About Alabama — What Will Happen to State Budgets When the Federal Subsidies End?

Alabama’s state government operates out of two big budgets: one for education (the Education Trust Fund budget) and another for the remaining services (the General Fund budget). Both have been in trouble since 2008. The temporary federal subsidies that have propped them up will disappear soon. The governor and Legislature we elect in November will have to decide how to balance these budgets.

In part, the problem stems from the deterioration of the economy, which has been deep and prolonged. The taxes and other continuing revenue sources that support the two budgets fell by about 12 percent from 2008 to 2009, and they have remained relatively flat since.

But the state also failed to control its spending in the years before the downturn. Alabama’s economy is cyclical: It is normal to have a string of growth years followed by a slowdown. The governor and Legislature did not foresee the end of the 2004–2008 growth period, which produced large surpluses. Expenditures increased. In fiscal 2008, the peak year just before the recession, education spending was 12 percent higher than continuing revenues would support and general fund spending was 15 percent above its revenue base.

After the surpluses were used, the state turned to “rainy day” funds that voters in prior years had approved for each of the budgets. To date, $598 million has been borrowed from these two funds and must be repaid in future years. State budgets also have been reduced, in part by more than $1.8 billion of midyear “proration” cutbacks, yet large gaps remain.

In 2009, the federal government began to provide “stimulus” funds to offset the impact of the recession on state budgets and boost economic activity. Alabama’s allocations from 2009 through 2011, when the payments will end, total more than $3 billion. Some of this money is for short-term projects, including more than $500 million for highways. Some is for temporary grants to local school systems and others. But well over half of it is one-time support for continuing state programs such as Medicaid and education.

When the temporary money goes away, how will the state cover budget gaps that appear to total from $800 million to $1 billion?

EDITOR’S NOTE — Jim Williams is executive director for the nonprofit, nonpartisan Public Affairs Research Council of Alabama.