Alabama Scene

A $400 million black hole



It appears the state will face this coming October with a $400 million hole and the possibility of level-funded general fund and education budgets… unless a miracle shows up and that isn’t likely.

It appears the legislative and executive leadership in Montgomery does not intend to propose any increase in taxes… period. And there are no miracles in sight so we are looking at further reductions in services and more employee layoffs.

Gov. Bentley said last week he will propose legislation to consolidate the state’s two budgets, one for education and the general fund which funds just about everything else except highways and bridges.

This is a direct affront to the powerful Alabama Education Association (AEA) because it could likely cause education to lose some of its earmarked money.

The problem that the governor will face with his consolidation proposal is that the largest revenue growth – sales and income taxes – are earmarked for schools. General Fund agencies such as the prison system, so far over capacity that we’re likely to see prisoners turned loose, and the seriously underfunded Medicaid program, must rely on the slowest growing revenues we have.

The state’s general fund budget has been so underfunded that state officials have had to “rob Peter to pay Paul,” by taking nearly $50 million for state troopers and the courts from state highway tax revenue.

And as The Huntsville Times points out, switching to one budget from two, as Gov. Bentley proposes, would require voter approval of a constitutional amendment in November, and that would be too late to make any difference for the problematic fiscal year that will begin Oct. 1.

This is the most significant of the many issues which will confront state lawmakers and the Governor when the Legislature gathers in Montgomery next month.

This past week House Speaker Mike Hubbard of Auburn spoke of another financial problem. Hubbard said the state can’t continue to support an investment strategy that cost the state $1 billion last year for public teachers and other employees’ retirement benefits and matching contributions.

The Retirement Systems of Alabama (RSA) is paying retirement benefits to just over 100,000 people, and it has more than 170,000 active members paying into the system. Its projected liabilities in payments to current and future retirees during the next three decades are projected at about $34 billion.

The teachers’ retirement fund consists of about 70 percent of those liabilities, and the state employees’ retirement fund 67 percent. In 2005 the funded ratio for teacher obligations was 83 percent.

RSA’s Dr. David Bronner has said a funding ratio between 80 and 85 percent is ideal. When retirement funding is at 100 percent, there is usually pressure to increase benefits, he has stated.

Bronner has said he realizes the numbers look grim. He said he thinks investment returns are lower because RSA, including the Employees’ and Teachers’ Retirement System, has invested hundreds of millions of dollars in Alabama, even though investing out-of-state – such as office buildings in New York and California – likely would have yielded better short-term returns. He believes that although the investment returns might be a bit lower in Alabama, they make up for that in jobs that create an increased tax base for the state.

I suggest there are only two ways to avoid raising taxes in the long term.

The first would be to reduce the number of state public employees in the neighborhood of 25 percent. For the past few years the number of regular state workers has remained in the neighborhood of 37,000. If education and other ancillary groups are added in, the total number of full- and parttime state employees, as compiled by the US Census in 2008, was almost 108,000.

Alabama local government employees in K- 12 in 2008 totaled 104,587. The total number of non-federal public workers in Alabama in 2008 stood at over 212,000.

I wrote a few weeks back that we need to abandon the “No new tax” theme that seems to permeate political thinking these days.

Folks in Alabama pay the lowest state and local taxes in the country and most of us have enough sense to understand that our schools, garbage collection service, courts, law enforcement, driver’s license tests, and other public services cannot exist on a tax base established in the 1950s.

So I would suggest to our Governor and legislators that somebody start giving some thought as to how this state is going to pay to fix the potholes.

Bob Martin is editor and publisher of The Montgomery Independent. E-mail him at: