How Much Money Do We Really Spend on K-12 Education in Alabama?

In order to understand how Alabama funds K-12 education, it helps to have a basic understanding of budgeting “language” when you look at the budget.  By the time you finish reading this, you will have a better understanding of the following:

1. What a fiscal year is.
2. What the Education Trust Fund is.
3. How budgets make it into the legislature, generally.
4. How budgets get approved by our elected representatives, generally.
5. How much money we have received and spent on education in Alabama since 1986.
6. What proration is and why it is bad for schools.
7. What the Rainy Day Account is and that it stands at zero.
8. What the Rolling Reserve Act is.

Where the Education Budget for Next School Year Is Right Now

The Senate passed its version of the Education Trust Fund (ETF) budget on Tuesday.  (Here’s the version sent to the Senate from the Governor’s office.) It cuts expenditure for K-12 education by 1.6%, or $56.7 million from 2011-2012 levels.  Deputy Superintendent Chief of Staff Dr. Craig Pouncey said that could cost Alabama’s schools as many as 948 teachers and 616 state-funded support staff.  We won’t know for sure until the budget is passed by the House.  

Here is SB318, the Senate’s version of the ETF budget.  The Pittman Amendment was adopted, but is not reflected in the substitute version.  The Sanford Amendment was also adopted, but is not reflected in the substitute version.  A new link will be posted when it is all put together in one document.

[Couple of notes about the Senate version:  Classrooms are to be given $300 for instructional materials.  Also, $1 million of the amount to be spent on textbooks will go to the ALSDE to pilot a digital textbook project in State School Board District 2.]

The House will now consider the ETF budget.

Budget Basics You Should Know

Before we move on, here are some basic facts you should know about how Alabama government and taxpayers fund K-12 education.  If you understand some of the basic terms, it surely helps to engage in the conversation.

The fiscal (not phy-si-cal, but fis-cal) year (FY) is the time period that a budget covers.  For Alabama, the FY begins on October 1 and ends on September 30 of the following year.  The budget that is being debated in the legislature right now is called the FY2013 budget because it ends in 2013.  The FY12 budget covers the time from October 1, 2011, to September 30, 2012.

(1)  Education Trust Fund. The ETF is the main source of state income for K-12 schools.  Alabama has two big funds, and thus two major budgets:  the ETF and the General Fund (GF) budgets.  ETF funds education and education-related activities.  The ETF funds not only K-12 education, but colleges and universities as well.

In addition, many non-school agencies are funded through the ETF, including the Department of Archives, the Department of Examiners of Public Accounts (the auditors), the Alabama Law Institute, the Dental Scholarship Awards Board, American Legion Scholarships, the Arts Council, the Educational Television Commission, the Governor’s Office of Faith-Based and Community Initiatives, the Higher Education Commission, Alabama Industrial Development Training, the Dauphin Island Sea Lab, the Medical Scholarships Award Board, Optometric Scholarship Awards Board, the Sickle Cell Oversight and Regulatory Commission, the Space Science Exhibit Commission, and the Supercomputer Authority.  These are mentioned only to help you understand that ETF money is spent on more than just K-12, Pre-K and Higher Education.  Here’s a spreadsheet from the Legislative Fiscal Office that shows all of the different agencies funded by the ETF.

It is important to note that Alabama is one of three states who segregate their Education spending into a separate budget.

The GF funds basically everything else, including Medicaid and prisons.

(2)  Money for the ETF.  The main source of taxes for the ETF is income tax.  Here’s a chart from the 2012 Tax Guide (published by the Legislative Fiscal Office) showing which taxes the bulk of the revenue for the ETF come from (click on it to make it larger):

So we know that income tax and sales tax are the two largest groups of taxes that fund the ETF.  (Remember to pay sales tax owed on online purchases on your Alabama income tax return.  If you don’t bother to do this, you are literally holding money away from our schools.)

(3)  Spending the money in the ETF.  The ETF budget (the document that outlines how the money collected into the ETF is going to be spent each year) process begins in August of the previous year.  Agency heads, department heads….everybody sends in their requests to the Executive Budget Office (EBO).  Budget hearings are held.  The EBO then looks at the requests, the projected revenue, and places the numbers into the Executive Budget. [Here’s a link to all of the budgets prepared back to 2004]  The Governor’s Office then sends it the Senate on the first or second day of the new legislative session.  Click here for more info about Alabama’s budget process from the Alabama Department of Finance.  These are just the high points.

Here’s a simple look at the dollars received and spent since 1990, also from the 2012 Tax Guide.  Remember, though, that these dollar amounts do not reflect the time value of money, therefore percentage changes are a bit misleading.

