, Rep. Terri Collins, R-Decatur, said that previous spending that had already been proven successful – even if it means spending increases – would be her main focus.
“I heard a lot of people that were basing some of these increases not just on what federal funds are running out, but on what we’ve seen has been successful, and I think that’s what we’re going to have to focus on,” Collins told ADN.
“I think a lot of (state agencies) have spent money on personnel, and I don’t regret that, I think all those things helped us have the recovery that we had from COVID, and that’s money well spent.”
Sen. Bobby Singleton, D-Greensboro, told ADN the state should consider dipping into some of its reserve funds to fill revenue gaps.
“I think we did some great things with some of the federal dollars, but the question is sustainability,” Singleton said.
“Now we’re on our own, and so at the level that we are, we’re going to have to be willing to spend some of the money that we have set back. We’ve been very prudent about our own dollars, but now we’re on our own, and we’re going to see exactly where we stand, and I’m waiting on that.”
Alabama Daily News’ Alexander Willis and Kate Essig contributed to this report.