The 2016 Regular Session of the Alabama Legislature begins on Tuesday, February 2 in Montgomery with the first day of the Session and Governor Robert Bentley’s State of the State address. The State’s Constitution requires the Legislature to meet once each year in Regular Session for no more than 30 days within a 105 calendar day window. Thus, this year’s Session must end no later than Tuesday, May 17. Although there are many issues facing the State, the coming Session will, like last year, be contentious and be dominated by discussions of the cash-strapped General Fund.

GENERAL FUND ISSUES

Alabama is one of a very small number of states that divides its budget into two separate parts. The General Fund pays for non-educational government programs and services, including Corrections and Medicaid. Education spending in contrast, is budgeted through the Education Trust Fund Budget.

General Fund Budget

In 2015, it took three tries—the Regular Session and two Special Sessions—for the State to adopt a General Fund budget. Prior to the beginning of the last year’s Session, Governor Robert Bentley announced an ambitious agenda of tax and fee increases that he claimed would serve as a long-term fix to the perennial deficiencies in the General Fund. However, the Legislature largely rejected the Governor’s proposed $500 million tax package. Instead, the Legislature cobbled together a $1.7 billion General Fund budget that incorporated small tax increases(including a $0.25 per pack increase in the cigarette tax)one-time money, cuts to government services, and the transfer of $80 million in use tax from the Education Trust Fund budget.

Given the events of last year, it is not surprising that the General Fund budget again will be the Legislature’s primary concern going into the 2016 Regular Session. Estimates are that the General Fund will again face a shortfall of as much as $200 million. Despite that, and despite warnings from legislative leadership in January 2016 that agencies should not expect more that level funding, nearly every General Fund agency that appeared before the joint House and Senate budget committee from January 12–14 sought an increase in their FY16–17 appropriation. In fact, the total amount sought in increases by just the 12 agencies that appeared at the committee hearings exceeded $225 million. Without question, many of the dozens of agencies that were not scheduled for budget hearings will also make requests for significantly larger appropriations. In short, there is a great likelihood of another difficult session this year.

Medicaid & Regional Care Organizations

By far the greatest requested increase from the General Fund was from the Alabama Medicaid Agency. Interim Medicaid Commissioner Stephanie Azar told legislators that she will need approximately $157 million in additional funds to continue the agency’s current level of service. This request technically does not seek a state budget increase of $157 million for the agency, however, because included in that figure is the replacement of the close to $60 million in one-time funds that were used last year to fund Medicaid this year. Nevertheless, the Medicaid request was met with a mixture of surprise and dismay from the members present at the committee hearings. In the end, the total state budget requested by Medicaid is $842.5 million. That budget is roughly $100 million larger than this year’s when all general fund sources are considered—including one-time funds from lawsuit settlements, contributions from the Alabama Hospital Association, and a large unspent carry-forward from Medicaid itself.

One of the reasons for the increased budget budget request by Medicaid is the need for funds to continue the transformation of the program. In 2013, the Legislature passed legislation that mandated the creation of Regional Care Organizations (“RCOs”), in which medical providers, including hospitals and physicians, would play a prominent role. The RCOs are designed to transform the program from a traditional fee-for-service model to one that utilizes provider-dominated managed care entities operating in five regions throughout the state. Under this plan, the RCOs would manage care for their members (Medicaid recipients) each year for a per person—or “capitated”—amount.

Over the past two years, RCOs have been formed in each of the five regions under the supervision of the Medicaid Agency and the federal government’s Centers for Medicare and Medicaid Services (“CMS”). Part of the plan for the transition requires a waiver, known as a 1115 Waiver, from CMS. Approval of the 1115 Waiver would result in significant federal dollars becoming available to assist the State with the transition. That waiver request has been pending for many months and is believed by some, including Commissioner Azar, to be on the verge of approval. At a recent presentation, however, Commissioner Azar indicated that final (or continued) approval of the State’s waiver likely would depend on whether, in the eyes of CMS, the Legislature sufficiently funded Medicaid.

The RCOs are scheduled to begin full operations on October 1, 2016, just more than eight months from now. However, when asked in budget hearings what would happen if the agency did not receive its requested budget of $842.5 million, Commissioner Azar included in her list of consequences that Medicaid would be unable to proceed with the RCO transition. She also stated that the agency would be forced to cut the few “optional” services provided by Alabama’s program—including outpatient dialysis and hospice care—and would drastically slash provider reimbursement payments. The latter would undoubtedly lead to a significant decrease in the number of physicians that participate in Medicaid.

