The General Fund Budget

The Governor’s Proposal

Just prior to the start of this year’s regular session, the state’s Legislative Fiscal Office (“LFO”) provided members of the House and Senate with a bleak outlook for the 2016–17 General Fund budget, which supports most non-educational state services. According to LFO, next year’s General Fund receipts are expected to decline by approximately $42 million, or about 2% compared to this year. Medicaid and prisons currently consume approximately 60% of the entire General Fund budget. However, due to many factors—including increased costs—Director of Finance Bill Newton indicated that a 10% shortfall in the General Fund budget was more likely. That would mean a loss of approximately $180 million, an amount similar to the shortfall faced in 2015.

In response, Governor Bentley proposed removing $180 million from the Education Trust Fund for Fiscal Year 2016–17 and using it to shore up the General Fund going forward. Approximately $150 million of this transfer was to come from reassigning use tax collections, and an additional $30 million would have come from the transfer of insurance premium tax. Governor Bentley proposed to offset the annual $180 million loss to the Education Trust Fund for the first year by withdrawing funds from the Budget Stabilization Fund, which was created in 2011 by the Rolling Reserve Act. Governor Bentley’s plan did not include a means to replace the lost Education Trust Fund revenue in subsequent years, though many speculated in late January that the plan was to propose an education lottery to fill the gap after Fiscal Year 2016–17.

Overall, Governor Bentley's budget called for a $100 million increase in the appropriation to the Alabama Medicaid agency—funding the agency at $785 million. This figure was nearly $70 million less than the $842.5 million originally requested by Medicaid Commissioner Stephanie Azar in budget hearings held in late January. Governor Bentley also sought a $20 million increase in the budget for the Department of Corrections. Most other agencies would have received level funding or only slight increases to their budgets.

General Fund Budget as Enacted

As actually enacted by the Legislature over Governor Bentley’s veto, the General Fund budget allocates about $95 million more overall than the current fiscal year. Some agencies received modest increases in the proposed 2016–17 budget. For example, the court system received an increase of $4.5 million—to a total appropriation of approximately $97 million. The Department of Corrections was funded at $412 million, or approximately $13 million more than this year.

However, the discussion in Montgomery—both during the session and in its aftermath—continues to center on how to fund Mediciad, which supports the healthcare needs of more than 1 million Alabamians, approximately 70% of whom are children. Overall, Medicaid—through matching finds and contributions from providers such as hospitals, nursing homes, and pharmacies—is a $6.5 billion program in Alabama. Because of these complicated matching arrangments, the General Fund only provides 11% of the total amount spent in the state.

The Governor vetoed the budget passed by the Legislature primarily because it funded the Medicaid Agency at just $700 million, approximately $85 million less that the agency and the Governor believe the program needs to maintain its current level of service.

Medicaid Funding and RCO Transition Delay

The Governor’s reaction following the Legislature’s vote to override his General Fund budget veto was a surprise to many. He had previously stated that he would not hesitate to call the Legislature back into special session this summer to address Medicaid funding. Nevertheless, in a press conference the day after the vote, he and Commissioner Azar instead outlined the cuts that the agency was looking to implement in order to “live within its means.” Senator Del Marsh (R–Anniston), the President Pro Tem of the Senate, has also indicated that a special session is not likely in the near future. Senator Marsh has stated that he believes that the cuts proposed by Medicaid should go into effect before the Governor makes any effort to bring the Legislature back into session. It is therefore likely that a special session, if there is one at all, will not take place until late summer or even until after the start of the state’s fiscal year on October 1st.

RCO Delay—Act 2016-377

The first casualty of the cuts to Medicaid appears to be the program’s transition from a traditional, fee-for-service model to a provider-managed, capitated model administered through so-called Regional Care Organizations (“RCOs”). Following enactment of the General Fund budget, the Governor and Medicaid Commissioner both stated that the RCO transition could not proceed as scheduled for October 1st. The Legislature moved fast to allow a delay in implementation, introducing bills in both the House and Senate on the 21st Legislative day to grant broad discretionary authority to Medicaid Commissioner Azar to delay the RCO transition. The House bill, HB530 by Representative April Weaver (R–Columbiana), passed on the last day of the session and has been signed into law by the Governor. Just days after enactment, the Commission announced that the RCO program was being postponed for an undetermined period of time, likely at least to January 1st and possibly even through the end of the first quarter of 2017.

Medicaid Section 1115 Waiver

Early on in the session, Governor Bentley and Commissioner Azar held a press conference in the Old House Chamber to announce that the federal government’s Centers for Medicare and Medicaid Services (“CMS”) had approved the state’s Section 1115 waiver proposal. The waiver is a key part of the state’s transition to RCOs, and is supposed to bring with it approximately $750 million in additional federal funds to support the transformation and establish programs designed to improve healthcare efficiency and outcomes. However, the additional funds tied to the waiver can only be used to implement the RCO program, and cannot be used to help fund the existing Medicaid system. The impact that the Medicaid funding crisis—as well as the resulting RCO delay—will have on the waiver and the promised funding is not yet known. State and federal officials have both indicated that the waiver can be withdrawn if it appears that the state is not “adequately” funding Medicaid.

Potential Medicaid Cuts

In additional to the delay in the implementation of the RCO program, the Governor and Commissioner Azar stated that the following additional cuts, and potential savings, are being examined:

• Prescription drug coverage: $50-60 million
• Health Home and Physician case management fee: $16.6 million
• Primary care physician pay bump, which increases the pay primary care doctors receive: $14.7 million
• Outpatient dialysis care: $3.7 million
• Program of All Inclusive-Care for the Elderly (“PACE”): $2 million
• Prosthetics and orthotics: $500,000
• Eyeglasses for adults: $300,000
• Reduced reimbursement rates for ambulatory surgical centers, doctors, dentists, optometrists, hearing specialists, and other programs: $0-$50 million.

Another option raised by Commissioner Azar was the use by Medicaid of a preferred pharmacy provider, which would be a single-source vendor that would reduce the price of needed prescription drugs in exchange for an exclusive right to a client base. This option could save the state anywhere from $19 million to as much as $30 million.

