2015 Legislative Update: First Special Session

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07.13.2015

On Friday, July 10, Governor Robert Bentley announced that he was calling the Legislature into special session beginning on Monday, July 13 at 4:00 pm. The special session is necessary because the 2015 regular session ended without a General Fund budget having been adopted. A budget must be in place not later than the start of the State’s 2015–16 fiscal year on October 1.

Legislative leadership’s reaction to the Governor’s decision to start the session now was extremely negative. In their view, the Governor had committed to start the session in mid-August. In several statements, leadership made clear that the preliminary work necessary to build a consensus around possible solutions to the fiscal crises was not complete, so beginning a session now would be unproductive. They therefore announced their intention to assemble on the first day of the special session and immediately recess for three weeks. It is unclear whether any bills will even be introduced on the first day of the session.

Here are some things to know about a special session of the Alabama Legislature:

When a Special Session Takes Place

It is entirely up to the Governor to set the time of the session and the matters to be addressed. Section 122 of the state’s constitution provides that:

The governor may, by proclamation, on extraordinary occasions, convene the legislature at the seat of government, or at a different place if, since their last adjournment, that shall have become dangerous from an enemy, insurrection, or other lawless outbreak, or from any infectious or contagious disease; and he shall state specifically in such proclamation each matter concerning which the action of that body is deemed necessary.

Section 122, Alabama Const. of 1901.

Thus, while the Legislature may disagree with the Governor’s determination, the Constitution does not include them in the decision. They are, however, given exclusive discretion to set their meeting days within a session, and to determine when they will adjourn sine die (final adjournment). Thus, while the session must begin on Monday, July 13 based on the Governor’s call, the Legislature is within its authority to recess until a time of its choosing. They could also adjourn sine die immediately, though in that instance the Governor could issue a new call and require them to reassemble the next day.

What is in the Call and Why it Matters

As noted above, pursuant to Section 122, the Governor has issued what is known as the “call,” in which he sets the date and time for commencement of the session and specifies the issues to be addressed in the session. In his July 10th Proclamation, the Governor listed the following topics to be taken up by the Legislature:

The 2015-16 General Fund Budget; Legislation to shift incoming revenue (on an ongoing basis) from the ETF to the General Fund; Legislation to un-earmark incoming State revenue; Legislation to modify the State business privilege tax to increase revenue to the General Fund; Legislation to increase the tax on tobacco products and to impose a tax on e-cigarettes and vapor products; Legislation to modify (i.e., reduce or eliminate) the State individual income tax deduction for taxes paid under FICA; Legislation to impose a beverage or “beverage product” tax “as an alternative to legislation related to the FICA deduction”; Legislation eliminating the ability of individuals to claim exemption from tax withholding; Legislation to create financing for the Gulf State Park project.

The Governor also purported to specifically exclude from the call any legislation that relates to gaming or gambling, and stated in the call that such measures would require a vote of two-thirds of the Legislature to be considered.

The statement that such matters would require a two-thirds vote was almost certainly unnecessary. According to Section 76 of the Constitution,

When the legislature shall be convened in special session, there shall be no legislation upon subjects other than those designated in the proclamation of the governor calling such session, except by a vote of two-thirds of each House. Special sessions shall be limited to thirty days.

Section 76, Alabama Const. of 1901.

Once issued, or at least once the Legislature has convened, the call may not be amended in order to allow legislation to avoid the two-thirds majority requirement. Opinion of the Justices, 198 So. 2d 304 (Ala. 1967).

Thus, while the Legislature may address any matter not included in the Governor’s call— including gambling—in order for those measures to pass they must receive a two-thirds majority vote. Based on case law, some quite old (well established), the two-thirds majority is of a quorum of the body and not of all elected members. E.g., Woodward v. Skeggs, 46 So. 268 (Ala. 1908); Farmer’s Union Warehouse Co. v. McIntosh, 56 So. 102 (Ala. 1911); Opinion of the Justices, 152 So. 901 (Ala. 1934). In other words, in the Senate, where the presence of eighteen members establishes a quorum, a measure outside the call technically could pass with twelve affirmative votes. This scenario appears unlikely, of course, as it is anticipated that all, or nearly all, members will answer the roll during the special session.