It is possible that this chain of events could jeopardize the existence of Medicaid in Alabama—a program that currently has a direct annual impact on the Alabama economy of $6 billion. The State therefore potentially finds itself facing an unenviable choice: find the $100–150 million needed to continue the Medicaid program and its transition to RCOs; find some alternative that allows Medicaid to continue at a lower cost; or risk losing $6 billion from the state’s economy as well as healthcare for the close to one million people served by Medicaid, approximately 70% of whom are disadvantaged children.

Finally, the issue of Medicaid expansion under the Affordable Care Act (a/k/a Obamacare) continues to be whispered about in Montgomery. Governor Bentley’s Healthcare Improvement Task Force recommended expansion in the summer of 2015, and many think that Governor Bentley has been warming to the idea. However, the cost to expand Medicaid would likely be in excess of an additional $100 million or more in state funds. Absent a reliable new funding stream, Medicaid expansion seems very unlikely.

Correctional System and Prison Reform

In 2015, the Legislature passed a sweeping prison reform measure that was designed to relieve overcrowding in the State’s correctional facilities. There are estimates that the facilities are occupied at nearly double their design capacity, and for years there have been credible threats of a possible federal takeover of the system. Federal control would likely result either in significantly increased costs for the State to upgrade the system or in a sudden, large-scale release of inmates similar to one that a federal court ordered in California several years ago.

The 2015 legislation, which resulted from a comprehensive study of the system, was championed by Senator Cam Ward (R–Alabaster). The plan, estimated to cost approximately $26 million per year for five years to implement, will also need to be funded as part of the General Fund budget.

Court Funding

Chief Justice Roy Moore spent a good bit of his time with the joint legislative budget committee discussing the fact that courts employees had not received raises in recent years, in contrast to some employees in the Executive and Legislative branches. Like Medicaid and Prisons, it is clear that the court system is in need of significant additional funding, though legislators did not seem to be persuaded by the Chief Justice’s call for pay raises for court employees.

Potential New Funding Sources and Taxes

As noted above, unlike 2015, there does not appear to be any credible possibility that significant additional revenue will be added to the General Fund during the 2016 Regular Session. In contrast to last year, the Governor has specifically stated that he will not propose any new taxes this year. Legislative leadership has similarly indicated that it does not favor additional taxes. Thus, most expect that the 2016 Session will end without any new General Fund taxes being imposed.

With that said, it is possible that the potentially devastating impact on the state’s healthcare system if Medicaid is not funded, or the threat of a costly federal takeover of the prison system, might prompt some lawmakers to seek additional funds in the form of taxes, fees, or other measures. This summer, the Governor’s Healthcare Improvement Task Force recommended an additional cigarette tax-and a recent poll conducted by the House and Senate Republican Caucuses’ pollster found that, even among Republican voters, there remains some support for another increase in cigarette taxes.

Further, it is generally known that the Governor’s Commissioner for the Department of Revenue favors the adoption of Mandatory Unitary Combined Reporting (“MUCR”), which would serve as an effective tax increase on many multi-state businesses operating in Alabama. Opponents of MUCR argue that it would be a significant impediment to economic development; and GE recently left Connecticut citing that state’s adoption of MUCR. A bill requiring MUCR will likely be introduced this year, but it is not clear what chance it has of passing.

Hospital Assessment Reauthorization

Every three years, the Legislature must reauthorize the “hospital assessment,” by which hospitals contribute significantly to the funds used by the State to pay for Medicaid and therefore to the drawdown of federal matching funds for Medicaid. If the Legislature does not reauthorize the assessment, it will expire on October 1, 2016. Hospitals, which rely heavily on Medicaid spending, will be closely monitoring the Legislature’s decisions on the General Fund budget—specifically Medicaid funding—as their assessment reauthorization legislation makes its way through the process.

Lottery

Another possible source of revenue for the state would be a lottery. Almost 17 years ago, voters in Alabama rejected then-Governor Don Siegelman’s proposed education lottery by a margin of 54% to 46%. With the General Fund now in dire straits, Representative Alan Harper (R–Northport) and Senator Jim McClendon (R–Springville) have introduced bills that would allow the people to once again vote on a lottery. The bills that have been introduced have been criticized by some for their lack of specificity. Both bills merely provide that, if approved by the people, the Legislature could establish a lottery. What sort of lottery games would be permitted (Powerball, scratch-off games, etc.) and how the money would be used by the State are left open.

Because the creation of a lottery requires an amendment to the State’s Constitution, and because the proposed amendments thus far would require significant additional legislation if approved byvoters, any new revenue from a lottery would take some time—most likely two or more years—to be realized. After passage by a three-fifths majority in both houses of the Legislature, the measure would be put to a vote of the people, probably at the November 2016 general election. If approved, the state would then have to pass enabling legislation setting up a lottery corporation to run the games. The corporation, once established, would then have to ramp up operations and select vendors for the operation of the lottery itself and vendors for the tickets. In Wyoming, the most recent state to adopt a lottery, the time between the passage of legislation and the first ticket sold was approximately fifteen months. Furthermore, in order to create its lottery, Wyoming did not have to go through the additional step of amending its Constitution as required in Alabama. Thus, even if a lottery were approved, it could take a number of months to come on line.

Casino Gaming

Less than a year ago, expanded casino gaming in Alabama seemed to have a fighting chance. At the time, one of the most powerful office holders in the state, Senate President Pro Tem Del Marsh (R–Anniston), was actively promoting a plan to allow Class III casino-style gaming at the state’s four existing dog racing tracks, to create a state lottery for education, and to encourage the Governor to seek a gaming compact with the Poarch Band of Creek Indians. A powerful coalition, organized under a foundation called the Alabama Jobs Foundation, supported the plan. That coalition included prominent Alabama business people as well as Pat Dye, the former Auburn football coach. According to a study conducted by Auburn University at Montgomery, Senator Marsh’s plan would have created as many as 11,000 jobs in the state. It would also have generated as much as $400 million in revenue annually, nearly all of which would have come from the lottery.

Unfortunately for gaming proponents, Senator Marsh has decided that he will not champion gaming or lottery legislation this year. According to Senator Marsh, the plan lacks sufficient support in the Senate and would likely bog down the Regular Session , making it impossible to accomplish other important tasks. Thus far, no one else has picked up the casino issue and indicated that they will sponsor legislation this year. Although it seems likely that some form of casino gaming bill will be introduced, its chances of passing seem fairly remote.

Gas Tax/Infrastructure Improvement

A significant effort by business and community leaders in Alabama is underway to increase the State’s gas tax, with the additional revenue to be earmarked for infrastructure improvement at both the state and local levels. According to proponents, Alabama’s tax is one of the lowest in the region, and the current low price of gas creates an opportunity to increase the tax without unduly burdening the public. In fact, Alabama’s gas tax was last increased in 1992—twenty-four years ago. Because vehicles are increasingly fuel-efficient, the average car on the road today provides less to the state in revenue rom the gas tax than the average car did 20 years ago. These factors, along with a 17% increase in the state’s population, have left Alabama’s roads in difficult shape.

Under the proposal being discussed, the price of gas would increase next year by $0.12 per gallon. An early version of the proposal would have added the initial increase, and then stepped up the tax over several years before finally being set at a fixed percentage of its market price. It is not clear, however, whether the current proposal includes this indexing feature.

EDUCATION ISSUES

Education Trust Fund Budget

In contrast to the General Fund, the Education Trust Fund remains in relatively good shape. As Senate Rules Committee Chair Jabo Waggoner (R–Vestavia Hills) put it, the money available is “not what we want, not what we need, but we can pass an education budget.” At $5.8 billion, the State’s Education Trust Fund budget dwarfs the $1.7 billion General Fund budget. Because growth taxes—such as sales tax and income tax, which track the rebounding economy—provide much of the revenue for the Education Trust Fund, it has recently been in a better position than the General Fund.

RAISE Act/Teacher Pay Raise

How Alabama retains and rewards teachers will be a significant issue in the coming session. Representative Chris Sells (R–Greenville) has already introduced a bill that would give teachers a 3% raise. The House Republican Caucus has also included a teacher pay raise in its 2016 legislative agenda. The Caucus agenda does not specify an amount for a targeted raise. Nevertheless, each year since Republicans became the majority in the Legislature, the House Republican Caucus has succeeded in passing all of the items on its agenda, usually in the first two weeks of the session. It seems almost a foregone conclusion that a teacher pay raise will make it to the Senate for debate. There, Senator Arthur Orr (R–Decatur), the Chair of the Finance & Taxation Education Committee has said, “[i]f there is money, I think teacher pay will be one of the highest priorities, if not the highest priority.” Even a 1% increase in teacher pay would require an additional $32–35 million in recurring revenue from the Education Trust Fund.