Hospital Assessment—Act 2016-299

The reauthorization of the hospital assessment, the mechanism by which substantial federal matching dollars are accessed for Medicaid, also passed on the next-to-last day of the Session. HB191, by Representative Clouse (R–Ozark), had been carried over to the call of the Chair in the Senate on several occasions prior to its passage on May 3rd. In the past, the hospital assessment has been reauthorized for three-year periods, but this year’s legislation was modified during the process to shorten it to just one year. The modification was necessary due to the uncertainly of the RCO transition and the funding crisis in the Medicaid program, but it means that the assessment will have to be authorized again in 2017.

BP Settlement Funds—HB569 Held in Senate Committee; SB267 Held in House Committee

In April, the federal court with jurisdiction over Alabama’s lawsuit against BP for the 2013 oil spill gave final approval to the settlement between the state and the company. Under the settlement, Alabama will receive $1 billion spread out over 20 years. The first $50 million payment is expected this July. A bill sponsored by Senator Bill Hightower (R–Mobile) and passed by the Senate would have authorized bonds that would have allowed the state to receive a lump sum of approximately $650 million right away for payments expected in years 2–20, rather than receiving the payments on an annual basis. Senator Hightower’s legislation, SB267, was in the form of an amendment to the state’s constitution, and so would have required approval by the people in a referendum. It would have allocated approximately $161 million to repay a portion of the funds taken from the Alabama Trust fund in previous years to prop up the state’s General Fund. Senator Hightower’s plan would then have set aside about $260 million for Mobile and Baldwin County infrastructure projects, with the rest of the state receiving about $230 for the same purposes.

Very late in the Session, HB569, introduced by House Ways and Means General Fund Chair Steve Clouse (R–Ozark), proposed an alternative distribution of the settlement funds. Clouse’s bill would have use $448 million to pay back money taken from the Trust Fund. It then would have allocated close to $200 million for road and infrastructure projects in Mobile and Baldwin Counties. Clouse’s plan also freed up approximately $70 million for Medicaid, bringing the agency to within $15 million of the $785 million that Commissioner Azar has stated is needed to maintain the current level of services. The bill passed the House on the 28th Legislative Day and was sent to the Senate. There, a dispute between lawmakers from North and South Alabama derailed the measure, killing it in committee. As noted then by Senator Arthur Orr (R–Decatur), Chair of the Senate Committee on Finance and Taxation Education, this is an issue that could—and almost certainly would—be brought back up by the Legislature in the event of a special session.

Medicaid Funding Going Forward

The Medicaid program continues to be a major focus of discussion in Montgomery and among members of the Legislature. In an effort to more fully develop the issues facing the program, the Legislature began a series of joint hearings on April 20th. There have been three joint hearings thus far addressing the basic pieces of the Medicaid program in Alabama. The next session is scheduled for May 17th at 1:00 PM in the State House.

Patient Malpractice Recovery—SB413 Held in Senate Committee

Towards the end of the 2016 session, a proposal that would have completely changed the manner in which victims of medical negligence are compensated for their injuries was introduced by Senator Trip Pittman (R–Montrose). The bill, SB413, would have converted the existing medical malpractice system into an administrative process, much like workers compensation in other states.

Proponents of the plan note that under the existing system as many as 80% of the patients who are injured by medical error never receive any compensation for their injuries, because their legal damages are considered too small for an attorney to take their case. Further, the cases that are taken to court often take five or more years to resolve. Proponents also note that studies have shown that doctors’ aversion to being sued for malpractice can result in the costly and unnecessary practice of defensive medicine. The additional tests, procedures, and prescriptions that result dramatically drive up healthcare costs for both private businesses and government programs such as Medicaid. In fact, an actuarial study found that the savings to the Medicaid program as a result of a 30% decrease in defensive medicine over a ten year period could be well over $100 million each year.

The Education Budget and Pay Raises

In contrast to the General Fund budget, LFO officials indicated in late January that the education budget was expected to grow in Fiscal Year 2016–17 by approximately $380 million. That increase would allow for education spending of $6.3 billion for next year, roughly a 6% increase over this year. As eventually passed and signed by the Governor, the $6.3 billion budget for education was the largest for the state since 2008. The relatively healthy revenue streams for the Education Trust Fund—as opposed to the perpetually anemic General Fund—made the ETF budget largely uncontroversial.

Both bodies also approved a 4% pay increase for all principals, assistant principals, 2-year college educators, and all other education employees earning less than $75,000 per year. All other education employees will receive a 2% raise. The 2016–17 Education Trust Fund budget also increases the spending for the state’s voluntary pre-kindergarten program to $68 million—an increase of $16 million. There are also modest increases for textbooks, technology investment, and school supplies. The spending ratio between K-12 and Higher Education in the budget sent to the Governor—a contentious issue in some years—remains the same as last year at 73% to 27%.

Education Legislation

Tenure and Evaluation Reform—Failed to Receive Vote in Senate

Prior to the session, it was expected that the methods by which Alabama retains and rewards teachers would be a significant issue this year. In the end, however, the relevant legislation did not make much progress. In January, Senate President Pro Tem Del Marsh floated an ambitious proposal to restructure Alabama’s teacher tenure laws. The plan, which at the time was called the Rewarding Advancement in Instruction and Student Excellence (or “RAISE”) Act, originally would have tied teacher pay to performance. That portion of the bill was later modified to focus pay incentives on teachers in particular subjects where there are teacher shortages, and for teachers who agree to teach in underserved systems or schools. The RAISE Act also called for two different employment tracks for teachers: one that was higher paying, but did not include tenure; and a second that offered tenure but with lower pay.

Once introduced, SB316, renamed the Preparing and Rewarding Educational Professionals (or “PREP”) Act, would have increased the time it took for teachers to achieve tenure from three to five years. It also would have created an evaluation system for teachers with five performance levels. Poor ratings in two consecutive years could result in the loss of tenure. The bill provided for rewards for high achieving schools, and incentives to attract teachers to schools facing teacher shortages. The bill was approved by a close vote in Senate committee, but was not brought before the full Senate for debate. It is expected that the legislation, or some version of it, will return in the 2017 Regular Session.

