Rolling Reserve Budgeting: The End to Proration in Alabama Rep. Greg Canfield

1. Rolling Reserve Budgeting:The End to Prorationin AlabamaRep. Greg Canfield

2. Over 80% of the revenues supporting the ETF are highly sensitive to economic shifts (Sales & Income) Sales and Income taxes are highly sensitive to changes in the economyOver 80% of the revenues supporting the ETF are highly sensitive to economic shifts (Sales & Income) Sales and Income taxes are highly sensitive to changes in the economy

4. Revenue Guesswork: Prone to Prorate 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 (FY 1982 was -3.4% and FY 1983 was +13.7%)

5. ETF Budgeting: Prone to Proration During the 30 year period of 1979 � 2009��9 education budgets have been prorated. Almost 1-in-3 education budgets are prorated

6. LFO projecting a negative 6% growth rate for FY09; $552 m less than LFO orig est. due to declines in income tax and sales tax receipts ETF revenues would need to grow at 7.6% for the year to fund $6.39 bill. Budget ETF Appropriations were just above $2b in 1987 and have climbed to almost $6.7b in FY2008 a 335% increase in education funding over 21 years But from FY 1996 to FY 2009, the Education Budget has been prorated in 9 of the 30 budgets because we can�t accurately forecast ETF revenues from one year to the next.LFO projecting a negative 6% growth rate for FY09; $552 m less than LFO orig est. due to declines in income tax and sales tax receipts ETF revenues would need to grow at 7.6% for the year to fund $6.39 bill. Budget ETF Appropriations were just above $2b in 1987 and have climbed to almost $6.7b in FY2008 a 335% increase in education funding over 21 years But from FY 1996 to FY 2009, the Education Budget has been prorated in 9 of the 30 budgets because we can�t accurately forecast ETF revenues from one year to the next.

7. Legislative Attempts to Limit 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?

8. Legislative Attempts (cont.) The Constitutional Rainy Day Account is a loan which must be repaid over a six year period�. Are we going to have to make loan payments from future ETF budgets at times when we can least afford it?

9. The Budget Problem: Proration Gov. Riley declared FY 2009 proration of 12.5% and by borrowing about � of the Rainy Day Account funds, the effective rate is 9% Remember�from the period FY�79 to FY�09, the ETF budget has been prorated 9 times. In other words, 1 in 3 Education budgets end up being cut in mid-school year in Alabama!

10. The Problem

11. The Budget Time Bomb: Unfunded Liability 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.

12. 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

13. The Budget Solution for the Future�Rolling Reserve Budget Act� Create budgets ceilings on spending based on the historical 15-year average annual growth rate When modeled for the period 1996 � 2009 the 15-year average annual growth rate ranged from 4.24% to 6.99% 15-year averaging makes sales tax and income tax act like property taxes�only better 

14. Simple Formula Ends Guesswork Last Known Actual Yr Revenue (less non-recurring revenues) is multiplied by the 15 Yr Average Annual Growth Rate plus 1 to set the ETF Budget ceiling

15. Example of the Formula How the FY 2009 Budget Would Have Been Set $5,854,027,193 (FY 07 Revenue and last known yr ) x 1.056 (5.60% 15 yr growth rate FY 07 + 1) = $6,181,815,276 (Would be FY 09 budget ceiling)

16. Rolling Reserve Budget Act 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

17. 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: ETF Pension Liability Fund (TRS unfunded liability) ETF PEEHIP Liability Fund (PEEHIP unfunded liab.) Capital Fund for Education

18. Rolling Reserve Budgeting Works LFO Modeled FY 1996 - FY 2009: All 3 years of actual proration would have been avoided The Statutory Proration Account would not have been drained to avoid proration in FY 2008 and no money would have been borrowed in FY 2009 from the Constitutional Rainy Day Fund to reduce proration because� FY 2009�s 12.5% proration would not have occurred. 

19. Education Trust Fund15-year average growth rate applied to last known actual revenues Fiscal Year Actual Withdrawal Ending Revenues 15-year from Budget ETF Retiree September (excluding RDA average App/Exp (15-year Proration Stabilization 20% of ETF Capital ETF Pension Health Care 30th transfers) growth average growth) Amount Fund appropriations BSF balance Fund Liability Fund Liability Fund

20. Rolling Reserve BudgetingSecures the Future of Education Builds additional funding for school construction Reduces the unfunded liability in PEEHIP & TRS Puts an end to Conditional Appropriations Ends the devastating cycle of proration

21. We Can Improve Teacher Pay Too

22. The Rolling Reserve Budget Act Clearly, a better way to fund public education in Alabama Rep. Greg Canfield