PROVIDENCE, R.I. – A new Rhode Island Public Expenditure Council (RIPEC) report released today analyzes Governor Daniel J. McKee’s fiscal year (FY) 2022 budget, revenue projections, and new federal resources. The report focuses on the extent to which the budget utilizes one-time federal funding to pay for ongoing state expenditures, analyzes the projected increases in available state resources since the budget was released in March, and summarizes the federal resources available to the state under the American Rescue Plan Act (ARPA). The report is the fifth in RIPEC’s series on the fiscal impact of COVID-19.
“Rhode Island’s state budget outlook has stabilized due to a dramatic jump in state revenues and federal funding,” said RIPEC President and CEO Michael DiBiase. “For the first time in many years, Rhode Island finds itself in the fortuitous position of having little or no structural deficit, and policymakers will need to preserve this stable budget situation by avoiding spending commitments beyond the state’s ability to pay.”
“Policymakers should also be deliberate in their investment of once-in-a-lifetime federal ARPA funds and resist the temptation to create new programs and expand existing programs that the state would be unable to sustain once the federal funding is gone,” DiBiase added.
Governor McKee’s proposed FY 2022 budget makes very little use of federal funding to pay for state expenditures in FY 2022 but relies heavily on federal funds to pay for state expenditures in FY 2021. The budget also defers $70 million appropriated to repay the Rhode Island Capital Plan Fund in connection with the rainy day fund transfer in FY 2020, and relies on $67.7 million in revenues from the taxation of Paycheck Protection Program (PPP) loans exceeding $150,000, a one-time event. In total, the FY 2022 budget depends on $418.9 million in one-time items. Not surprisingly, the governor’s proposed budget projects future deficits ranging from $374.4 million in FY 2023 to $318.9 million in FY 2026.
The budget picture has brightened considerably since the governor released his budget in March, however. Incorporating both revised estimates of the May Revenue and Caseload Estimating Conferences and savings because of increased federal funding, the FY 2021 Third Quarter Report from the Office of Management and Budget projected a general revenue surplus of $416.8 million. This projected surplus, in addition to a positive variance for FY 2022 of $155.4 million projected at the May Revenue and Caseload Estimating Conferences over November estimates, total a remarkable $572.2 million.
Importantly, the May 2021 estimates do not include revenues connected with the taxation of PPP loans, thereby reversing projected revenues of $133.3 million included in revenue estimates at the November 2020 Conference. Nor do these surplus revenues include any funding from ARPA.
Under ARPA State and Local Fiscal Recovery Funds, Rhode Island state government will receive an allocation of $1.1 billion, and local governments in the state will receive a total of $536.9 million. ARPA also includes specific funds, such as: $112.7 million for capital projects, $415 million for K-12 education, $90.8 million for public and private higher education, $245.3 million for rental assistance, $94.4 million for childcare, $78.9 million for public health, and funding for several other programs.
In light of this budget picture, RIPEC recommends several areas of priority for policymakers to consider:
- The state should avoid spending beyond available revenues and minimize the structural deficit going forward. It is critical that the state’s stable budget situation be preserved by avoiding spending commitments in the FY 2022 budget beyond available revenues.
- The state should fully repay the Rhode Island Capital Plan Fund in connection to the $120 million rainy day fund transfer used to balance the FY 2020 budget. Given the greater state revenues now available, and the state’s considerable capital needs, this repayment should be completed in FY 2022.
- Policymakers should avoid both raising the state personal income tax and applying state income taxes on PPP loans. Doing so is unnecessary given the improved budget outlook and would negatively impact the state’s economic recovery.
- Policymakers should resolve the spending issues connected with Eleanor Slater Hospital. Eleanor Slater Hospital represents arguably the most troubling spending issue in the state budget given the sizable loss and uncertainty relating to federal reimbursement, extremely high per patient costs, and the recent reversal of proposed budget savings.
- The state should follow a deliberate process to plan expenditures of ARPA funds. ARPA funds represent a once-in-a-generation opportunity to pursue transformative investments that could potentially change the trajectory of our state’s economy and quality of life.
An executive summary is available here.