Alabama lawmakers are preparing for a tighter budget in 2025 as federal COVID relief funds expire and Medicaid costs rise, prompting a focus on essential services and fiscal restraint. (Stew Milne for Alabama Reflector)
Amid the loss of federal COVID relief funds and a likely decline in at least one state revenue stream, legislators say they want to prioritize critical services as they get ready to put the state’s two budgets together in the 2025 session.
Rep. Rex Reynolds, R-Huntsville, chair of the House Ways and Means General Fund Committee, said that although he expects the General Fund budget to come in around $3.7 billion for fiscal year 2026, which starts October 1 — a $400,000 increase from the previous year — $275 million has already been set aside for conditions line items from the previous budget, including $200 million for prisons, $50 million for prison personnel, and $35 million for the State House.
COVID funding and historically high income and sales tax revenues left state coffers flush over the last several years, allowing legislators to pass supplemental funding bills near the start of the legislative sessions. But Reynolds said he expects reduced supplemental appropriations — if any — as the budget-making process for the General Fund starts in the House this year. With uncertainty around what may happen to interest on state accounts and an expectation that it might decrease, Reynolds said that although the General Fund is strong, future revenue projections are affected by these factors.
“We’ll be back to basic budgeting, prioritizing the most critical services we provide as a state,” Reynolds said in a phone interview.
The Alabama Legislature begins its 2025 session on Tuesday.
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Kirk Fulford, deputy director of the Legislative Services Agency’s (LSA) Fiscal Division, said in an email Thursday that “interest on state deposits is what is concerning.”
The General Fund, which draws from more than 40 revenue streams, saw interest earnings on state deposits rise from roughly $19 million in 2021 to more than $557 million in 2024, driven by high cash reserves and elevated interest rates. The Federal Reserve has decreased interest rates by a single percentage point, and, further cuts may occur depending on economic policies set by the new administration.
“The last time the Federal Reserve reduced interest rates by over 1% in 2020, we saw a reduction in interest on state deposits to the General Fund by over 45% over a 6-month period following the reduction, and we had far less money invested the than we do right now,” Fulford said. “It is potentially a big deal.”
He added that a similar rate reduction in 2020 led to a more than 45% decline in interest earnings over a six-month period, despite the state having fewer funds invested at the time.
Medicaid costs are also a concern, with significant anticipated increases despite the removal of over 300,000 people from the program’s rolls after pandemic-era policy kept states from disenrolling recipients. Reynolds is waiting for further details from the Alabama Medicaid Agency on expected costs, but lawmakers are expecting a substantial increase in the state’s share of the Medicaid program, which could top $1 billion for the first time in history.
The number, while large, would only be a fraction of the total program; the federal government is expected to pay about 73% of the cost of Medicaid in 2026, according to KFF.
Sen. Greg Albritton, R-Atmore, chair of the Senate Finance and Taxation General Fund Committee, voiced the same concerns, saying they are “going to be trying to hold the reins on any supplementals and things that might be proposed” because of the expected increase in the Medicaid Agency budget.
“We’re not having to take from anybody yet. But if our revenue, which is flat now, takes a dive of any type, it’s going to put a squeeze on everybody,” Albritton said.
On the education side, Sen. Arthur Orr, R-Decatur, chair of the Senate Finance and Taxation Education Budget Committee, said that although he is expecting a supplemental appropriation bill of around $500 million, budgeting for the 2026 fiscal year will also be tighter than in previous years in which Alabama received significant federal financial aid.
“We’re now kind of trending back to the norm, and we’re going to have to make decisions and set priorities,” Orr said.
Orr said his top priority this session will be advancing a hybrid funding model for public schools, which would allocate more resources for students with special needs, English learners, and those from low-income backgrounds.
He also said that lawmakers will consider whether to extend or modify the state’s tax cut on overtime pay, which is currently set to expire in June. That tax cut ended up decreasing revenue to the state by more than the initial projection of $34 million, at $230 million from January 2024 through September 2024, Fulford said.
Minority Leader Rep. Anthony Daniels, D-Huntsville, defended the extension of an overtime tax and said he’ll push to extend it, citing a 13.65% increase in corporate tax receipts and a 1.92% rise in individual income tax receipts, totaling $191 million and $130 million, respectively. He further argued the overtime bill has boosted productivity and workforce participation, leading to economic benefits, adding that the $230 million cost is offset by increased consumer spending and productivity gains, totaling over $450 million.
Blue Cross Blue Shield proposed establishing an “ALLHealth plan” aimed at providing private health insurance to up to 330,000 eligible Alabamians, either through ALLHealth or premium assistance for employer-provided insurance using Medicaid expansion funding.
Albritton, although skeptical about the program’s reliance on federal funds, said it is worth considering because “it’s not a government plan” and the state “can’t afford Medicaid as it is hardly.”
“There are several things that are positive about it. My concern is how much it’s going to cost … I just don’t know that we’re capable of handling that program without having monies for it,” Albritton said.
With Alabama’s prison population rising and crime legislation on the horizon, Albritton said there is a need for a balanced approach to crime legislation.
“We don’t want to make felonies of everything that’s a misdemeanor,” he said. “I don’t want to put people away when we don’t have to.”
Mental health services are another key concern. Legislators are looking for ways to support existing crisis centers, though they do not plan to fund a new one in the next fiscal year, and address the long-term care gap.
“The budget will be tight. We will not be adding any additional crisis centers. We’ll better focus on our services this year, still looking at what we can do long term for long term beds,” Reynolds said.
Despite expecting a slowing economy, legislative leaders remained optimistic about the budgets’ overall economic health.
“Even with the decline in revenue in the General Fund, we’ll still see one of the largest General Funds in the history of Alabama, so I feel like our economy remains strong,” Reynolds said.
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