So here is a chart of ETF receipts and expenditures from 1986 to 2011 normalized for 2005 dollars created by the Alabama School Connection.  This means that the dollar amounts are now reflective of how much they would represent if all of these transactions had been done in 2005.  It allows us a better look at fluctuations in receipts and expenditures because it takes inflation and deflation out of the figures.

Here is the accompanying graph:

(4)  Passage of the ETF Budget.  Both houses (Senate and the House of Representatives) must pass the budget in order for it to become the law.  Once it passes both houses of the legislature, and the Governor signs it, state agencies, including the ALSDE, then go about divvying up monies based on the what the budget says.

After the Budget Is Passed – Things That Can Go Wrong

Waiting to Make Decisions.  The budget usually gets passed toward the end of a legislative session, sometimes as late as May.  School districts have already been planning for the new school year since January or February (some start even earlier).  School districts have to make plans even though they really don’t know exactly what amounts they will be receiving from the state.

Remember, a school district’s funding is made up of three sources:  state, federal, and local monies.  State funding usually makes up the largest portion.  It can be difficult for districts to operate when funding is unpredictable.  Generally, they have an idea based on discussions with folks from the Alabama State Department of Education (ALSDE), but they don’t know for certain until the actual budget is passed.

Remember, too, that state law requires school districts to give teachers’ notice of their non-renewal (meaning the teachers are not going to be employed by that district the following school year) before the last day of school.  Districts have a small window to work within to make those final decisions if they’re having to make those decisions based on how much money the state will give them.  Some go ahead and make those decisions based on predictions, while others wait until the final budget is signed by the Governor.

Proration.  Proration is when the Governor declares an across-the-board cut for all agencies funded under a budget (the ETF or GF).  School districts receive money from the ALSDE on a monthly basis (their yearly amount divided by 12).  Once that percentage of reduction amount is declared, that monthly amount gets cut by that percentage.

Proration puts school districts in a real bind, because salaries cannot be prorated.  The real effect of proration is that something OTHER than salaries must get cut pretty drastically in order to make up for the shortfall.

Here’s a chart from the 2012 Budget Fact Book, published by the Legislative Fiscal Office, showing how many times proration has been declared since 1979:

Proration has been declared six times in the last 10 years.  Some of the actual percentage reductions were avoided by transferring money from the proration prevention account, known as the Rainy Day Account (RDA).  Here’s a history of that account’s activities, also from the 2012 Budget Fact Book:

As you can see, the RDA was wiped out in 2009.  So there is no money in reserve if the ETF needs rescuing again.  The $437 million borrowed from the RDA must be repaid by 2015.

Rolling Reserve Act of 2011.  The legislature enacted the Rolling Reserve Act of 2011 (RRA), which stipulated that expenditures must be tied to percentage growth in ETF receipts over the last 15 years. Prior to that, a much shorter time frame was used, which did not account for long-term dips in the economy. The Act creates a Fiscal Year Appropriation Cap (the “Cap”).  The actual calculation description begins in Section 3(b).

The RRA calculations meant that spending from the ETF had to be decreased by $108 million for FY2013 due to the Cap.  Any revenues over and above spending from the ETF must be put into the RDA to repay that $437 million borrowed in 2009.

We’re Going to Stop Here for Now

In order to truly engage in the discussion about how much money Alabama spends on K-12 education and to truly understand how those decisions are made, you need a good understanding of the process and terms laid out in this post.

This is Part 1.  This is all state-level stuff.  Part 2 will concern what happens once the ALSDE knows how much money it’s going to receive and how that money gets doled out to school districts.  Then there is Part 3 (federal monies), Part 4 (local monies), and so on.

The idea is to share this information in bite-sized chunks to help Alabama’s school community better understand how our K-12 schools are funded and whether that money is spent on what we, the school community, believe it needs to be spent.  If we want to have a voice in those decisions, we need to be able to speak the language.

What Did You Learn by Reading This?

The Alabama School Connection’s basic goal is to help our Alabama school community learn the basics…the language…of K-12 education in Alabama.  Funding and budgets and school finance can be daunting subjects, but it is absolutely crucial for parents and families and ordinary taxpayers to understand how Alabama’s schools are funded.

After you read this, you now know:

1. What a fiscal year is.
2. What the ETF is.
3. How budgets make it into the legislature, generally.
4. How budgets get approved by our elected representatives, generally.
5. How much money we have received and spent on education in Alabama since 1986.
6. What proration is and why it is bad for schools.
7. What the Rainy Day Account is and that it stands at zero.
8. What the Rolling Reserve Act is.