BIRMINGHAM, Ala. – More than a dozen years after the Great Recession forced painful cuts across Alabama’s schools, state lawmakers determined not to repeat them have built up what will soon be $3 billion in reserves to protect against another downturn.
Some education officials, though, say the same discipline that filled those accounts is now making it harder for schools to meet today’s needs.
The Rolling Reserve Act governs how Alabama budgets education spending. Under the law, the state can grow the Education Trust Fund budget only by a set amount each year. Lawmakers approved a 6% increase for the current budget. Next year, that cap tightens to 5.75% – a level many educators say won’t cover inflation, higher health care costs or pay raises.
“We were early and ardent supporters of the Rolling Reserve Act. It’s worked well,” Sally Smith, executive director of the Alabama Association of School Boards said. “But with unprecedented growth (in revenue) in recent years, we may need to take another look at those caps.”
Senate Education Budget Chairman Arthur Orr, R-Decatur, defends the limits and the state’s conservative approach. He remembers the years before 2011, when the state declared proration four years in a row.
“Before the Rolling Reserve Act, before we had fiscal discipline, we rode the roller coaster,” Orr said. “We rode up great years, and then when the bottom fell out … everyone, figuratively, was caught with their pants down, and we wound up in the proration situation.”
Orr said lawmakers aren’t simply stashing cash, adding that they regularly appropriate money from reserve funds.
Last year, lawmakers transferred $375 million from the Educational Opportunities Reserve Fund to pay for the RAISE Act, the new K-12 funding formula tied to student needs.
“We’ll pull a good chunk out again this year,” Orr said. “So we’re not just sitting on a hoard of cash, and the amount we’re sitting on is not excessive.”
Smith said she agrees with lawmakers’ goal of avoiding proration – the across-the-board cuts that hit schools and colleges mid-year – but worries the new limit may be too restrictive.
Lawmakers will take up the fiscal year 2027 ETF budget during the next session, which starts Jan. 13. That budget will be capped around $10.5 billion – 5.75% higher than the current year’s $9.9 billion budget. That means there’ll be $570 million in new money to spend.
Preliminary budget discussions requests already exceed that amount. Higher education is seeking an estimated additional $280 million and K-12 leaders hope for $350 million on top of this year’s $6.6 billion.
Then there’s the projected $380 million shortfall for the state’s educator health insurance plan, Smith pointed out.
“That’s before factoring in a pay raise, and I’d be willing to think there will be one in an election year,” she said. Each 1% in educator pay raises is estimated to cost $50 million.
While budget requests often outpace available money, lawmakers could face more pressure this year as the federal government shifts some costs back to the states.
Smith supports keeping solid reserves for downturns but said it may be time to ask when enough is enough. She pointed out that Alabama still funds student transportation at 1995 levels and that inflation and new state teacher benefits – such as paid parental leave – are eating away at local districts’ buying power.
How money gets into reserve
Alabama keeps three education reserve accounts: the Advancement & Technology Fund, the Educational Opportunities Reserve Fund and the Budget Stabilization Fund. Each has rules for how the money can be spent.
Together they currently hold just under $2 billion, but that total will grow when $1.6 billion in surplus revenue from the 2025 tax year is distributed. After transfers and reversions, the Department of Finance estimates the balances will then be:
- A&T Fund – $1.1 billion
- EORF – $1.04 billion
- BSF – $940 million
When tax collections exceed what lawmakers budgeted, the excess revenue flows through what’s called the “waterfall”:
- The first 1% of that surplus goes to the Budget Stabilization Fund, which can be used in a downturn without declaring proration
- Of what remains, 50% (up to $1 billion) goes to the A&T Fund,
- 20% to the EORF, and
- 30% becomes available for lawmakers to appropriate during the next session in the form of a supplemental spending bill outside the normal education budget.
While good for education, those large balances often draw attention from agencies facing financial challenges. Orr said he and House Education Budget Chairman Danny Garrett, R-Trussville, are already hearing from groups that want to tap the education reserves to cover rising costs elsewhere.
He said that’s a temptation lawmakers plan to resist.
“We are resolved to not open the floodgates and put ourselves back where we were 15 years ago,” Orr said.
Smith shares that caution but said the state may soon need to rethink how tightly it reins in growth.
“It’s an artificial limit,” she said of the 5.75% cap. “We don’t want to go back to the days of proration, but at some point we have to ask when we’ve saved enough to start meeting the needs in front of us.”
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