Longitudinal Data Study—Carried Over on Senate Floor

Another measure favored by some education reformers that failed to achieve final passage was a bill that would have created the Alabama Longitudinal Data System, which would track student performance throughout the state. The bill, HB125, was sponsored by Representative Terri Collins (R–Decatur), Chair of the House Committee on Education Policy. The measure would have created Alabama Office of Education and Workforce Statistics and charged that office with developing the program. The new office was to be housed in the Department of Labor. The program’s purpose was to allow the state to track student performance and progress from early childhood through entry into the workforce. However, all of this information would only have been available in the aggregate; the bill would not allow the database to include personal identifiable information of any student or parent. Opponents expressed significant concern about the centralization of so much of students’ personal data, even though it would theoretically be kept anonymously, in one government database. The bill passed the House and made it to the Senate floor, but was carried over several times before the session ended and so it never achieved final passage.

Student Data Privacy—Held in House Committee

Tangentially related to the Longitudinal Data Study measure was an initiative to severely restrict the collection and use of student data in Alabama. Representative Arnold Mooney (R–Helena) introduced HB267 early in the session. The bill was modeled on legislation passed recently in Louisiana. Representative Mooney’s bill was supported by an unusual coalition of the conservative Eagle Forum and the ACLU. Opponents of the measure argued that the bill went too far, and would not only make the work of the schools and school systems more difficult, but could make certain publication of certain school materials like yearbooks, directories, and football programs impossible. In the end, the Mooney bill was not placed on a committee agenda and therefore never received a hearing. Representative Mooney has indicated that he intends to modify the legislation between now and next February and introduce a new version of the bill next year.

Technology Investment—Act 2016-139

Several pieces of legislation combined this year to significantly advance local schools on the issue of connectivity and digital learning. HB41, sponsored by Representative Donnie Chesteen (R–Geneva) made changes to the Alabama Ahead Act, which the Legislature first passed in 2012. The changes would direct roughly $35 million of state and federal money toward the installation of high-density Wi-Fi in schools. The bill’s funding model, known as the WIRED (for Wireless Infrastructure Renovation for Education) plan, also required a supplemental appropriation of $6 million from the Education Trust Fund. The state’s money is to be matched at a very favorable rate by the Federal Communication Commission’s E-Rate program.

Digital Learning Commission

During last year’s second special session, the Legislature created the Alabama Digital Learning Study Commission. The Commission examines several aspects of digital learning, including infrastructure, professional development, hardware, and digital learning content. The WIRED Act, sponsored by Representative Chesteen, and the supplemental appropriation sponsored by Representative Bill Poole (R–Tuscaloosa) that will help fund that initiative, were among the recommendations of the Commission. In its Report to the Legislature, issued in early March, the Commission also recommended additional funding for professional development in the area of digital education, though no legislation was introduced in the 2016 Session. The report also recommended a permanent budget line item in the Education Trust Fund budget, with an initial finding level of $100 million, for local school systems to use for digital learning. The work of the commission is likely only the beginning of a major shift in the way that Alabama educates its students. Additional legislation, likely dealing specifically with the acquisition of tablets and the process for adoption of digital content for use in schools, will almost certainly be introduced in 2017.

Common Core Repeal—Held in Senate Committee

A bill that would have required the state’s Board of Education to abandon its tough College and Career readiness standards (known more commonly as Common Core) was again introduced this year but failed to pass. The bill, SB60, sponsored by Senator Rusty Glover (R–Mobile), had fifteen Senate cosponsors but was not brought to a vote in either the House or Senate.

Prison Construction—Conference Committee Report Failed to Receive Vote in House

In his State of the State Address, Governor Robert Bentley proposed an ambitious prison construction plan that would close nearly all of the state’s existing facilities and consolidate the housing of inmates statewide in four mega-prisons. The plan called for three new 4,000 bed facilities for male inmates and one 1,200 bed facility for female inmates. Fourteen of the sixteen existing prisons in the state would also be closed. Governor Bentley set a target of 2017 to begin construction on the new prisons, which likely would take three years to complete. According to Jeff Dunn, the Commissioner of the Department of Corrections, the state could issue $800 million in bonds in order to pay for the construction. The bonds would be repaid by the savings realized as a result of the projects, estimated by the administration to be as much as $50 million per year. In particular, the Department estimated that it would save as much as $21 million on decreased overtime costs and $10 million on reduced medical costs annually.

For years now, the state’s corrections system has operated under the threat of intervention by a federal court that could result in a complete federal takeover. Such an action could, in turn, lead to mandated upgrades to existing facilities at extremely high cost, or the mass release of thousands of inmates. The goal of the construction plan was to reduce the level of overcrowding at the state’s facilities from more than 180% capacity to 125% capacity.

One aspect of the Governor’s plan that was met with skepticism was his desire to allow a single company to both design and also build the facilities. In order to accomplish that part of his plan, the Department of Corrections would need an exemption from the state’s bid laws, which requires that each of those functions be separately bid. Officials contend that combining the design and build functions could save as much as $100 million. Lawmakers were concerned, however, that this approach would result in the elimination of in-state contractors from consideration for the work, as very few Alabama-based companies have the ability to both design and build at all four mega-prisons.

Bills to carry out the Governor’s plan were introduced in both houses by the General Fund Budget Committee Chairs: HB313 by Representative Clouse, and SB287 by Senator Pittman. Senator Pittman’s bill became the vehicle for the plan late in the session after passing the Senate. On the 28th legislative day, the Pittman bill passed the House, but with a provision that would have required the Joint Legislative Prison Committee to produce a detailed report on the prison construction plan by the 25th day of the 2017 regular session—essentially delaying any work for a year. As a result, the bill was sent to a conference committee, which met several times during the last day of the session to try to compromise on a version of the bill that could pass both the Senate and the House. In the end, the committee proposed a scaled down version of the legislation, calling for bonds in the amount of $550 million and the construction of three prisons instead of four. That version passed the Senate shortly before 11:00 PM and was sent to the House. The House, however, never brought the bill up for debate, and the initiative failed to reach final passage.

