Kirk Fulford Deputy Director

Legislative Services Agency Fiscal Division

October 25, 2017

Presentation Overview

History of Education Trust Fund (ETF) Proration

FY 2017 ETF Appropriations

Condition of the ETF for FY 2017

ETF Revenues and Trends

FY 2017 Receipts by Source

Comparison of FY 2017 Major Sources to FY 2016

Income and Sales Tax Historical Growth

Recent Trends

FY 2018 ETF Appropriations Cap

Appropriations from the ETF for FY 2018

Estimated Condition of the ETF for FY 2018

2

3

Balanced Budget Required

Amendment 26 to the Alabama Constitution provides that no warrants shall be withdrawn on the state treasury unless sufficient revenues are available.

In such instances, any expenditures from funds (ETF or General Fund) which have insufficient revenues shall be prorated so that only available revenues are expended.

Once proration is declared by the Governor, state expenditures from those funds are reduced across the board by the percentage necessary to balance the budget.

4

ETF Proration Since 1992

FY 1992: 3.0%

FY 2001: 6.2%

FY 2003: 4.4% (Reduced to 0% after transfer of approximately $180

million from Rainy Day Account/PPA)

FY 2008: 6.5% (Reduced to 0% after transfer of approximately $439

million from PPA)

FY 2009: 18.0% (Reduced to 11% after transfer of approximately

$437 million from Rainy Day Account)

FY 2010: 9.5%

FY 2011: 3.0%

5

ETF Proration Since 1992

ETF Rolling Reserve Act

Passed in 2011 – effective beginning in FY 2013

Placed a cap on annual appropriations from the ETF tied to the percentage growth in recurring revenues to the ETF over the last 15 years

Also, created an additional reserve fund, the Budget Stabilization Fund, to access only in the event of proration

No ETF proration since the Rolling Reserve Act became effective

6

7

The Education Trust FundFY 2017 Appropriations Cap

FY 2015 Net Recurring Revenues $6,129,399,073

PLUS:

Average growth for the 14 highest

years out of the last 15 (3.90%) $239,046,564

PACT appropriation for FY 2017 $63,622,000

FY 2017 ETF Appropriations Cap $6,432,067,637

8

Section 29-9-3(d), as amended

If the average of the estimated available revenue certified

by the Finance Director and the Legislative Fiscal Officer

pursuant to Amendment 803 is less than the fiscal year

appropriation cap, the Legislature shall appropriate no

more than the lesser amount of the average of the

estimated available revenue or the fiscal year

appropriation cap.

The average of the estimated available revenue was

$6,327,000,000 so this became the maximum amount

that could be appropriated from the ETF in FY 2017,

excluding the beginning balance

9

10

Condition of the ETFFY 2016 and FY 2017

11

FY 2016 FY 2017 Difference

Beginning balance 2,567,160 5,041,468 2,474,308

Regular Receipts 6,106,888,061 6,327,327,215 220,439,154

Gross Sales Tax Transfer - Prepaid Affordable College Tuition (PACT) -33,952,000 33,952,000

TOTAL RECEIPTS 6,072,936,061 6,327,327,215 254,391,154

TOTAL AVAILABLE (beginning balance plus total receipts) 6,075,503,221 6,332,368,683 256,865,462

TOTAL ETF EXPENDITURES 5,959,521,088 6,332,041,468 372,520,380

ENDING BALANCE BEFORE REVERSIONS AND ADJUSTMENTS 115,982,133 327,215 -115,654,918

Reversions and Adjustments 5,041,468 6,592,090 1,550,622

DISTRIBUTION OF ENDING BALANCE BEFORE REVERSIONS

AND ADJUSTMENTS

Budget Stabilization Fund 59,595,211

Advancement and Technology Fund 56,386,922

Budget Stabilization Fund

Established by the ETF Rolling Reserve Act

A portion of any revenues deposited into the ETF in excess of the fiscal year appropriation cap for the immediately preceding fiscal year are transferred to the Budget Stabilization Fund

For FY 2015, up to 2% of the previous year’s ETF appropriations ($118,305,984)

Thereafter, up to 1% of the previous year’s ETF appropriations ($59,595,211 in FY 2016) until the fund reaches 7.5% of the previous year’s ETF appropriations

Total current balance of approximately $178 million

Amounts in the Budget Stabilization Fund may be withdrawn only to prevent proration in the ETF

12

Advancement and Technology Fund

Also, established by the ETF Rolling Reserve Act Any funds remaining after the transfer to the Budget Stabilization Fund are

transferred to the Advancement and Technology Fund For FY 2016, the transfer was $56,386,922 No transfer for FY 2017

Funds must be appropriated through an independent supplemental appropriation bill for: repairs and deferred maintenance of facilities; for classroom instructional support; for insuring facilities; for transportation; and for the acquisition or purchase of educational technology and equipment

The annual appropriation of these funds is divided between the public schools and institutions of higher education in accordance with the percentage split between these two sectors of education

The supplemental appropriation bill to appropriate these funds did not pass during the 2017 Regular Session (SB 307)

13

14

Education Trust Fund Revenue Sources - FY 2017

Sales Tax

$1.8 B

28.63%

Use Tax

$158.5 M

2.51%

Income Tax

$3.9 B…

Utility Tax

$388.0 M

6.13%

Other

$70.1 M

1.21%

15

Total Receipts:

