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

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Rolling Reserve BudgetingThe End to
Prorationin AlabamaRep. Greg Canfield
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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)

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ETF Budgeting Prone to Proration

• During the 30 year period of 1979 20099
  education budgets have been prorated.
• Almost 1-in-3 education budgets are prorated

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12.5 Proration
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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?

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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?

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The Budget Problem Proration

• Gov. Riley declared FY 2009 proration of 12.5
  and by borrowing about ½ of the Rainy Day Account
  funds, the effective rate is 9
• Rememberfrom the period FY79 to FY09, 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!

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• The Problem

• The Statutory Rainy Day Account is not based on
  planned savings
• The Constitutional Rainy Day Account is a loan
  that must be repaid over a short period of time

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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 Employees Health Insurance Plan
  (PEEHIP) for retirees.

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The Budget Time BombUnfunded 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

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The Budget Solution for the FutureRolling
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 taxesonly better

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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

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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)

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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

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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

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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 2009s 12.5 proration would not have
  occurred.

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• 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

LFO adjusted FY09 revenue estimates down to
5.59 billion.Rolling Reserve Budgeting would
provide 6.18 billion in education spending.a
difference of 590 million!!
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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

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We Can Improve Teacher Pay Too
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The Rolling Reserve Budget Act

• Clearly,
• a better way to fund public education in Alabama
• Rep. Greg Canfield