Tax Legislation

Gas Tax—Failed to Receive Vote in House

A bill that would have provided what supporters argue is desperately needed revenue for infrastructure repair and maintenance never made it to a vote in the Alabama House. HB394, sponsored by Representative Mac McCutcheon (R–Capshaw) would have set an excise tax on gas that is based on the average tax in Florida, Georgia, Mississippi, and Tennessee. If implemented today, the bill’s formula would result in an increase to Alabama’s current gas tax of $0.06 per gallon. The bill also called for adjustments to the tax in subsequent years—again based on the average tax in surrounding states. A second bill, which would have required any revenue generated by the gas tax to be spent exclusively on road and bridge projects, was part of the infrastructure improvement package supported by a wide coalition of business interests under the umbrella group Alliance for Infrastructure. The state’s gas tax has not been increased since 1992. Although support for the measure seemed to be strong, it did not appear that the bill could overcome an anticipated filibuster in the Senate.

Voluntary Internet Sales Tax Submissions—Act 2016-110

In special session last year, the Legislature passed a bill that allowed entities selling goods over the internet to individuals in Alabama to voluntarily remit use taxes due from the purchaser to the state. So-called remote sellers, who lack sufficient nexus with the state, are not required to collect and remit either sales or use tax on such purchases under current law—although the tax is due from the purchaser. It has been speculated that the Alabama loses as much as $250 million in unpaid taxes as a result of purchasers’ failure to remit the amounts owed. Under the new law, in exchange for a simplified—and guaranteed—rate, some remote sellers have begun to collect taxes. In fact, the $15 million that was added to the Medicaid budget in the House Committee on Ways and Means General Fund was specifically attributed to new revenue that resulted from this voluntary program. A bill to tweak this new law made its way through the Legislature this session, and SB233, sponsored by Senator Trip Pittman (R–Montrose), was passed and signed by the Governor on March 17th.

Mandatory Unitary Combined Reporting—Held in Senate Committee

Once again, a bill that most in the economic development community say would severely damage Alabama’s ability to recruit and retain companies to the state was introduced this session in the Senate. Opponents argue that the Mandatory Unitary Combined Filing (“MUCR”) legislation, SB202, sponsored by Senator Linda Coleman-Madison (D–Fairfield) and supported by Revenue Commissioner Julie Magee, would have amounted to a tax increase on multistate businesses. Estimates were that the bill would raise taxes on businesses by approximately $30 million per year overall by altering the manner in which taxes are calculated on separate, related enterprises. The bill was not placed on a committee agenda, and therefore did not receive any debate or a vote this session. However, the legislation is expected to return in 2017, or possibly in a special session.

HSA Deduction—Act 2016-345

HB109, sponsored by Representative Becky Nordgren (R–Gadsden), was passed by the Senate on May 3rd, creating a state tax deduction for Health Savings Account contributions. The bill mirrors federal law, and a companion bill was sponsored in the Senate by Senator Paul Sanford (R–Huntsville). Beginning in tax year 2018, a state income tax deduction will be available for contributions limited to the annual deduction amount allowed by federal law, which today stands at $3,350 for individuals and $6,750 for families.

Dark Store Litigation—Act 2016-127

Beginning this October 1st, counties in Alabama will be required to hire outside counsel when commercial property assessments are appealed to Circuit Court. Under prior law, county District Attorneys were responsible for defending these lawsuits, although they often lacked the experience and expertise required. The purpose of SB128 is to combat so-called “dark store” litigation being pursued in Alabama and around the county by some major retailers. The dark store tax challenges seek to have property occupied by a large retailer valued at the price that property—with the existing building on it—would sell for, rather than the cost incurred to construct it. The tax challenges pose a major risk to property tax revenue in the state, particularly for Alabama Counties.

Alabama’s Taxpayer Advocate—Failed in Senate Committee

Changes proposed by the House Republican Caucus to the state’s Office of Taxpayer Advocacy were blocked in the Senate by the Department of Revenue. HB38, sponsored by Representative Mark Tuggle (R–Alexander City), was designed to make Alabama’s existing Taxpayer Advocate, who is charged with attempting to resolve ambiguities in the state’s tax laws on behalf of taxpayers, more independent from the Department of Revenue. Under current law, the Revenue Commissioner appoints the Taxpayer Advocate from within the Department. HB38 would have created a nominating committee that would send a list of potential candidates to the Governor, who would make the final selection from that list.

Economic Development Legislation

Alabama Renewal Act—Act 2016-102

The Alabama Renewal Act, promoted by the Alabama Department of Commerce, became law on March 22nd, 2016. The bill, HB34, sponsored by Representative Mac McCutcheon (R–Capshaw), creates the Renewal of Alabama Commission, which has the authority to approve tax credits for businesses that use the state’s ports. Under the bill, a “port facility” is any publicly owned facility through which cargo is transported by ship, by air, or by rail. The port credits for use of Alabama ports cannot exceed $5 million in any one fiscal year. The bill also allows credits to be extended to warehouse or distribution facilities locating in the state which commit to investing at least $20 million and to creating at least 75 new jobs. The bill would also allow for tax credits to be given to private companies for contributions of cash or property to approved economic development organizations in the state. The contributions are intended to create a fund to be used for the acquisition of project sites and for the development of needed infrastructure.

Apprenticeship Tax Credit—Act 2016-314

A new tax credit for companies hiring apprentices also became law this year. SB90, sponsored by Senator Orr, provides a $1,000 tax credit for companies that hire a qualified apprentice. The tax credit is capped at $3 million for the first three years, and then $5 million in years thereafter. No one company may claim more than $5,000 per year in credits.