The two-thirds vote required to address a measure outside the call is not a separate roll call vote. Rather, any matter can be place on the calendar, brought up and voted upon. Such a measure cannot pass, however, unless—on the third reading—it receives the required two-thirds majority of the votes of a quorum. The determination as to whether a bill received the requisite vote rests with the Legislature, and case law indicates that Courts will not look behind what is recorded in the Legislative Journals. E.g., BJCC Auth. v. Birmingham, 912 So. 2d 204 (Ala. 2005).

As noted above, the Governor’s call specifically provides that matters related to gambling are not to be considered and require a two thirds majority to pass. While that statement certainly is accurate with regard to legislation regarding gambling, there is case law indicating that Constitutional Amendments are treated differently from other bills during special sessions. Section 284 of the Constitution provides that a Constitutional Amendment must receive a three-fifths (3/5ths) vote of all members elected in both bodies, and then must be approved by a simple majority of the electorate. In a 1956 Opinion of the Justices, the Alabama Supreme Court found that, during a special session, the three-fifths requirement in the Constitution for Amendments controlled, and not the two-thirds majority set forth in Section 76. Opinion of the Justices, 84 So. 2d 767 (Ala. 1956). That said, it is not clear whether the current Supreme Court would follow precedent, or would overrule the earlier case.

Because some of the measures that have been discussed regarding gambling would almost certainly have to be Constitutional Amendments, the question of which margin is needed is more than merely academic. Assuming all members answer the roll, the difference between a two-thirds and a three-fifths majority in the Senate is 24 votes to 21 votes. In the House, the difference is 70 versus 63.

One hurdle that is removed in a special session is the Budget Isolation Resolution. This procedural vote—which is a separate additional vote required by Amendment 448 to the Constitution—specifically applies only in a regular session. Matters within the call therefore only require one simple majority vote on third reading in order to pass.

How Long the Session Can Last

A special session may only last thirty calendar days. Additionally, Amendment 339 limits the number of meeting days allowed during those thirty calendar days. According to that Amendment,

Beginning in the year 1976 regular sessions of the legislature shall be held annually on the first Tuesday in May, or on such other day as may be prescribed by law, and shall be limited to 30 legislative days and 105 calendar days. Special sessions of the legislature convened in the manner provided by this Constitution shall be limited to 12 legislative days and 30 calendar days.

Amendment 339, Alabama Const. of 1901.

As previously noted, Legislative leadership has indicated that they intend to recess immediately upon convening until August 3rd. This would mean that the first day (July 13) would simply be subtracted from the allowed twelve meeting days, leaving eleven to complete the work. As a practical matter, this creates no significant problem because bills require only five legislative days to make their way through the process. Thus, if all goes according to the Legislature’s stated plan, the effective first day of the session will be August 3rd. The 30th day of the Special Session will be Tuesday, August 11th. Including August 3rd and the 11th (and including weekend days), the Legislature will have nine calendar days to complete its work.

What to Expect

Obviously it is impossible to predict what will happen during the special session. The possibilities range from the passage of the simple, bare bones budget passed during the regular session, to some combination of taxes and fees, to the introduction in Alabama (if approved by the voters) of a lottery and full-scale casino gaming. Any forecasts of what is to come is speculation at best. However, here is a rundown of some of the measures expected to be addressed.

The Budget

What the 2016 General Fund Budget looks like depends entirely on the success or failure of all of the other measures included in the Governor’s call. During the regular session, the Legislature passed a bare bones budget that would have cut spending overall by $204 million , or approximately 11%, when compared to the current fiscal year. The Governor immediately vetoed the budget, which is why the special session is necessary.