In the Senate, Senate President Pro Tem Del Marsh is pursuing an ambitious restructuring of Alabama’s teacher tenure laws. Senator Marsh’s proposal, known as the Rewarding Advancement in Instruction and Student Excellence (RAISE) Act, has undergone some changes since he first shared it with stakeholders several months ago. In earlier versions, teachers’ pay would have been tied to performance. As of last week, however, it appears that that portion of the bill has been modified, and that the reward-based pay pieces of the legislation may focus on incentive pay for teachers in particular subjects where there are teacher shortages, and for teachers who agree to teach in underserved systems or schools. Some versions would have created two different tracks for teachers: one that was higher paying, but did not include tenure; and a second that offered tenure but with lower pay. Under one version, the time needed for a teacher to receive tenure would have increased from three to five years. The bill is still in the process of being altered based on input from many sources. Once finalized, though, most expect Senator Marsh’s proposal to substantially alter the teacher tenure system in Alabama.

Digital Learning

During last year’s second special session, the Legislature created the Alabama Digital Learning Study Commission. The Legislature charged the Study Commission with finding “effective and sustainable ways to provide technology supported learning in PreK-20 classrooms,” with particular emphasis on infrastructure, digital content, devices, educator professional development, and funding. The Study Commission, a mix of legislators and stakeholders, has already met several times and will continue to meet during this year’s Regular Session. It plans to present a final report to the Legislature as whole by March 10th.

The contents of the report will likely suggest a massive shift in the way that Alabama educates its students. By encouraging the Legislature to direct funds from the Education Trust Fund toward digital learning, issuing bonds to develop infrastructure, using state dollars to draw down federal matching funds through the Federal Communications Commission’s E-Rate program, and leveraging the Governor’s renewed focus on broadband access in rural parts of the state, the State would be able to bring wireless digital access to each student in Alabama over the next several years. In short, the State would largely replace textbooks with tablets. The effects of such a change would be dramatic: teachers would need to be retrained, facilities built, and the time for approving and purchasing new educational content—which is typically on a six-year cycle—would shorten significantly.

Student Data

Tangentially related to the issue of digital learning, there appear to be several different initiatives underway to deal with the collection and use of student data in Alabama. Senator Marsh’s earlier versions of the RAISE Act included a proposal to centralize and monitor student data statewide. However, it seems that the sections dealing with that process have been carved out from the RAISE Act and will instead be introduced as a separate bill be Representative Terri Collins (R–Decatur).

Separately, Representative Arnold Mooney (R–Helena) plans to introduce a bill that would significantly restrict the data that could be collected and how that data could be used by school systems. Representative Mooney’s bill—which is supported by an unusual coalition of the conservative Eagle Forum and the ACLU—appears similar to measures passed in other states, including Louisiana. Opponents of the measure argue that the bill goes too far, and would not only make the work of the schools and school systems more difficult, but could make certain school functions like yearbooks, directories, and football programs impossible to produce.

OTHER MAJOR ISSUES EXPECTED

Pension Reform

Since the end of last session, a legislative commission has been meeting to discuss pension reform in Alabama. Alabama’s retirement program, like most government retirement systems historically, is a defined benefit plan. This type of program guarantees employees a certain benefit when they retire, placing the responsibility of fulfilling those promises on the benefit provider—here, the Retirement Systems of Alabama (“RSA”). In contrast, many current private sector employees are more familiar with 401(k) plans, which are defined contribution programs. In a 401(k) plan, employee contributions and employer matches are invested, but no particular return or benefit is promised. The risk in a defined contribution plan therefore falls on the employee.

Proponents of pension reform in Alabama, including the conservative Alabama Policy Institute, believe that the RSA has current unfunded pension liabilities of between $10 and $40 billion over the next thirty years. They argue that the plan has fallen from fully funded in 2001 to only 67% funded today for non-teacher state employees. The Alabama Policy Institute, along with others, has recommended that the state begin to shift from defined benefits to defined contributions, in order to lessen the risk for taxpayers in future years. The House Republican Caucus has adopted state pension reform as another of its agenda items, so it is expected to be front and center this session.

