Interests on state deposits continue to fuel the state’s General Fund revenue increases, though that growth is slowing and a possible interest rate cut looms.
Ten months into the fiscal year, the General Fund revenues are up 7.6% to $2.7 billion.
Most of that growth is because of interest earnings on money in savings accounts, including yet-to-be-spent federal COVID-19 money.
State budget leaders have warned that decades-high interest rates will eventually drop and those COVID-19 funds will be spent in the next two years.
“I continue to remind (lawmakers) about the impact of the interest on state deposits on General Fund growth over the last couple of years,” Kirk Fulford, deputy director of the Legislative Services Agency, told Alabama Daily News on Friday. “Through July, the General Fund is up by $194.8 million over last year … but $140.8 million of that growth is from the interest on state deposits.
“Interest on state deposits continues to grow, but by smaller amounts than previous months. And it now appears likely the Federal Reserve will begin to reduce the rates in September.”
Federal Reserve Chair Jerome Powell last week indicated a cut could be coming next month, if inflation continues to decrease, the Associated Press reported. It would be the central bank’s first rate cut in four years.
“We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate,” Powell said, “but we’re not quite at that point.”
Fulford last month warned lawmakers that interest from state deposits is projected to hit its peak this fiscal year at $575 million, then drop to $375 million in 2025, $200 million in 2026, $175 million in 2027, and $150 million in 2028.Excluding interest on state deposits, receipts to the state’s General Fund are forecast to increase slightly into 2025 before taking a moderate dip.
General Fund receipts did decline in July compared to July 2023, but Fulford said that was largely because of the timing of some deposits and wasn’t a major point of concern.
General Fund agency budget hearings before Senate and House budget committees will continue next week. Agencies include the departments of corrections and human resources.
In the Education Trust Fund, which supports K-12 and higher education, receipts were up 1.49% in July compared to July 2023 and up 1.66% for the year to $8.4 billion.
“We have generated enough growth from income taxes — mostly corporate — to offset the decline in sales taxes,” Fulford said. “Gross sales tax collections are now down by -$112.7 million, but net receipts are only down by -$40.2 million due to declines in various deductions.”
