Rolling Reserve Budget Act: The Right Approach to Budget Education in Alabama By Greg Canfield, State Representative Steve French, Senate Sponsor

Consider For a Moment 739,000 Public School Students in K-12 80,000 Public Two-Year College Students 149,000 Public University Students Almost 1 million students in Alabama! All Share One Sad Statistic in Common

Each of these students During their 17 years of school from K – 16 Will likely experience proration 5 times during their Alabama school career !

How Often Do We Prorate Education Budgets? 19 Years of prorated education budgets since 1950… That’s 32.2 % of all education budgets passed.. Or the equivalent of almost 1 in every 3 budgets adopted by the Alabama Legislature

Proration Hurts All Public Schools The Auburn Villager, Dec. 18, 2008 writing on proration declared for FY 2009: “Auburn City Schools will likely lose about $2.5 million in state funding..” “…Auburn University will also lose more than $26 million to proration…” WKRG (Mobile), Sept. 29, 2009 reporting on the latest round of proration and the effect in Baldwin County Schools and its loss of $7.5 million this year: “…there’s only one thing you can do, and that’s cut personnel.” Terry Wilhite, Baldwin Cty Public Schools.

Proration Effects the Classroom Tuscaloosa News, “County Schools Consider More Cuts,” Aug. 11, 2009: “To make up for the loss of an estimated 6% in state funding because of proration in the 2010 fiscal year…there are $1.9 million in cuts that include the loss of 20 jobs…[including] 5 licensed practical nurses…and 7 PE aides.” Dothan Eagle, “Larger Class Sizes, Fewer Teachers Likely Result of Proration”, October 18, 2009 – These headlines say it all.

WHY DO WE HAVE ALL THIS PRORATION? It’s All About the How We Budget Education in Alabama

81% of the ETF Revenues Are: Business & Personal Income Taxes 54.13% Sales Taxes 26.67%

Revenue Budget Guesswork: Forecasting Volatility The current ETF budget process requires forecasting changes in revenues from one year to the next…. Yet, ETF revenues are highly sensitive to economic changes and can fluctuate widely from one year to the next….

Who Can Accurately Forecast Revenues This Volatile from One Year to the Next? A 10.6% change in revenues between FY 2005 and FY 2006 A 17.2% change in revenues between FY 1983 and FY 1984

Recent Proration The Fiscal Year 2009 Education Budget set spending at $6.39 billion After borrowing all $437 million from the Rainy Day Fund, the Education Budget was still cut by 11% or $703 million FY 2010 was just cut by 7.5% and more could come

The Legislature Has Attempted to End Proration The Statutory Rainy Day Account – is built upon unanticipated revenues…. …..but when do we expect the next batch of unanticipated revenues to be available? The Constitutional Rainy Day Account is a loan which must be repaid over a six year period…. …but will we have to repay the loan from future revenues in years when we can least afford it?

“A budgeted reserve tied to revenue growth could help create a long-term equilibrium between revenues and expenditures. The key words are budgeted reserve.” Comments by Dr. Ira Harvey, Decision Resources LLC to School Superintendents of Alabama 08Jun2009

The Budget Solution for the Future “Rolling Reserve Budget Act” Create budget ceilings based on the historical 15-year average annual growth rate to smooth out year-to-year unpredictability in the change of revenues When modeled for the period 1996 – 2009 the 15-year average annual growth factor ranged from 4.24% to 6.99%, thus reducing the roller coaster effect of year-to-year variation 15-year averaging makes sales tax and income tax act like more stable property taxes…only better, because we are able to harness the power of growth revenues to fund education

Calculating a Budget Ceiling How the FY 2009 Budget Would Have Been Set $5,854,027,193 (FY 07 Revenue and last known yr ) x (5.60% 15 yr growth rate FY ) = $6,181,815,276 (Would be FY 09 budget ceiling)

Built-in Savings Prevent Proration In years when actual revenues exceed the budget, excess revenues transfer to a Budget Stabilization Fund and those revenues “roll” from one year to the next In years when actual revenues are short of the budget, revenues are transferred from the Budget Stabilization Fund to prevent proration, eliminating the need to borrow from the ATF through the Rainy Day Fund

Rolling Reserve Budgeting Works LFO Modeled FY FY 2009: All 3 years of actual proration would have been avoided Even FY 2009’s 11% net proration would not have occurred.

The Hidden Budget Time Bomb: Unfunded Liabilities The State of Alabama, and ultimately the tax payers, are required by law to guarantee the Teachers’ Retirement System (TRS) and the Public Education Employee’s Health Insurance Plan (PEEHIP) for retirees.

The Budget Time Bomb: Unfunded Liability As of September 30, 2007 the unfunded liability for TRS was $5.2 billion The unfunded liability for PEEHIP for retirees was $12.6 billion This $17.1 billion liability, left unpaid, threatens future expenditures on public education and the retirement security of teachers

Rolling Reserve Budget Act When the Budget Stabilization Fund balance reaches an amount equal to 20% of the current budget, these excess funds “roll” into: 1)ETF Pension Liability Fund (TRS unfunded liability) 2)ETF PEEHIP Liability Fund (PEEHIP unfunded liab.) 3)Capital Fund for Education

Cuts Could Be Avoided  In FY 2009, schools were cut over $700 million due to proration which could have been avoided using Rolling Reserve Budgeting  The 7.5% proration, a reduction of over $425 million, declared at the beginning of FY 2010 could have been avoided in Rolling Reserve Budgeting by withdrawing from the $568 million savings in the Budget Stabilization Fund  Had Rolling Reserve Budgeting been in practice from FY FY2009, no proration would occur and $1.56 billion would have gone into school construction and pay- down of the unfunded liabilities in TRS and PEEHIP

Rolling Reserve Budgeting Secures the Future of Education Ends the devastating cycle of proration Builds additional funding for school construction Reduces the unfunded liability in PEEHIP Reduces the unfunded liability in TRS Stable budget process helps stabilize tuition rates

Rolling Reserve Budgeting Endorsed By: Alabama Association of School Boards School Superintendents of Alabama Higher Education Partnership (Representing 13 public universities) Business Council of Alabama Mobile Chamber of Commerce Birmingham Regional Chamber of Commerce Shoals Chamber of Commerce

Rolling Reserve Budgeting in the Press Mobile Press Register, Apr 12, 2009 by Michael Ciamarra: “…it would dramatically change the way the state's education dollars are budgeted, save taxpayers money, ensure quality educational outcomes, meet future capital needs for construction and renovation of schools and be a simple end to proration.” The Birmingham News, Aug. 2, 2009 by Bob Blalock: “There's no better time for his cause than now…Nor is there a better argument than this: Had Canfield's way of writing the education budget been put in place years ago, we would have avoided the mandatory, across-the-board spending cuts that have gouged 11 percent out of this fiscal year's budget for K-12 schools, colleges and universities.”

The Rolling Reserve Budget Act Clearly, a better way to fund public education in Alabama Rep. Greg Canfieldwww.gregcanfield.com