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 tradeoff.
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?” Daniels said.
“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-to-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-to-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’s health care and a road pledge
The General Fund budgeting process in 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 budget chairs were on board with it. And ... it kind of was the last piece in the puzzle, if you will, on the General Fund budget, getting it through.”
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,” House education budget committee chairman Rep. Bill Poole, R-Tuscaloosa, said. “There’s been a sentiment that it really is a General Fund revenue.”
Poole said House members were in a difficult position with the 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 said.
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 told Alabama Daily News that 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 rough 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.
Groups OK with transfer, but not CHIP
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, it’s very difficult to get it out” of the education budget, 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, 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 for a reason, Poole said. That was a directive that the residents of this state gave and can’t be forgotten in these discussions.
“I will not support transfers of income or sales taxes,” Poole said.
Other lawmakers said they don’t generally support transfers from the education budget. Others said it depends on the need.
“... the General Fund was struggling and the problem is going to be worse in future years,” said Rep. Andrew Sorrell, R-Muscle Shoals. “So as a general rule, I want to say no, but never say never. It depends on what our budgets look like year to year. I'll tell you this, if it was the other way around and the General Fund had a bunch of money and the ETF was short, no one would think twice about transferring money from General Fund to the ETF."
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. 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.”
Alabama Daily News reporter Caroline Beck contributed to this report.