Telemedicine

Telemedicine is a rapidly growing industry not just in Alabama but nationwide. It is viewed by many as an innovative method to increase access to healthcare while keeping costs low. Others, especially many providers, have concerns that telemedicine does not result in an adequate doctor-patient relationship. Prior to the summer of 2016, Alabama’s Board of Medical Examiners had put in place fairly restrictive rules relating to the practice of telemedicine in the state. In the wake of the United States Supreme Court’s ruling in North Carolina Board of Dental Examiners v. Federal Trade Commission in February 2015, however, the Board of Medical Examiners rescinded their rules and have not yet proposed a new framework for regulation of telemedicine. It is therefore expected that the Board of Medical Examiners, as well as other interested parties, may support legislation this year that creates the authority, consistent with the U.S. Supreme Court’s instructions, for regulating this expanding type of delivery system.

Broadband Initiatives

In July of 2015, Governor Bentley created an Advisory Board on Broadband that has been meeting to formulate a plan for extending broadband to currently unserved and underserved areas of the state. The Governor is expected to announce his broadband initiatives in his State of the State address on February 2, but most expect that his plan will focus on ensuring that Alabama’s schools and hospitals are fully wired and connected to the internet. Thus far, however, the Governor has largely kept the details of his broadband plan private.

Guns

President Obama’s recent Executive Order regarding firearms has created significant buzz among Alabama’s elected officials both in Washington and in Montgomery. While it was likely that pro-gun legislation would have been introduced this year anyhow, the President’s actions have made it a certainty. Thus far, two major initiatives have been introduced. First, Senator Gerald Allen (R–Tuscaloosa) has reintroduced his proposal to allow all Alabamians to carry a loaded handgun without a permit in their vehicles. Last year, Senator Allen’s “guns in cars” bill passed the Senate but died in the House of Representatives. In addition to Senator Allen’s bill, Representative Mack Butler (R–Rainbow City) has introduced a proposed State Constitutional amendment that would allow individuals to carry firearms on college campuses. Currently, most schools in the state have rules in place prohibiting firearms on campus. The proposed amendment would override such rules. Additional legislation on this issue is almost certain to be filed once the session begins.

Alcoholic Beverages

Last year, the Legislature created two Alabama Alcohol Beverage Study Commissions. The first Commission’s mission was to “examine and determine if Alabama's alcoholic beverage laws related to . . . alcoholic beverages are congruent, competitive, and consistent with the alcoholic beverage industry related laws from across the United States.” This Commission has drafted several bills for consideration during this year’s session dealing with the sale of alcohol by producers directly to consumers. The first would allow breweries to open in several new counties, and would allow some breweries to sell slightly more than two gallons of beer per day per customer for off-premises consumption. The second would allow some wineries to operate off-site tasting rooms to sell their wine. The third would allow distilleries to sell one 750ml bottle of liquor per year per customer for off-premises consumption.

These proposed laws would generate a slight shift away from the State’s historically close regulation of alcohol sales. The proposed legislation relating to direct sale of alcohol is of particular note.

A second Commission was charged with examining the control exercised by the State’s Alcoholic Beverage Control Board (“ABC”) over hard liquor sales. Under existing law, the ABC has essentially operated as both the middle man and as a retailer, setting the price and distribution framework for all liquor sold in the state and selling that liquor to the consumer through State-operated stores. Private liquor stores, of which there are nearly three times as many as State-owned liquor stores, may only purchase liquor at the same retail prices as individual consumers. As a result, there is a significant push this year to eliminate the State’s retail alcohol operations.

Under the current versions of proposed legislation, the State would still set wholesale prices, but would no longer compete with private sellers directly. The proposal would save the State the considerable cost of managing its statewide retail operation, and would allow the market to set competitive prices. Furthermore, the tax collected from the sales of liquor would remain unchanged. Nevertheless, the ABC has opposed the change, arguing that despite a decrease in cost and the possibility of increased sales at the same tax rate the result would likely be a net loss of revenue. There is significant skepticism that the ABC’s argument will withstand the scrutiny of a Legislature looking to cut costs and increase available funds.

CONCLUSION

The Legislature is expected to meet on Tuesday and Wednesday of this week; the first and second meeting days of the 30 permitted. Because it takes three Legislative days for a bill to pass either body, unless the schedule changes, no bills will be voted on by either the House or Senate this week.

Although it is safe to say that the General Fund Budget will dominate discussion during the Regular Session – and possibly for one or more Special Sessions – most everything else is subject to change in the next 105 days. Maynard, Cooper & Gale will publish Weekly Legislative Reports throughout the Session. If you would like to receive the Reports directly, please contact Caroline Dodson at cdodson@maynardcooper.com. Additionally, for more rapid updates on various topics during the Session, you can follow Ted Hosp on Twitter@TedHosp.

For additional information contact Ted Hosp or Edward O'Neal.