2017 legislative update: Kicking the can: Windfall temporarily cushions shortfalls for Medicaid, other General Fund services in Alabama

The state budget hearings that ended Tuesday made one thing clear: There’s still no long-term answer to Alabama’s budget woes. The state once again likely will use one-time money next year to delay hard decisions about how to provide sustainable funding for vital services like Medicaid, child care and mental health care. And even though funding for K-12 and higher education will grow slightly in 2018, Alabama still hasn’t restored education support to where it was before the Great Recession.

Sen. Trip Pittman, R-Montrose, who chairs the Senate’s General Fund (GF) budget committee, said Alabama isn’t collecting enough money to support essential services in the long term. “We’re going to need more revenue if we’re going to live up to the responsibilities of our state,” Pittman said.

One-time money shields Medicaid from massive cuts – for now

GF revenues will be essentially flat in 2018, despite the growing costs of services like Medicaid and corrections, according to Legislative Fiscal Office (LFO) projections. The GF, which supports non-education services in Alabama, will have $1.94 billion available next year, LFO Deputy Director Kirk Fulford said. That’s about $4 million less than this year’s funding level.

Alabama’s funding problems would be much larger if Medicaid weren’t receiving a one-time infusion of $105 million in BP oil spill settlement money in 2018. With that money unavailable for 2019, the state’s budget picture will be bleak without significant new revenue to support health care and other services.

GF revenue may not have grown, but the costs of the services it supports have. GF agencies asked for nearly $140 million more than they received in 2017, Fulford said.

The largest request was from Medicaid, which asked for an additional $63.5 million (for a total of $869 million) from the GF to maintain current services and move forward with regional care organization (RCO) reforms designed to save money and keep patients healthier by focusing on preventive care. Alabama’s return on those state dollars is significant: Medicaid insures more than 1 million Alabamians – mostly children, seniors, and people with disabilities – and nearly 70 percent of its funding comes from the federal government.

Medicaid Commissioner Stephanie Azar warned lawmakers that if enough money isn’t available to complete RCO reforms by October 2017, the federal government will withdraw the Medicaid waiver that allows the changes to move forward. That would end the RCO reforms and cost Alabama nearly $750 million in promised federal funds.

Gov. Robert Bentley’s proposed $1.924 billion GF budget would provide $23 million more for Medicaid and level funding for most other services. Bentley also has requested $19 million to give state employees a 4 percent cost of living increase.

ALL Kids’ uncertain fate could force special session; DHR, courts, ALEA all request more funding

The future of ALL Kids is another major question mark for the GF. Congress must reauthorize the Children’s Health Insurance Program (CHIP), which supports ALL Kids in Alabama, by Sept. 30. The state didn’t have to put up any of its own money in 2016 or 2017 to support the ALL Kids program, which insures children whose low- and moderate-income families don’t qualify for Medicaid. But if Congress reverts to an earlier CHIP formula, Alabama once again would have to pay a share of ALL Kids’ cost. Medicaid and the Department of Public Health would need an additional $91 million to meet such a requirement, Fulford said. That could force the Legislature to return for a special session later this year.

Unmet GF needs extend far beyond health care. The state court system requested $106 million, a $9 million increase, citing a $3 million shortfall for juvenile probation officers and a $1.2 million shortfall for trial courts. Without the increase, the state would have to lay off juvenile probation officers, acting Chief Justice Lyn Stuart said. Sen. Vivian Figures, D-Mobile, raised serious concerns that such layoffs could lead to more juveniles falling into the adult corrections system.

The Department of Human Resources (DHR), which oversees crucial services like child protection, child care and the Supplemental Nutrition Assistance Program (SNAP), sought an additional $15.7 million, according to the LFO. The Alabama Law Enforcement Agency (ALEA), which oversees state troopers, requested an extra $37.4 million in GF money to continue current services, while the Department of Corrections asked for another $13.8 million. Bentley’s proposal to issue $800 million in bonds to build four new “mega-prisons” is likely to be a contentious topic at the Legislature this year.

‘We’ve got to start doing a better job of doing our job’

Many legislators expressed concerns about the Department of Mental Health, noting that it is at risk of federal court intervention. Rep. John Knight, D-Montgomery, made a passionate case for the state to invest more in community-based mental health care. “We’ve got to start doing a better job of doing our job,” Knight said.

Sen. Linda Coleman-Madison, D-Birmingham, said the state’s lack of investment in mental health care means many Alabamians who need treatment end up in the corrections system instead. Coleman-Madison emphasized that prisons cannot be treated as a substitute for mental health care. “Locking people up is not the answer,” she said. “We’re better than this.”

Regular shortfalls for services like Medicaid, mental health care and child care are a common refrain: The GF relies on a hodgepodge of revenue sources, most of which grow slowly even in good economic times. That leaves the GF with a structural deficit, meaning revenue growth is not strong enough to keep pace with ordinary cost growth. Read The Alabama Tax & Budget Handbook for more on how this deficit came to be and how Alabama can end it.

State Finance Director Clinton Carter pointed to declining revenue from Alabama’s oil and gas leases in the Gulf of Mexico as one of the causes for stagnant GF revenue. Since 2006, royalties from these leases, which flow into the Alabama Trust Fund (ATF), have dropped by more than $325 million. Because interest from the ATF helps support the GF, declining ATF revenues mean less money for GF services.

Carter did highlight some good news for the GF, though. Two years ago, the Legislature allowed “remote sellers” (online sellers that don’t have a physical presence in Alabama) to collect state and local sales taxes voluntarily on sales to Alabamians in exchange for keeping a small share of the revenue. The GF has received more than $50 million from these collections since 2016, Carter said.

But Carter said all the new revenue that has come into the GF since 2010 has gone to only two agencies: Medicaid and corrections. If those agencies are excluded from the calculation, funding for the remaining GF agencies has been essentially flat over this period.

Bentley seeks pre-K boost in slow-growing education budget

The funding picture is slightly better for the Education Trust Fund (ETF), which receives most of its support from sales taxes and income taxes that increase as the economy grows. Pre-K programs are a high priority in Bentley’s proposed ETF budget, which includes a $20 million (or 30 percent) increase for them. Bentley would direct $4.4 billion to K-12 education, $1.6 billion for higher education and $366.8 million for other expenses (such as rehabilitation services for children) supported by the ETF.

Nearly $6.42 billion will be available to fund education next year, Fulford said. That’s about $90 million (or 1.4 percent) more than was available in 2017. Challenges to the education budget include higher health insurance and retirement costs, Fulford said, as well as an open-ended commitment to cover higher education costs for spouses and children of deceased or disabled Alabama veterans.

By Carol Gundlach, policy analyst, and Chris Sanders, communications director. Posted Feb. 9, 2017.

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