A new report from the Rhode Island Public Expenditure Council suggests lawmakers should start preparing for a leaner fiscal future now with the federal stimulus funding spigot shutting down and inflation driving up expenses. (Photo by Janine L. Weisman/Rhode Island Current)
A team of independent policy analysts gave high marks to elements of Gov. Dan McKee’s proposed fiscal $13.7 million 2024 budget, but the praise was undercut by a warning.
Good times are ending soon, and lawmakers should start preparing for a leaner fiscal future now as federal stimulus funds run dry and inflation drives up expenses, according to the Rhode Island Public Expenditure Council (RIPEC) report published on Wednesday.
“The governor’s FY 2024 budget appears to be the last of a series of flush state budgets fueled by enormous allocations of federal pandemic funding and very large general revenue surpluses,” RIPEC President and CEO Michael DiBiase said in a statement.
“Policymakers have had a relatively easy time managing expenditures, but the state is now entering a period in which pandemic-related federal funding will be running out and state general revenue growth will be considerably more constrained. Policymakers will need to avoid unsustainable spending commitments and be prepared to curtail the level of spending growth.”
The 31-page report comes as legislators prepare to unveil their own version of the state’s tax-and-spend plan, which will likely include substantial revisions to the budget proposal McKee put forth in January. Hanging heavy over upcoming budget deliberations are revised economic forecasts which cut $61 million from the surplus for the current fiscal year, while also projecting slower revenue growth as inflation curtails job gains – and in turn, those tax revenues.
Indeed, the state’s general revenue will grow by 2.5% a year on average over the next five years, according to revised estimates, which is “dramatically lower” than the 6.6% annual revenue growth rate the state experienced from fiscal 2019 to 2023, RIPEC said.
This slowdown comes as the state finishes doling out its $1.1 billion federal COVID-19 recovery funds, $610 million of which is included in McKee’s proposed fiscal 2024 spending plan.
RIPEC lauded McKee for focusing the federal windfall on one-time and non-recurring investments, a prudent strategy given that federal guidelines require the state to allocate its stimulus funds by December 2024.
Setting aside the influx of cash from pandemic relief, the governor was tasked with what DiBiase called a “tight” budget, with fiscal 2024 revenues only projected to grow by $81.5 million, according to revised estimates.
RIPEC also gave McKee’s proposal high marks for its inclusion of tax relief to residents and businesses, including a proposed .15-percentage point cut to the state sales tax and deferral of a gas tax increase. Other “positive” elements from McKee’s plan, according to RIPEC, are increasing the state’s reserve, or rainy day fund, to at least 6% of its revenue (above the current 5% minimum); a $45 million investment in the bioscience industries; $25 million for an East Providence marine terminal supporting offshore wind projects; and tweaks to the much-maligned education funding formula that determines state aid to students in public schools.
“We like tax relief and we like investments in growing the economy,” DiBiase said in an interview. “We credit [the governor] for taking the money and making investments in things that could grow more later.
Still, there’s room for improvement: increasing the rainy day fund even higher than 6% of revenues, which remains below the national median 11.9% of state general revenue. A more daunting recommendation is the call to overhaul the education funding formula to match federal calculations while ensuring more state dollars go to economically disadvantaged and multilingual students.
“The governor’s approach is not comprehensive and instead consists of several ad hoc measures that seem to be more intended to address funding gaps for individual districts than to establish coherent and consistent policy for the long term,” the report stated.
And the time is “perfect” to restructure given the inflow of federal support, DiBiase said in an interview.
“If the governor’s proposal was enacted, it would just take us away from overhauling the formula,” DiBiase said.
No less arduous is the recommendation to revamp the state’s system for delivering health and human services.
“Spending demands in this area will likely present the most challenging issue for the fiscal 2025 budget,” the report stated. “Policymakers should focus on consolidating programs and streamlining services.”
Other recommendations included improving the state’s business tax climate through a tangible tax exemption, legislation for which is already making its way through the Rhode Island Senate, and focusing on transportation to ensure the state can maximize federal funding that will require a state match. Especially because of other funding constraints, including declining gas tax revenue and the $70 million in lost truck toll revenue the state expects to backfill after a U.S. A District Court judge ruled its truck toll was unconstitutional in 2022.
“Given these funding challenges, the governor’s proposal to temporarily suspend the gas tax appears questionable,” the report stated.
And with the state already boasting a competitive sales tax rate, further decreasing it might not be the best form of tax relief either, DiBiase said.
Above all, the report urged lawmakers to take the long view, thinking not just of the immediate priorities when shaping next year’s budget but the issues that “will require attention for fiscal 2025 and beyond:” pre-K seats, state hospital patient costs, the rising cost of the East Providence marine terminal and other construction projects and a structural gap in workers’ compensation fund among them.
On worker’s compensation, DiBiase said the deficit was “not a large amount of money but it’s fairly unusual for the state to subsidize that.”
McKee’s office did not immediately respond to inquiries for comment.
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