Revenue Measures

Most of the Governor’s call is a list of measures that would increase revenue. Prior to the regular session, the Governor insisted that the State needed additional revenue totaling at least $541 million per year. That number has been lowered, in part as a result of the BP settlement, and his current target for increased revenue is in the $310-$320 million range. Revenue measures must originate in the House, so look for the measures discussed below to originate in that body.

Business Privilege Tax

As much as any measure being discussed, there seems to be some consensus on changes to the Alabama Business Privilege Tax (BPT). Alabama currently imposes a BPT that is based on a company’s apportioned Alabama income. The current tax on most businesses (not for financial institutions and insurance companies) is capped at $15,000 per year. During the regular session, Rep. Elaine Beech (D–Chatom) introduced a bill that proposed to increase the cap to $22,000, while simultaneously exempting businesses with a net worth of less than $10,000 from the $100 minimum payment. The bill was estimated to raise $39 million per year. The bill was not able to receive a vote on the House floor prior to adjournment.

Tobacco Tax

There appears to be some support for an increase in the Alabama tobacco tax, though whether there is enough to pass a bill is impossible to say. The figure being discussed most often is a $0.25 increase, which would put the per pack tax in Alabama at $0.675. This proposal was introduced as HB572 by Representative Patricia Todd (D–Birmingham) during the regular session but never made it to the House floor. The fiscal note for the bill put the estimated increased revenue at $66 million per year. That proposal also decreased the discount amount that was retained by distributors. It is not clear whether the legislation to be introduced in the Special Session will include the discount reduction. More important, though, it appears likely that the proposal will include a minimum mark-up provision, essentially fixing prices on tobacco in Alabama to prop up smaller sellers of the product.

Governor Bentley’s call also included reference to the imposition of a tax on vapor and e-cigarette products in Alabama. These products are not currently subject to a state tax (other than the sales tax).

FICA Deduction

Alabama tax law allows individuals to deduct from their State tax return the amount that they pay to the Federal Government for Social Security and Medicare (commonly referred to as the Federal Insurance Contribution Act, or FICA, exemption). That amount is typically 7.65% of a person’s income.

In discussions with lawmakers, the Governor has indicated that his plan for eliminating this deduction would have only a minimal effect on each taxpayer, but because the specific proposal has not yet been released, the potential revenue generated, as well as the sources of possible opposition, are not yet known.

Soft Drink Tax

There are some pockets of support for the institution of a tax on soft drinks, though those pockets appear to be significantly smaller than for other measures such as a tobacco tax. The Governor has released no details regarding a possible soda tax at this time. Many have expressed doubt that a measure to impose additional costs on items, like soft drinks, purchased by the great majority of Alabamians can find the votes needed to pass.

The Governor’s call appears to contemplate the soft drink tax as an alternative to the elimination of the FICA deduction. In fact, the call states that a soft drink tax is proposed “as an alternative to the amendment of the individual income tax deduction for taxes paid under FICA.” There does not appear to be any authority for the Governor to limit the Legislature on alternative measures listed in a call (i.e., pick one or the other, but not both). See e.g., Opinions of the Justices, 171 So. 902 (Ala. 1936) (recognizing the Legislature’s authority to address and modify measures listed in the call as they desire).

Exemption from Withholding

This proposal was a piece of Governor Bentley’s $541 million tax package at the start of the 2015 Regular Session. It was a small piece, however, estimated to raise only $12 million per year. House Bill 240 was introduced by Representative Ken Johnson (R-Moulton), but did not receive a vote in the House. This legislation is not expected to have significant opposition, though.

Shift of Revenue from the Education Trust Fund (ETF) to the General Fund

A point of debate in the Regular Session was whether revenue streams, in particular use taxes, would be shifted from the ETF to the General Fund. The goal of both the Governor and some members of the Legislature has been to find growth streams that could be moved to the General Fund to help its revenue issues going forward. The bill failed towards the end of the session based primarily on a disagreement regarding how much would be transferred.

