Riley was right - the first time
When Gov. Bob Riley took office in 2003, he pitched an aggressive overhaul of the state's tax structure. Most people still refer to that plan as Amendment 1. Voters rejected by a ratio of almost two-to-one.
There were good reasons to support Riley's tax plan and those reasons didn't go away when it failed, although it might have seemed that they did.
When Riley pitched his tax plan, Alabama was still reeling from the 2001 recession. That's right. In 2003 the state's revenue, the Education Trust Fund in particular, was still suffering from a national recession that had ended two years before.
What happened next was a badly timed rebound. In 2004, revenue for the Education Trust Fund grew more than nine percent. In 2005, it grew more than 11 percent. This boom lifted education funding out of the crisis, but the effect it had on public opinion was pernicious. The gloom-and-doom predictions Riley and his proxies had made during the Amendment 1 campaign didn't come true. Voters thought the Amendment 1 campaign had been a scam - nothing but scare tactics meant to mislead them into higher taxes.
The gloom and doom didn't go away, it was merely waiting its turn. In the meantime, Alabama was experiencing the good side of its Jekyll and Hyde tax structure.
Alabama has a tax structure that is overly dependent on sales taxes, especially for funding education. This system is unstable and hypersensitive to fluctuations in the economy. When people feel good about the economy they buy stuff. Sales taxes are flush. When the economy sours, businesses tighten their budgets and people quit spending money. Sales taxes tank. You don't have to understand how derivatives or structured investment vehicles work to understand Alabama's problem. This is pretty simple stuff.
When the national economy catches a cold, Alabama gets the flu. Now the national economy has the flu, which must mean Alabama has bird flu.
Of course, this is only half of the problem. The other half, to no one's surprise, is the Alabama Legislature. If revenue climbs seven percent one year, then our elected officials will project eight percent the next. If the laws of physics worked by the Alabama Legislature's rules then pendulums would spin in circles and gravity wouldn't apply at all. What goes up just keeps going up.
And the state doesn't just project these revenues. It budgets by them, too. What this means is that when the state budgets for an six percent increase and revenue remains flat, it feels like a six percent drop.
Which is about where we are right now.
What's more problematic is that Alabama law prohibits a deficit. To fiscal conservatives that's a good thing, but it also creates a different set of problems. Take what has happened to the Education Trust Fund.
Last month school superintendents throughout the state received an October surprise. The state gave them only 75 percent of the funding they had been promised. State Finance Director Jim Main blamed it on a "cash flow problem," but neither Main nor Riley were eager to explain what that meant.
It appears now that the state ended the 2008 fiscal year in September with a deficit, which is prohibited by law. State officials fudged by encouraging some major companies to pay their October taxes early. October revenue went on September's books. It appeared the budget was balanced, when in fact the state was borrowing from October to pay for September.
That left the state short in October. The state told school systems that the missing 25 percent of October's funding was on its way, when really it was borrowing from November to pay October. So on and so forth.
This year, Alabamians heard Gov. Riley pitching another Amendment 1, but this one was very different from the first. On November 5, Alabama voters gave the state permission to borrow as much as $427 million from the Alabama Trust Fund, the so-called rainy day fund. That will help the state catch up with its payments to schools, but ultimately, it only buys time. And instead of solving the problem, it potentially makes it worse. At best it spreads the pain thinner but over a longer period of time.
You see, the state is required by law to pay back the money to the Alabama Trust Fund within six years. The outlook for 2010 is no better than 2009. A year from now the state could be looking at the same level or revenue or worse, and the state will have to begin paying back the money it borrowed.
Some observers I've talked to are already predicting the state will balk at repaying the borrowed money. Essentially, the state is borrowing the money from itself, so if the legislators don't put the money back into the rainy day fund, who's going to arrest them?
Also, there's speculation that state gambling interests (Need I say his name?) will use this problem to push through legalized gambling as a solution.
Gov. Riley doesn't want to call for proration, across-the-board state-mandated spending cuts. It has been a badge of honor for him that his administration has never had to call for proration. It seems that streak is at an end. In fact, the longer Riley delays the cuts the deeper they might have to be later.
School systems can't cut salaries or staff mid-year. Salaries and benefits account for, very roughly, 80 percent of schools' budgets. That leaves 20 percent from which to cut spending - things like books, roof repairs, heating bills. It's going to be a cold winter for some Alabama students.
Gov. Riley's best qualities have been his optimism and his faith in the people of Alabama. Unfortunately, his optimism has led him to kick Alabama's biggest problem down the street instead of fixing it, and his faith in Alabamians in 2003 was unfounded. He was right the first time. Our state's tax structure is woefully flawed. We didn't believe him when he told us so, but we're about to learn the hard way.
War on Dumb is a column about political culture. Write to kyle@bhamweekly.com
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