$6.33 billion

FY 2017 vs. FY 2016 ETF Receipts

FY 2017 FY 2016Total Net Receipts - $6.327

Billion

Total Growth % - 4.19%

Gross Income Tax: Total – $4.666 Billion

Individual - $4.206 Billion

Corporate - $460 Million

Gross Sales Tax – $2.27 Billion

Simplified Sellers Use - $6.55 Million

Use Tax - $158.5 Million

Utility Tax - $388.0 Million

Total Net Receipts - $6.073 Billion

Total Growth % - .41%

Gross Income Tax: Total – $4.489 Billion

Individual - $4.072 Billion

Corporate - $417 Million

Gross Sales Tax – $2.23 Billion

Simplified Sellers Use -$280,000

Use Tax - $156.8 Million

Utility Tax - $376.6 Million16

17-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% Change in Total Individual Income Tax Gross Receipts Since 1992

FY 2009

-7.94%

FY 2002-1.55% FY 2010

-3.24%

FY2014-.04%

18

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

FY 2001-1.11%

FY 2009-9.86%

% Change in Sales Tax Gross Receipts Since 1992

Growth in ETF Recurring Revenues Since FY 1997

19

-15%

-10%

-5%

0%

5%

10%

15%

199

7

199

8

199

9

2000

2001

2002

2003

2004

2005

2006

2007

2008

200

9

2010

2011

2012

2013

2014

2015

2016

2017

ETF Income Sales

FY 2001-1.11%

FY 2002 -1.55%

FY 2009 -7.94%

FY 2009 -9.86%

20

Individual Income Tax Components

Withholding Largest individual income tax component and generally

reflects the strength of the economy because it largely comes from current wages (represents 79% of gross collections)

Estimated Payments Taxpayers that reasonably expect to owe $500 or more

make estimated tax payments on their income not subject to withholding tax. This income often comes from investments

Payments with returns

S-Corporation

21

FY 2017 Individual Income Tax

22

Withholding,

$3,314,080,975,

79%

Estimates,

$284,541,328,

7%

Returns,

$447,324,870,

10%

S-Corp,

$160,842,548,

4%

Total Gross

Collections -

$4.21 Billion

% Change in Withholdings Since 1992

23

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Growth in Alabama Withholding Payments After Recent Recessions

2001 Recession Great Recession

Short recession lasting only eight months (March-November 2001)

Economy contracted for two quarters

Period of time between end of this recession and Great Recession ~ 6 fiscal years (2002 – 2007)

Average growth in Alabama withholding payments during that period ~ 5.2%

The longest recession period since the 1929 Depression (December 2007 through June 2009)

Economy contracted in five quarters, including two quarters by more than 5 percent

Now the longest recovery period between recessions since World War II

Average growth in Alabama withholding payments during this period ~ 2.9%

24

Possible Reasons for Slow Wage Growth

Change in Labor Force

Underemployment

Fewer number of people employed

Real wages staying ahead of inflation

Flat productivity

25

Recent Trends

September 2017 Alabama unemployment rate – 3.8%

Down from 4.2% in August 2017

Lowest rate since April 2007 Total number of employed people in September 2017 still

below April 2007 level

April 2007 – 2,087,466

September 2017 – 2,068,594Source: Alabama Department of Labor

Withholding growth averaging > 7% since April 2017

26

27

28

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

FY 2001-1.11%

FY 2009-9.86%

% Change in Sales Tax Gross Receipts Since 1992

Growth in E-Commerce Sales

29

Growth in Service Expenditures

30

31

ETF Rolling Reserve ActFY 2018 Cap

FY 2016 Net Recurring Revenues $6,106,888,061

PLUS:

Average growth for the 14 highest years out of the last 15 (4.05%)

$247,328,966

PACT appropriation for FY 2017 $62,783,000

FY 2018 ETF Appropriations Cap $6,417,000,027

ETF Appropriations for FY 2017 $6,327,000,000

Spending Difference: FY 2018 vs. FY 2017 $90,000,027

32

Appropriation of Education Trust FundFY 2018

33

All Other

5.78%

K-12 Program

68.83%

University

Education

19.65%Community

College

Education

5.74%

Total ETF:

$6.42 billion

The SplitK-12: 73.05%

Higher Education: 26.95%

34

Condition of the ETFFY 2017 and FY 2018

35

FY 2017 FY 2018 Difference

Beginning Balance 5,041,468 6,592,090 1,550,622

Regular Receipts 6,327,327,215 6,514,000,000 186,672,785

TOTAL RECEIPTS 6,327,327,215 6,514,000,000 186,672,782

TOTAL AVAILABLE (beginning balance plus total receipts) 6,332,368,683 6,520,592,090 188,223,407

TOTAL ETF EXPENDITURES 6,332,041,468 6,419,162,629 87,121,161

ENDING BALANCE BEFORE REVERSIONS AND ADJUSTMENTS 327,215 101,429,461 101,103,137

Reversions and Adjustments* 6,592,090 -6,592,090

*A portion of the reversions from FY 2017 were reappropriated to certain agencies

pursuant to language in Act 2017-353.

DISTRIBUTION OF ENDING BALANCE BEFORE REVERSIONS

AND ADJUSTMENTS

Budget Stabilization Fund 63,320,415 63,320,415

Advancement and Technology Fund 38,109,046 38,109,046

36

Q&A