Small Business Jobs Credit—Act 2016-188

The Small Business Jobs Act, HB36, sponsored by Representative Kyle South (R–Fayette), was also signed into law this year. The bill creates a $1,500 tax credit for small businesses—defined as those that employ fewer than 75 people—for each new job added with an annual salary of more than $40,000. The bill, which passed the House 88–12, was part of the House Republican Caucus Agenda and was one of the first to pass its house of origin. The bill would increase the credit by an additional $1,000 if the new employee is a recently returned, unemployed veteran. The business must retain the new employee for a full year in order to qualify for the credit.

Historic Tax Credit—Failed to Receive Committee Assignment in the Senate

Legislation to reauthorize the state’s Historic Tax Credit program, widely considered a major success, failed to achieve final passage this session despite broad support in the Legislature. The program has been a major boost to redevelopment efforts across the State, but will now expire this spring. The reauthorization legislation, HB62, sponsored by Representative Victor Gaston (R–Mobile), was approved by the House by a vote of 91–4. The Senate version, sponsored by Senate Rules Committee Chair Senator Jabo Waggoner (R–Vestavia Hills) had 32 of the 35 Senators listed as co-sponsors. Despite this apparently overwhelming support, the bill died in the Senate, as it was never assigned to a committee after it passed the House. An independent study of the tax credits by Novogradac, an accounting and consulting firm, found that that the return on investment for the program is approximately $3.90 for the state for every $1.00 of credit invested. The extension of the credit was supported by a broad coalition of business and development groups, including REV Birmingham, the Birmingham Business Alliance, the Business Council of Alabama, the Downtown Mobile Alliance, and the Mayors of Birmingham, Huntsville, Montgomery and Mobile. The proponents have indicated that they intend to continue their efforts to bring the popular program back next session, or possibly in a special session if one is called by the Governor.

Small Business Capital Investment Credit—Failed to Receive Vote in the Senate

A bill that would have provided incentives for businesses that provide capital investment in a small business fund qualified by the state’s Department of Commerce failed to pass on the final day of the session when it was carried over in the Senate to the call of the Chair. HB224 was sponsored by Representative Danny Garrett (R–Trussville).

Research & Development Tax Credit—Held in House Committee

A revised version of the Governor’s research and development tax credit bill from the 2015 Session, HB390, was introduced this year by Representative Chris Pringle (R–Mobile), but failed to make it out of committee in the House. The 2016 version would have increased the proposed available tax credits from the $10 million in last year’s legislation to $25 million. The bill allows for a credit of 25% of the research costs for research conducted with a qualifying Alabama research facility.

State Contracts with Boycotting Entities—Act 2016-389

The Legislature also approved a measure that would prohibit the Alabama from doing business with entities that boycott any jurisdiction with which the state enjoys free trade. SB81, sponsored by Senator Orr, is part of a nationwide effort to push back against what many view as the anti-Israel “Boycott, Divestment, and Sanctions” movement, though the bill would apply beyond those companies boycotting Israel. Under the terms of the legislation, no public entity, including any political subdivision of Alabama or any state university, would be permitted to enter into a contract with a business that is boycotting any jurisdiction with which Alabama can engage in free trade. This would include all World Trade Organization members, as well as any government with which the U.S. has a free trade agreement. Similar bills have passed in several other states.

Incentives Study and Report—Act 2016-389

SB208, also sponsored by Senator Orr, passed late on the last day of the session and was signed into law by Governor Bentley. The bill is an effort to begin an in-depth look at the impact that the state’s incentives and tax credit programs have on the state’s budgets. SB208 requires the head of each agency that administers an incentive program or tax credit to produce a report examining the program and its effectiveness in detail. The first such report would be due to the Legislature not later than the second legislative day of the 2018 Regular Session. Several high profile and popular tax incentive programs—including the Historic Tax Credit—were held back by the Senate during this session by concerns that the state was not adequately assessing the long term return on investment of the programs.

Tax Credit Suspension Legislation—Held in House Committee

Late in the session, Representative Phil Williams (R–Huntsville) introduced HB505, which was designed to addresses concerns expressed by some legislators that tax credits ought not be allowed in years that state revenue does not meet budgeted projections. Under Representative Williams’ bill, if the Governor, because of mid-year revenue a shortfall, declared proration in either the General Fund or the Education Trust Fund, then tax credits would be suspended for that year. The bill further provided that tax credits would be suspended if the General Fund or the Education Trust Fund budget is merely level funded from the prior year. The bill failed to receive a committee hearing this session, but likely will be reintroduced next year or possibly in a special session.

Employment Legislation

Minimum Wage Preemption—Act 2016-18

The Alabama Uniform Minimum Wage and Right to Work Act, HB174, sponsored by Representative David Faulkner (R–Mountain Brook), became law early in the 2016 session. The bill provided that minimum wage laws in Alabama may only be set by the state, and not by individual counties or municipalities. Alabama currently has no statewide minimum wage; instead, it uses the federal minimum wage of $7.25 an hour. The bill was introduced last year by Representative Arnold Mooney (R–Helena), who was also a primary co-sponsor of this year’s legislation. The bill was subject to what looked like a high stakes game of chicken as the Birmingham City Council voted more than once to accelerate the implementation of its minimum wage ordinance. Proponents of the uniform minimum wage law argued that increasing the minimum wage results in job loss, and that having a patchwork of different minimum wages throughout the state unduly burdens businesses that operate in multiple locations.

Right to Work Constitutional Amendment—Act 2016-86

A bill that would enshrine Alabama’s Right to Work status in the state’s constitution passed the Legislature and will appear on the November ballot. Proponents view the measure, sponsored by Representative Arnold Mooney (R–Helena), as a means to assist in the recruitment of new businesses—in particular manufacturers—to the state. Alabama currently has a statute in place declaring the state to be Right to Work. However, union activity and efforts to unionize Alabama’s still growing manufacturing base have appeared to increase in the past several years. Proponents contend that an amendment to the constitution would demonstrate to the world—and especially to businesses considering whether to locate here—that the Right to Work philosophy is one of Alabama’s core values.

