Alabama Faces Looming Revenue Shortfall as Federal Funding Dries Up

Alabama's state government is bracing for a significant decline in a major revenue stream in the coming years, as the influx of federal pandemic relief funds begins to dry up. According to a presentation made to state lawmakers, the state's General Fund, which supports non-education state agencies, has been heavily reliant on the interest earned on these federal dollars, but this source of revenue is expected to shrink dramatically in the years ahead.

Capitalizing on Federal Funds, but at a Cost

The Rise and Fall of Interest Earnings

During the fiscal year 2023, Alabama saw a record-high .2 billion in revenue for its General Fund, with a staggering 4.6 million, or 12.5%, coming solely from interest on state deposits. This windfall was largely due to the state's ability to temporarily hold federal pandemic relief funds, such as those from the 2021 American Rescue Plan Act and the 2020 CARES Act, in investment accounts where they could accrue hundreds of millions in interest.However, this revenue stream is expected to peak this fiscal year at 5 million and then plummet to just 0 million by 2028, according to projections from the Legislative Services Agency's Fiscal Division. This decline is attributed to the requirement that states spend the federal funds by the end of 2026, as well as potential cuts in interest rates set by the Federal Reserve.

Preparing for the Inevitable Decline

Kirk Fulford, the Deputy Director at the Legislative Services Agency, cautioned lawmakers that the end of federal subsidies and other market factors will likely shrink this revenue source in the coming years. He emphasized that the state's General Fund is currently in a strong position, but warned that the loss of this significant revenue stream will need to be addressed.Senator Greg Albritton, the chair of the Senate General Fund budget committee, acknowledged that there is little lawmakers can do to stop the decline in revenue from interest on state deposits, as the federal funds are intended to be spent by the end of 2026. He noted that the state's reliance on these federal dollars has created a situation where the state government has become "accustomed to having a lot of ice cream," and will now have to adjust to a "standard growth rate" as the extra funding disappears.

Navigating the Uncertain Future

Fulford emphasized that the severity of the decline in General Fund receipts, including interest from state deposits, will depend on various factors, such as the pace of spending the federal funds and the impact of potential interest rate cuts. He cautioned that a half-basis point cut in interest rates could result in a 0 million hit to the state's revenue.Albritton expressed concern that the projected revenue shortfall stems from just one revenue source to the state's General Fund, and that many unknown economic factors will determine its severity. He acknowledged that the state government is "hugely" dependent on federal dollars and that the loss of this additional funding will require careful planning and budgeting to avoid potential funding cuts to state agencies.As Alabama prepares for the inevitable decline in this significant revenue stream, state leaders will need to navigate the uncertain economic landscape and find ways to diversify their revenue sources to ensure the continued stability and growth of the state's General Fund.