The Governor’s FY 2025 Budget Proposal: A Transitional Budget as the State Faces More Constrained Revenues

PROVIDENCE, R.I. – The Rhode Island Public Expenditure Council (RIPEC) released a report today analyzing Governor Daniel J. McKee’s proposed fiscal year (FY) 2025 budget, revisions to the FY 2024 budget, and the state’s fiscal outlook ahead of the May Revenue Estimating Conference.

RIPEC found that the governor’s proposed budget represented a transitional spending plan between a series of budgets flush with abundant federal pandemic relief funding and more challenging fiscal times ahead. While state general revenues have grown by only $135.8 million (2.6 percent) from FY 2024 to FY 2025, the governor budget relies on surplus dollars and, to a lesser extent, federal funding to pay for operating expenses. The governor’s budget projects a deficit at nearly $250 million for FY 2026 and higher in FY 2027 and FY 2028.

“By using one-time surplus and federal resources, the governor’s FY 2025 budget does not fully reflect the more difficult budgetary choices anticipated in the next fiscal year and beyond,” said Michael DiBiase, President and CEO of RIPEC. “The governor’s use of one-time dollars to fund continuing expenses contributes to a sizable structural deficit for next year and beyond.”

From FY 2024 to FY 2029, state general revenues are projected to grow at a rate of 2.9 percent, comparable to the period before the pandemic, but dramatically lower than the 6.4 percent annual growth rate over the previous five fiscal years.

RIPEC’s report analyzes certain key spending areas that raise challenges for policymakers. A fast-growing component of the state budget, health and human services expenditures are driven in large part by spending on Medicaid, which alone encompasses nearly one-third of all general revenue expenditures. State general revenue spending on Medicaid has grown at an average annual rate of 9.0 percent since FY 2019—significantly higher than the overall rate of general revenue spending growth. For FY 2025, the governor is seeking to increase general revenue spending on Medicaid by $107.5 million (6.7 percent) over the FY 2024 enacted level.

The governor’s proposal to fund K-12 education includes a major revision to the funding formula for education in the form of a cap on annual increases to the core instructional amount. The governor also proposed to increase the categorical funding bonus for multilingual learners (MLL). More robust March 2024 student enrollment figures would enhance the governor’s education aid proposal, which was based on lower October student counts. However, despite the proposed increase in MLL funding, all school districts, except Providence and Central Falls, receive less aid under the governor’s plan than under current law.

RIPEC also cites transportation funding as presenting a critical long-term fiscal challenge. Greater federal funding allocations require greater matching contributions by the state while potential match funding for replacement of the Washington Bridge and a sizable deficit at RIPTA add to the demand for increased state transportation dollars. Adding to this challenge are declining revenues from the gas tax—the state’s largest funding source for transportation—and a suspension of the state’s truck toll program by a federal court ruling pending the state’s appeal.

Rhode Island’s serious housing affordability challenges also place pressure on the state’s finances. Starting in FY 2021, the General Assembly made historic investments of $361.2 million to produce affordable housing, funded in large part by federal pandemic relief funds. In his budget, the governor has proposed a $100.0 million housing bond, by far the largest ever presented to the voters. However, RIPEC’s analysis found that these investments will produce a limited number of net new affordable units due to rapidly rising development costs and subsidy requirements that are now approaching $500,000 and $150,000 per unit, respectively.

Based on this analysis, RIPEC made the following recommendations:

  • The General Assembly should curtail spending growth in crafting the FY 2025 budget.
  • Policymakers should manage the growth of health and human services spending.
  • The Assembly should allocate state education aid to better support urban core districts.
  • Policymakers should develop a sustainable finance plan for transportation.
  • The state should dedicate greater resources to affordable housing while also improving its return on investment.
  • The General Assembly should seek to continue to improve the state’s business climate.

An executive summary of the report is available here.

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