Ban The Box—Failed to Receive Vote in Senate

Senator Quinton Ross (D–Montgomery) introduced legislation to “Ban the Box” this session. SB327 would have generally eliminated questions on employment applications about whether the applicant has ever been arrested or has a criminal record. Ban the Box initiatives are designed to help those who have served out their criminal sentences re-enter the workforce, but opponents argue that some such measures create significant administrative and practical burdens on businesses. Additionally, there are certain businesses, such as financial services organizations, that face conflicting obligations under federal law. The bill was amended in committee to limit it to public employees and those with public contracts, and it was reported favorably by a close vote. The bill was not brought before the full Senate for a vote, but it is expected to return next session.

Office of Minority Affairs—Act 2016-378

Midway through the 2016 Session, Governor Bentley signed an Executive Order creating the Governor’s Office of Minority Affairs. Maynard, Cooper & Gale attorney Nichelle Nix was appointed to lead the new office. One of the first tasks for the office was to pass legislation making it a cabinet level post. To that end, early in the last day of the session, HB534, sponsored by Representative John Knight (D–Montgomery), was passed with broad bipartisan support and was sent to the Governor for his signature. The office has a broad portfolio, and is charged with reaching out to communities across the state and weighing in on issues such as employment, health, education, and criminal justice.

Gaming Legislation

Lotteries—Failed to Receive Votes in Houses of Origin

Almost 17 years ago, voters in Alabama rejected then-Governor Don Siegelman’s proposed education in a referendum vote of 54% to 46%. With the General Fund in seemingly perpetual dire straits, several new lottery proposals were introduced this year. Though some advanced through committee in their houses of origin, though, none made it to the floor of either body for vote. Early in the session, Representative Alan Harper (R–Northport) and Senator Jim McClendon (R–Springville) introduced bare-bones bills that would have allowed the people to once again vote on a lottery. The bills merely provided 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 were left open, and would have had to be addressed by subsequent legislation.

Because the creation of a lottery requires an amendment to the state’s constitution, though, any new revenue from a lottery likely 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. 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. Wyoming did not require the additional step of amending its Constitution to institute its lottery.

Later in the session, Senator Trip Pittman also introduced a lottery bill that would specifically dedicate any revenue from a lottery to the cash-strapped General Fund. Senator Pittman’s bill would also limit the games that the state could participate in to multi-state lottery games such as Powerball and MegaMillions. Multi-state games have jackpots that can rise into the hundreds of millions of dollars and therefore generate a great deal of press and attention, but they typically account for a very small portion of the revenue generated by states through their lotteries. In fact, while estimates have indicated that a full scale adoption of lotteries, including scratch off games, would generate as much as $325 million annually for the Alabama, the estimates for multistate games alone are as low as $40 million.

Fantasy Sports—Carried Over in House

A bill that would have clarified the legal status and provided for the regulation of fantasy sports games in Alabama failed to make it out of the House this year. The failure of the legislation, combined with Attorney General Luther Strange’s mid-session declaration that the games violate Alabama’s anti-gambling laws, has led to a withdrawal from the state of the popular games run by companies such as FanDuel and DraftKings. HB56, sponsored by Representative Connie Rowe (R–Jasper), was favorably reported by the House Committee on State Government, but was carried over several times in the House before running out of time for final passage. The companies are also facing class action lawsuits in the state filed on behalf of the games’ participants.

Legal Reform

Antitrust Laws—Board Rulemaking and Review—Acts 2016-256; 2016-313; 2016-410; and 2016-302

Several measures prompted by last year’s U.S. Supreme Court decision in N. C. State Bd. of Dental Examiners v. FTC were passed this year in order to protect boards and commissions that are dominated by the professions they purport to regulate. The individual bills covered the Boards of Medical Examiners, Dental Examiners, and Pharmacy, and were designed to re-insulate a board or commission from federal antitrust laws with state action immunity. In the its decision, the Supreme Court found that in order to receive state action immunity, a state board that was controlled by participants in the regulated profession—in that case, a dental board that was made up by a majority of dentists—must act pursuant to a clearly articulated state policy, and must be subject to meaningful oversight.

In addition to the individual board’s bills that attempt to set for the “clearly articulated” policy, a separate a bill that intended to provide the “meaningful oversight” or review of proposed regulations that impact competition, was also passed. SB80 by Senator Gerald Dial (R–Linville) established a new review process for anticompetitive regulations proposed by covered boards or commissions. Under the new process, the Legislative Council must examine each such rule separately and hold a hearing if one is requested by a potentially affected party.

Judicial Reallocation—Failed to Receive Vote in House

A bill that would have established a commission to study and recommend reallocation of judicial resources, namely judgeships, came within one step of final passage, but failed when it did not receive a vote on the House floor. SB88, by Senator Orr, would have created the Judicial Resources Allocation Commission consisting of twelve members, including the Chief Justice, the Governor’s Legal Advisor, the Attorney General, and three each from the ranks of Circuit Judges, District Judges, and licensed attorneys. The measure set forth the criteria to be used by the Commission to determine the need to increase or decrease the number of judges in a particular part of the state. Relocation of judgeships under the proposal would only have been permitted in the event of a vacancy, meaning no sitting judge would have his or her position eliminated.

Deceptive Trade Practices—Act 2016-407

A bill designed to remedy a recent 11th Circuit Court of Appeals decision, SB270, sponsored by Senator Phil Williams (R–Rainbow City), was passed on the last day of the Session and was signed into law by the Governor. The plain language of Alabama’s Deceptive Trade Practices Act has always prohibited private class action lawsuits under the Act. Nevertheless, in November 2015, the Court of Appeals held that the availability of a class action lawsuit was a procedural issue—rather than a matter of substantive state law—and that therefore the Court would apply federal law, and permit private class actions. Senator Williams’ legislation specifies that the prohibition of private class actions is a matter of substantive Alabama law, in an effort to ensure that federal courts will apply the plan language of the Alabama statute and prohibit class actions from being brought under the Act.

Stand Your Ground—Act 2016-420

SB420, sponsored by Senator Williams, was intended to codify a decision by the Alabama Court of Criminal Appeals from December of last year in Harrison v. Alabama. The bill clarifies for trial courts throughout the State that when a defendant raises a Stand Your Ground defense, a pre-trial hearing and ruling is required. If proven by a preponderance of the evidence that the defense is legitimate, the case would be dismissed—though the District Attorney could appeal that decision. If Stand Your Ground immunity is not granted pre-trial, the case would go to trial and the defendant may raise the defense to the jury.

