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Officials warn interest-driven revenue may decline as state readies FY26 budgets
Summary
Legislative Fiscal Officer Kirk Fulford and Finance Director Poole told the Joint Interim Committees the recent boost from interest on state deposits is likely temporary, leaving slimmer margins for supplemental spending and raising pressure on Medicaid, CHIP and corrections spending in FY26.
Kirk Fulford, Legislative Fiscal Officer, told members of the Joint Interim Committees that Alabama’s recent revenue gains driven by high interest on state deposits are unlikely to persist and that the state should plan for flatter receipts in FY26.
“The interest on state deposits — it’s a big deal,” Fulford said, noting that the line rose to about $557,000,000 in 2024 after only $19,000,000 in 2021. He warned that much of recent general fund growth depends on that volatile source and that budget planners should be cautious as the Federal Reserve and broader economy evolve.
The warning followed Fulford’s review of both the general fund and the Education Trust Fund (ETF). He said the general fund ended the year with a $759,000,000 ending balance, but much of that — including $298,000,000 in conditional appropriations and $191,000,000 in reversions — has already been reappropriated. Fulford emphasized that removing interest-on-deposits growth would leave minimal year-over-year growth in recurring revenues.
Finance Director Poole echoed Fulford’s cautions and summarized the governor’s proposed FY26 budgets, which the administration transmitted to the legislature. “The sugar high is over,” Poole said, referring to the unusually large ETF growth in 2021–22 driven by federal and pandemic-era anomalies. Poole noted the state expects ETF receipts to grow about 1.8% in 2026 and general fund receipts to decline roughly 1.65% year over year.
Both presenters highlighted near-term pressures that will absorb much of any available supplemental capacity: Fulford and Poole put the combined cost pressures for Medicaid and the Children’s Health Insurance Program (CHIP) north of $250,000,000. Fulford said a $228,000,000 request for Medicaid is meant to maintain current services, not to expand the program, and Poole warned that pharmacy and drug costs are increasing.
Corrections also is a budget pressure. Poole noted the new Elmore County prison — a roughly 4,000-bed facility scheduled to come online in FY26 — will require phased staffing and operational investments while existing prisons remain active. That transition, Poole said, will stretch staffing and operating resources for the Department of Corrections.
On the ETF side, Poole described available supplemental capacity and the governor’s proposed allocations. The administration projects roughly $524,300,000 in supplemental ETF capacity this year and $1.66 billion in the Advancement of Technology fund (an Education Opportunities Reserve Fund balance figure Poole summarized), and proposed a mix of one-time investments: school safety and transportation fleet renewal, literacy and numeracy programs, charter school grants, and higher-education deferred-maintenance projects. Poole also described a proposed $133,000,000 allocation from the Education Opportunities Reserve Fund that would include $40,000,000 for poverty weights, $40,000,000 for special education, and $20,000,000 for sparsity funding to support weighted financing discussions.
Fulford and Poole both urged caution about recurring commitments. Fulford noted that much of the ETF’s recent growth included one-time federal funds (about $3,000,000,000) that LEAs used for programs they may be unable to sustain when federal money expires. Poole said the governor’s supplemental proposals are intended to be one-time investments rather than recurring program funding.
Committee leaders closed the session by scheduling a Joint Interim Committees meeting to finalize a report on school funding options and weights; committee staff said they will meet next Thursday to adopt a final report for the legislature. Poole and Fulford said they will be available for follow-up questions as members review the detailed spreadsheets that the administration and LFO will provide.
The presentation included multiple other line-item and agency highlights reviewed by Poole (public safety investments, workforce and economic development site preparation grants, university deferred maintenance, and transfers of workforce programs between agencies). Both presenters pointed to the state’s comparatively strong reserves and budget practices relative to other states but reiterated that interest-driven revenues are unlikely to remain at recent levels and that budgeting should reflect that uncertainty.
