Revenues into the state’s Education Trust Fund dropped by 6.32%, nearly $66 million, in December compared to a year prior and are down 2.34% in the first three months of fiscal 2026.
Senate education budget committee chairman Sen. Arthur Orr, R-Decatur said Tuesday he’s “not concerned, but watching closely” the funding streams that support public education, and some private education, in the state.
Lawmakers gavel in on Tuesday for the 15-week legislative session where passing the state’s two 2027 operating budgets will be the dominant issue.
Orr said he still expects the state to help with the estimated $380 million shortfall in the teachers’ health insurance plan and give a raise to educators.
“I still feel confident in the ’27 budget process and that we have a very manageable situation if the (Public Education Employees Health Insurance Program) board will meet us halfway with the large increase year-over-year for our PEEHIP appropriation.”
The state picking up half the increase would leave the board and its reserve fund responsible for the rest.
“I think that’s a reasonable ask,” Orr said.
Because of self-imposed spending caps, the education budget, about $10 billion for ’26, can only grow by $570 million in fiscal 2027.
Orr said lawmakers will likely also consider a teacher pay raise of 2% to 3%. Each percentage point increase costs about $50 million.
“I think we’ve got to since we didn’t do anything in the current year,” Orr said. “I’m certainly pushing for that and that we need to also have a retiree bonus on the table as well.”
Orr didn’t have a specific figure for that bonus yet, but it should be enough to have an impact on retirees.
Dips and reserves
The ETF is on track to meet its 2026 obligations, officials say. Revenue totals so far in 2026 are about $2.44 billion. Last year, the ETF totaled $10.9 billion. And even if ETF revenues decline, lawmakers have built up more than $3 billion in reserves in recent years, helped in part by federal pandemic relief funds. Those reserves were built under the Rolling Reserve Act, first passed in 2011 and amended multiple times since, which caps year-to-year education spending growth and prevents budgets from rising and falling at the same pace as state revenues do.
The most significant December drops were in the fund’s two largest revenue sources, income taxes, down $58.8 million, and sales tax, down $7.7 million.
Kirk Fulford, deputy director of the Legislative Services Agency, said the decline in income taxes is on the corporate, not individual, side.
“Corporate receipts were down in (fiscal 2025) by more than $125 million and that trend has continued into ’26,” he said this week. “There are several contributing factors to that decline, but the receipts, like everything else, jumped exponentially post COVID.
“The sales tax decline is two fold, partially caused by the reduction in food and due to slower spending patterns over the last couple of years.”
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.
Gov. Kay Ivey will give her budget recommendations to lawmakers next week. Fulford and Alabama Finance Director Bill Poole will also give members their fiscal predictions for the coming year on Wednesday morning.
In a written statement, the Alabama Department of Finance said lower corporate income tax collections are likely the result of various federal and state policy changes and timing-related factors.
“In addition, the Department of Revenue has processed a higher volume of corporate refunds more quickly, which impacts the timing of collections in the short term,” the statement said.
General Fund
State General Fund revenues were also down in December by more than 6% but are up 2.48% for the fiscal year.
Fulford said $11.25 million of the $16 million decline last month was a timing issue on revenue from the sale of abandoned property.
Interests on state deposits, which has been a major revenue stream for the fund in recent years, was also down more than $9 million or 18% in December. That’s a trend that’s expected to continue.