Daubert Standard for Expert Testimony—Held in House Committee

Legislation that would have conformed Alabama’s law related to the admissibility of expert testimony to the standards used in federal courts failed to advance from the House Committee on the Judiciary. HB161, sponsored by Representative Matt Fridy (R–Montevallo), would have extended the standard currently used in Alabama for admissibility of scientific evidence, known as the Daubert standard, to additional categories of evidence, including technical and specialized categories of knowledge. The Daubert standard has been used in Federal Courts since 1993, and in 2011 was partially adopted by Alabama’s Legislature. Many—particularly those in the business community—contend that Daubert is a more reliable means to determine whether expert testimony should be admitted. In part, this is because the standard strengthens the role that judges play in the process of reviewing expert theories and testimony. The bill was the subject of a public hearing in committee but did not receive a vote.

Alabama RICO Act—Held in Senate Committee

An Alabama Racketeer Influenced and Corrupt Organizations (“RICO”) Act, creating new criminal and civil penalties for organized crime in Alabama, was introduced this year by Senator Orr, but failed to pass either body. Modeled after the federal RICO Act, SB234 would not only have provided law enforcement with new weapons in their fight against criminal activity, but would also have created private civil causes of action, allowing for awards of treble damages against people and businesses alleged to be engaging in organized criminal activity. The bill was supported by the Alabama District Attorneys Association, which maintained that such a law is a necessary tool for pursuing increasingly sophisticated criminal operations in the state. It is expected that the bill will be re-introduced in 2017.

Data Breach Legislation—Held in House Committee

As a result of the failure of SB238, sponsored by Senator Arthur Orr, Alabama remains one of only a handful of states without data breach notification legislation. Under SB238, entities that were the victims of a data breach that affected more than 1,000 people and that might result in financial damage would be required to notify the Attorney General, Alabama residents whose information had been compromised, and credit-reporting agencies. The notification would have to occur within 60 days of the breach, though a 15-day extension could be granted. Failure to comply with the notice requirements would have been considered a deceptive trade practice, but not a criminal offense. The bill specified that no private right of action would be created by the legislation, although businesses were concerned that the incorporation of the Deceptive Trade Practice Act by reference would be used as a back door to create private civil litigation. Civil penalties of up to $50,000 for each breach, but not for each affected account, could be imposed under the bill. SB238 passed the Senate towards the end of the session, but died in the House. It is expected to be introduced again next year.

Banking Measures

Change in Control—Act 2016-278

Today, when a proposed sale of bank stock would result in a change of control of the bank, state and federal banking regulators have the power to disapprove the sale. However, the threshold level that triggers review has differed under state and federal law. Federal review is triggered when the stockholder would own more than 25% of the stock when there is no majority shareholder and 10% if there is a majority shareholder. State review was not triggered unless the stockholder would own more than 50% of the stock. SB385, sponsored by Senator Slade Blackwell (R–Mountain Brook), addressed this difference. The bill aligns Alabama law with the federal thresholds. The bill therefore gives the state’s Banking Department the power to disapprove the sale of stock in a state-chartered bank if the federal thresholds are reached.

Apportionment and MTC “Uncoupling”—Act 2016-283

For the purposes of paying Alabama taxes, financial institutions operating in multiple states calculate their Alabama taxable income using an apportionment formula adopted by the Department of Revenue. Under current law, this formula must be “substantially the same” as the formula recommended by the Multistate Tax Commission (“MTC”), a national group consisting of top revenue officials from 48 states. Until this year, Alabama was the only state with this “automatic adoption” statute. HB451, sponsored by Representative Oliver Robinson (D–Birmingham), removed this “automatic adoption” provision. Going forward, the state’s apportionment formula will be proposed and adopted by the Department of Revenue without having to be “substantially the same” as the MTC recommendation.

Federal Home Loan Banking—Act 2016-367

Members of the Federal Home Loan Banking (“FHLB”) system are afforded access to reliable sources of funding that can be used to finance qualifying housing projects. Only banks, credit unions, and insurance companies are allowed to join the FHLB system. Federal law establishes procedures for banks and credit unions to use in the event they go bankrupt while owing a debt to the FHLB system. Because these procedures are in place, banks and credit unions enjoy favorable borrowing terms, but there are no similar federal provisions applicable to FHLB-member insurance companies who become insolvent. Thus, insurance company FHLB members do not have access to the same rates as banks and credit unions. HB370, sponsored by Representative A.J. McCampbell (D–Livingston), creates a roadmap for the Department of Insurance’s Receiver to use when an FHLB-member insurer operating in Alabama becomes insolvent. Assuming such a process is put in place, FHLB-member insurers should receive access to the same favorable borrowing terms currently offered by the FHLB system to banks and credit unions.

Insurance Legislation

Captive Insurance Companies—Act 2016-191

The Governor signed legislation sponsored by Representative David Faulkner (R–Mountain Brook) that is an effort to modernize Alabama’s captive insurance law and make Alabama more attractive to businesses looking to form captive insurance companies. Alabama’s Captive Act was first passed ten years ago, but has not been revised since, despite changes in the industry and—more importantly—in the way other jurisdictions regulate it. Proponents contend that the changes in HB270 will allow for easier captive formation, especially for small businesses. The changes include the revision of capital requirements for protected cell captives, which give small businesses additional access to captive insurance. The new law also allows captives to be formed as any entity—instead of only as corporations as required under existing law. The new update will also provide a 60-day provisional license, which should make entry into the market easier. According to the Captive Association, Alabama currently has 40 licensed captives.

