Alabama finance leaders say ‘sugar high is over’ for state budgets

Alabama finance officials said Wednesday that the state’s “sugar high is over” as they predicted uncertainty around the economy in the coming years.

Speaking to lawmakers on Wednesday, officials said growth in the General Fund and the Education Trust Fund (ETF) are declining from double-digit growth it has seen over the last couple of years, due to the loss of federal COVID relief funds and uncertainty about a General Fund revenue source dependent on higher interest rates.

“In a span of three years, you went from a revenue source that wasn’t even on a pie chart in terms of its percentage contribution to the total General Fund to it’s now the second largest revenue source, and it’s not a reliable revenue source,” said Kirk Fulford, deputy director of the Legislative Services Agency.

Gross domestic product (GDP) grew by 6% in the 3rd quarter of 2023, higher than all but Arkansas, and personal income increased by 5%.

The General Fund’s revenue grew about $226 million year over year, largely driven by a $150 million increase in interest on state deposits, Fulford said. 

The ETF, which gets most of its revenue from state income and sales taxes, is expected to grow 1.82% in fiscal year 2026. The current 2025 budget was about 6% higher than the prior year’s budget. 

State Finance Director Bill Poole, who said “ditto on virtually everything” to Fulford’s remarks, cautioned lawmakers to budget conservatively.

“Be cautious, particularly in periods of uncertainty and clearly in kind of a transformative transition period in national and state economy,” Poole said.

Gov. Kay Ivey will request a $3.7 billion General Fund budget, about $400 million (12.1% increase) higher than the current budget, and a $9.9 billion ETF, about $560 million (6% increase) higher than the current ETF. The budget prioritizes education, public safety and workforce development. Key proposed allocations include increases of $230 million for Medicaid, $124 million for PEEHIP (Public Education Employees’ Health Insurance Plan) costs and further investment in mental health and law enforcement.

The Alabama Legislature will have the final say on what the budgets look like. 

Poole said that as the state reduces earmarked funds and removes one-time line items from the last budget, it may look like some agencies may have been negatively impacted. 

“But there’s a story behind those numbers. Understand that we have not reduced operating maintenance costs at any of the agencies,” he said.

Fulford also reminded lawmakers of the expiration of federal Elementary and Secondary School Emergency Relief (ESSER) funds, which provided Alabama schools with $3 billion in temporary funding. Officials warned that school districts may seek state support to continue programs initially funded by ESSER, potentially straining future budgets.

“You can’t sustain another $3 billion of funding, and by the way … you certainly couldn’t support it on an ongoing basis either,” Fulford said.

But Alabama’s economy seems strong compared to other states, Fulford said.

“There’s so many other states that are having to come in and figure out how to move the shells around to fill holes in their budget because of various decisions that they made, because of revenues declining and them not assuming the revenues were going to decline as fast as they did,” Fulford, adding that many states would like to be in Alabama’s position.