The success of the revenue shift proposal in the special session likely hinges on other revenue measures—such as the elimination of the FICA deduction—that would replace the revenue lost by the ETF.

BP Settlement Funds

On July 2nd, the Governor and Attorney General Luther Strange announced that the State of Alabama, along with Louisiana, Mississippi and Florida, had reached a settlement with BP regarding the 2010 Deepwater Horizon explosion and massive oil release. That settlement includes approximately $1 billion in relief for Alabama for economic damages. The payments are to be made over an eighteen year period following final approval of the settlement. Under state law, those funds go to the General Fund by default, though the Legislature has the authority to appropriate the finds as they see fit.

Initially, based on the Governor’s statements at the press conference, it was thought that the State would receive the settlement in equal portions of roughly $54 million per year. Last week, however, it was reported that the State would receive an initial payment of approximately $200 million once the settlement was approved (year 0), would receive no payments in years 1 and 2, and then would receive approximately $53 million per year for the remaining period of the settlement.

It is a near certainty that there will be controversy and debate over how the BP settlement funds are to be used. The Governor and the General Fund Budget Chairs, Senator Arthur Orr (R–Decatur) and Rep. Steve Clouse (R–Dothan) have expressed their preference that the funds be used to pay back money previously borrowed from various funds to prop up the ailing General Fund. However, Senate Education Budget Chair Trip Pittman (R–Montrose) has stated that he would like to see the money sent to the ETF.

While an initial payment from BP of $200 million might seem like it could solve most of the General Fund budget problems in the short term, there is no way of knowing when those funds would become available. The settlement has not yet been approved by the court, and it appears unlikely that it will be prior to the start of the 2016 Fiscal Year. That said, while the BP settlement does not solve the budget crisis, it appears that it will greatly assist the Legislature in its ultimate task of closing the budget gap.

Gambling Measures

President Pro Tem of the Senate Del Marsh (R–Anniston), has put forth a plan to would rely on revenue from gambling to fix the budget deficit. Specifically, Senator Marsh proposes a Constitutional Amendment (or Amendments) that would allow Class III casino gaming at four of Alabama’s existing dog racing tracks, would institute a state lottery, and would encourage a compact with the Poarch Band of Creek Indians (PCI). PCI currently operated three casinos in the state at which they operate Class II gaming—specifically video bingo. Senator Marsh commissioned a study by Auburn University at Montgomery, which found that the potential revenue from his plan is in the neighborhood of $420 million, the great bulk of which would be from a lottery.

Recently, a group led by former Alabama Power CEO Charles McCrary, Harbert Management Corporation CEO Raymond Harbert and former Auburn Football Coach Pat Dye was formed to advocate for the Marsh Plan. The “Alabama Jobs Foundation” is expected to play an active role in lobbying the members of the Legislature in favor of Marsh’s proposals, and likely will work to influence public opinion on the issue as well.

As noted above, the Governor appears to believe that his specific exclusion of gambling measures in the call serves to increase the vote margin necessary for the Marsh Constitutional Amendments from three-fifths to two thirds, though it is unclear upon which this theory is based.

Gulf State Park

Unrelated to the budget issues, the Governor has also included in the call a measure that would create funding for the construction of a Gulf State Park Convention Center. The Governor’s proposal would use approximately $84 million in already received BP settlement funds and $50 million in bonds to create a hotel and meeting center at Gulf State Park. Legislation on this issue came within one step of passage during the regular session.

Conclusion

Like every legislative session, making predictions about what will happen in the next thirty days is probably close to useless. The following is known, however: Alabama has a shortfall in the General Fund Budget of at least $200 million over the current Fiscal Year budget. Moreover, that deficit does not include money that is required, under current law, to be repaid to various trust funds, rainy day funds and the Federal Government. What is not known is whether the budget deficit and the amount owed these funds has yet created enough desire among the electorate and the members of the Legislature to accept the revenue measures favored by the Governor.