MONTGOMERY — In the last days of the legislative session in late May, lawmakers quickly and quietly transferred a tax revenue source worth nearly $31 million a year from the state’s education budget to the General Fund budget to fill a "hole" created by other financial commitments.
Those normally opposed to diverting money from schools to other state expenses didn’t complain.
Education advocacy groups were relieved the education budget didn’t get stuck with the growing expense of the Children’s Health Insurance Program, so losing a small, flat revenue source was an acceptable trade-off.
Some Republicans have said they didn’t know many details of the transfer, but leadership said the idea wasn’t new.
Democrats in the House say they didn’t have time to oppose it. They found out about it when it was on the House floor on the second to last day of the session via an amendment to an economic incentives bill they supported. If they tried to kill the transfer, they’d kill the incentives.
“What do you do?” said House Minority Leader Anthony Daniels, D-Huntsville. “You go on record voting against a bill for rural incentives? Or do you approve an amendment that there’s a year to contend with?”
Senate President Pro Tem Del Marsh, R-Anniston, proposed the amendment to House Bill 540, a bill to expand tax incentives for economic development in rural areas. The amendment was approved 30-0 in the Senate on the final Wednesday of the session. The next day, it went back to the House where individual amendments didn’t have to be approved. Representatives voted 99-0 to concur with the Senate’s changes to the bill.
The transfer doesn’t begin until October 2020, after lawmakers’ next regular legislative session.
Children and roads
The General Fund budgeting process this session wasn’t as dire as in some previous years. But several moving parts had to be coordinated between the $2.1 billion General Fund and the education budget, which was a record $7.1 billion.
First, lawmakers had a new expense to deal with: $35 million to pay the state’s share of the federal Children’s Health Insurance Program. Gov. Kay Ivey suggested in her budgets that education pay for it because education has the revenue growth to accommodate the increase and healthier children make better learners in school. Some lawmakers disagreed and eventually it became a General Fund expense.
Second, to garner support for her proposed gas tax increase earlier this year, Ivey suggested stopping at least some of a $63 million annual transfer from the Alabama Department of Transportation to fund state courts and law enforcement. Ivey’s budget proposal left $35 million for ALDOT that had been going to courts, leaving a hole for the 2020 General Fund budget.
In the final days of the session, Marsh said lawmakers were trying to plug that hole.
“That's when I put the amendment to move the insurance premium tax, which is really a set number right at $31 million,” Marsh said.
“… So to me, that was the easy one to do. There wasn't a whole lot of pushback on it.”
The insurance premium tax — imposed on the amount of premiums written by an insurer — isn’t much compared to other ETF revenue streams. It’s been capped at around $31 million for years. Most of that tax’s revenue already goes to the General Fund. It was worth about $349.4 million in total in fiscal year 2018.
“The truth of the matter is that there has been talk of that transfer for years,” said House education budget committee chairman Rep. Bill Poole, R-Tuscaloosa. “There’s been a sentiment that it really is a General Fund revenue.”
Poole said House members were in a difficult position with this amendment in the waning hours of the session.
“(But) it should not be a surprise to anyone that there were conversations going on the entire session to determine how to best reconcile these issues (with CHIP and the road and bridge money).”
Poole confirmed that the transfer won’t start for more than a year.
“This issue can be reconsidered in the context of ongoing budget issues,” Poole said. “Everybody is going to have another chance, quite frankly, to look at this issue again.”
Daniels said House Democrats will bring legislation next session to repeal the transfer and put the $31 million insurance premium tax back in the education budget.
However, legislative leaders have already sounded the alarm that 2021 will be a rough one for the General Fund budget. Budget committee chairmen say there will be demands for more money for Medicaid and prisons.
The transfer was a result of that anxiety, said Sen. Arthur Orr, R-Decatur. He’s the Senate education budget chairman.
Orr points out that as the budgets came from Ivey, the education budget was paying $35 million for CHIP. In the end, it lost about $31 million in revenue, netting out about $4 million, he said.
Senate Minority Leader Bobby Singleton, D-Greensboro, said Senate Democrats supported the transfer from education because it was needed for CHIP, the program for low- and middle-income children.
“We were all wanting to make sure we fund CHIP,” Singleton said. “I think if it had been anything but CHIP, there would have been some pushback.”
Ivey's office said the transfer decision was made by lawmakers and deferred questions to legislative leadership.
AEA weighs in
The Children’s Health Insurance Program will also need more money in 2021, maybe $70 million more. That’s partly why education advocates opposed putting it in the education budget.
“Once an expense goes in (the education budget), it’s very difficult to get it out,” said Ashley McLain, public relations manager for the Alabama Education Association.
McLain said AEA agreed to the insurance premium tax revenue being sent to the General Fund. It’s hard to argue the education budget shouldn’t be paying for CHIP, an insurance program, when some of its revenue comes from a tax on insurance premiums, she said.
Losing the insurance premium revenue was better than getting saddled with CHIP going forward, said Ryan Hollingsworth, executive director of School Superintendents of Alabama.
“With the concern of increasing CHIP cost every year, this revenue would offset some of that cost and keep CHIP in the General Fund where it belongs,” Hollingsworth said.
Alabama is one of just a few states with separate budgets for education and government agencies. In good economic times, the education budget's two largest revenue streams, sales and income taxes, grow faster than the General Fund’s revenues. But Orr and Poole said the ETF shouldn’t be looked to for future bailouts.
“I personally will have a very hard time giving any more education money to the General Fund,” Orr said.
The state has two budgets because citizens wanted it that way, Poole said.
“I will not support transfers of income or sales taxes,” Poole said.
Marsh, who leads the Senate as President Pro Tempore, said the transfer was equitable.
"Understand: we moved $31 million out of the Education Trust Fund to the General Fund from the insurance premium tax," Marsh said. "The Education Trust Fund last year had an increase in revenue of about half a billion dollars. They have the growth taxes in the state and continue to have them. It's already projected that we'll have an increase next year.
"So, you know, it was a fair trade, if you will, to help the General Fund keep its commitment of moving dollars back to the road bridge fund."
Confusion in the Chamber
Some Republican and Democratic House members said they did not realize the budget transfer was happening when it did, while others said they were aware.
Rep. Terri Collins, R-Decatur, said she heard conversations about the revenue transfer, but wasn’t aware it was done in Poole’s bill. Collins also pointed to the promise to stop using road money to fund courts as a reason behind the transfer. She said she’s pleased lawmakers followed through with that.
“We are following through on the commitment that I felt like we made to people to stop diverting funds from the revenue that were already coming from the gas tax into the courts,” Collins said.
Daniels, the leading Democrat in the House, said he appreciates the position Poole was in to bring the bill and stressed the amendment was Senate-made.
“It was a helluva game of chicken,” Daniels said. “My message will be: Don’t do it again. If you’re going to use the last days to make trick plays, we’ll make the last days very difficult."
Marsh disputed that there was anything "tricky" to the budget transfer and said it had been discussed for the last week.
McLain, with the AEA, said people should be careful when assuming more money in the education budget means schools have everything they need.
“We don’t have (school resource officers) in every school; we don’t have mental health providers in every school; we don’t have nurses in every school — some nurses have six, seven schools,” McLain said. “We’re not 100% funded in transportation, our buses don’t have air conditioning. Those things need to be taken into account when people look at the ETF and say, there’s so much money there.”