NAIC ORSA Requirement—Act 2016-386

Model legislation regarding Own Risk and Solvency Assessment (“ORSA”), proposed by the National Association of Insurance Commissioners (“NAIC”) in the wake of the financial crisis, passed on the last day of the session and was signed into law by Governor Bentley. The new ORSA law, SB170, sponsored by Senator Slade Blackwell (R–Mountain Brook), requires insurance companies to conduct a self-assessment of their current and future risk. It is also intended to allow regulators to gain a better understanding of an insurer’s ability to withstand financial stress. Pursuant to NAIC rules, U.S. insurers and insurance groups are required to regularly perform an ORSA and file a confidential ORSA Summary Report of the assessment with the regulator of each insurance company upon request, and with the lead state regulator for each insurance group, whether or not any request is made.

NAIC Principle-Based Reserving—Act 2016-411

Another NAIC proposal to update the method by which insurers calculate their reserves also passed on the last day of the session and has been signed by the Governor. SB169, also sponsored by Senator Blackwell, adopts Principle-Based Reserving (“PBR”), which replaces the current formula-based approach to determining policy reserves. The goal of PBR is to switch to an approach for reserve calculation that more closely reflects the risks of the highly complex products and that allows greater flexibility for regulators and companies as products and market conditions change.

Alcohol Legislation

Craft Alcohol Laws—Acts 2016-97; 2016-131; and 2016-130

Three changes to Alabama’s alcohol laws that were recommended by the Alcohol Beverage Study Commission have also now been codified. Each of the bills allows greater opportunity for consumers to purchase alcohol directly from manufacturers, and so would blur the categories of Alabama’s three-tier distribution system. HB176, sponsored by Representative Anthony Daniels (D–Huntsville), allows Alabama breweries to sell up to 288 ounces of beer per consumer per day for off-premises consumption. The Senate version of this legislation was sponsored by Senator Bill Holtzclaw (R–Madison). SB166, sponsored by Senator Linda Coleman-Madison (D–Birmingham), allows Alabama wineries to open one additional off-site tasting room, and to sell one bottle of wine per day directly to each consumer. The House version was sponsored by Representative David Faulkner (R–Mountain Brook). Finally, Senate Bill 132, sponsored by Senator Bobby Singleton (D–Greensboro), allows Alabama distilleries to sell up to one standard-size bottle (up to 750 milliliters) of liquor per customer per day. The House version was sponsored by Representative Alan Boothe (R–Troy).

Liquor Tastings—Act 2016-111

A bill that allows liquor tasting at retail establishments, including state-owned ABC stores, was also passed and signed into law this year. The bill was being promoted and pushed by the Distilled Spirits Council of the United States (“DISCUS”), and allows tastings of no more than ¼ ounce of liquor to be conducted on site by the manufacturer.

Sunday Sales Legislation—Enacted

As in previous sessions, local jurisdictions sought the ability to expand the sale of alcohol to Sundays. At least eight Sunday sales bills were introduced covering various counties, cities, and towns across the state. All eight bills passed, though some require approval of the voters in the particular jurisdiction.

Full Retail Privatization of Alcohol Sales—Failed to Receive Vote in Senate

Senator Orr again introduced his proposal to phase out the state’s retail sale of alcohol. The bill, SB292, was assigned to the Senate Committee on Fiscal Responsibility and Economic Development, which held a lengthy public hearing in mid-March. Alabama currently has almost 600 privately owned and operated liquor stores; which must purchase all of their product from the ABC Board and then directly compete with the 175 state-owned ABC stores. Senator Orr’s bill would have phased out the ABC’s retail operations over a five-year period. The bill was favorably reported by the committee by a vote of 10–4, but was not brought to the Senate floor for a vote. Senator Orr has indicated that he intends to introduce the bill again in 2017.

Healthcare Legislation

CBD Oil—Act 2016-268

A bill to make it easier to provide medical treatment in the state using Cannabidiol oil (“CBD oil”), which is an oil derived from marijuana that contains low levels of the psychoactive substance THC, was signed into law this year. The bill was sponsored by Senator Paul Sanford (R–Huntsville) in the Senate and by Representative Mike Ball (R–Madison) in the House. In its final form, the bill allows for the use of CBD oil with a strength as high as 3%. CBD oil is believed by proponents to provide the most effective treatment for certain illnesses, and particularly for conditions that cause seizures in children. During the 2014 session, the Legislature approved a pilot program through the University of Alabama at Birmingham for the use of CBD oil. That legislation, under which a 2% grade of CBD oil is being tested at UAB, was known as “Carly’s Law.” This new measure, named “Leni’s Law” for a child born with a rare form of epilepsy and severe cerebral palsy, likely will significantly increase the use and availability of CBD oil by decriminalizing its possession.

State Park Funding—Act 2016-145

Senator Clay Scofield (R–Guntersville) sponsored and passed a proposed constitutional amendment this Session designed to preserve funding for state parks. The amendment, if approved by voters in a referendum in November, would prohibit the transfer of funds from the State Parks Fund or the Parks Revolving Fund to any other state agency or account. Over the past several years, approximately $30 million has been transferred from these funds to help support other General Fund agencies, such as Medicaid and the Department of Corrections. The bill, SB260, does include a provision by which, if the Revolving Fund revenues exceed $50 million in a year, incoming revenue for the next fiscal year would be reduced by the same amount.

Payday and Title Lending—Failed to Receive Vote in the House

An effort to reform the payday lending industry in Alabama failed to receive final passage in the last week of the session, despite its inclusion on the House Special Order Calendar for the next-to-last day of the session. Payday loans are short term loans of $500 or less that roll over every two weeks if not paid back. Because of the fees incurred with each roll-over, the effective annual interest rates on such loans can be as high as 450%. As amended in House committee, SB91 by Senator Orr, would have required a minimum loan term of 28 days, and would lower the effective APR of the loans to about 180%. Supporters of reform in the industry were concerned that the bill was too watered down by the House changes, while many in the industry felt the bill still went too far. As introduced and as passed by the Senate, Senator Orr’s legislation would have allowed borrowers to pay back the loans over a period of six months, and would limit the allowed effective interest rate to 120%. In the end, the House carried the bill over without a final vote. Senator Orr has stated that he fully intends to bring this legislation back in 2017.

For more information please contact Ted Hosp or Edward O'Neal.