PROVIDENCE, R.I. – The Rhode Island Public Expenditure Council (RIPEC) released a report today analyzing Governor Daniel J. McKee’s fiscal year (FY) 2023 budget, including American Rescue Plan (ARPA) expenditures, the state budget surplus, and the fiscal outlook for future budget years. The report found that total spending of $12.82 billion proposed in the governor’s budget is 34.0 percent larger than the FY 2019 enacted budget, the last year unaffected by the pandemic. While this increase is primarily driven by federal funds, proposed state general revenue spending of $4.73 billion represents an increase of 4.0 percent over FY 2022. The state’s average annual increase in general revenue spending of 5.3 percent between FY 2019 and FY 2023 is markedly higher than the 3.5 percent annual growth rate averaged from FY 2014 to FY 2019.

“Rhode Island’s state budget situation has been dramatically affected by the COVID-19 pandemic over the past three fiscal years,” said Michael DiBiase, President and CEO of RIPEC. “With higher-than-anticipated revenue projections and unprecedented levels of federal funds available, the state should avoid spending one-time funds on recurring expenditures and minimize the structural deficit going forward. RIPEC also urges state policymakers to tackle longstanding issues like Eleanor Slater Hospital and K-12 education, and to increase the rainy day fund.”

The governor’s budget does not include any broad-based tax increases—in fact, Governor McKee’s budget proposes minor tax cuts. The centerpiece of the governor’s budget is proposed expenditures of $1.24 billion in ARPA funds between FY 2022 and FY 2027. The governor’s proposed ARPA expenditures generally are one-time investments that appear well-suited for one-time funds, but some proposed ARPA spending items may require general revenue commitments in future budget years. Likewise, the proposed budget allocates most of the general revenue surplus to one-time items, but roughly $118.2 million of the projected general revenue surplus of $618.4 million is used to pay for continuing expenditures, implicating a potential structural deficit in future years. The governor’s budget includes a projected deficit for FY 2024 of $215.3 million, and although more recent revenue projections suggest the deficit will be smaller, the gap is likely to be significant with the potential to increase if one-time spending items require further general revenue commitments.

Eleanor Slater Hospital (ESH) continues to be a source of budget issues related to federal reimbursement dating back to 2019. The governor’s budget assumes savings from a structural reorganization of ESH that would establish a new 100-bed medical facility at the Zambarano Campus, while the 52-bed Benton facility would become the Rhode Island Psychiatric Hospital.

Also noteworthy in the governor’s FY 2023 budget is proposed spending of $49.7 million to hold school districts “harmless,” such that districts would not experience a reduction in state aid from the amount appropriated in FY 2022 because of a decline in enrollment. The FY 2022 enacted budget contained a provision which calculated state aid for districts using the larger of March 2020 and March 2021 enrollment data.

Based on its analysis, RIPEC offers several recommendations to policymakers:

• The state should avoid spending beyond available revenues and minimize the structural deficit going forward. State general revenue spending has been growing at a rate significantly greater than the historical rate, and this growth trend is likely not sustainable in the long term.

• The state should spend one-time federal funding on one-time items and prioritize those investments that produce long-term savings or have the potential to stimulate economic growth. With some limited exceptions, the governor generally has proposed to use one-time ARPA funding on one-time items; the General Assembly likewise should resist the temptation to use ARPA funds for continuing expenditures.

• Policymakers should be more assertive in ensuring that federal funding for K-12 education be used to improve student outcomes. The federal government has allocated $646.3 million in pandemic relief funds for elementary and secondary education in Rhode Island. Given the urgent need to address student learning loss resulting from the pandemic and the very low student proficiency levels revealed by the most recent assessments, policymakers should be more assertive in placing requirements and oversight over these federal funds.

• Policymakers should resolve the spending issues connected with Eleanor Slater Hospital. ESH represents arguably the most troubling spending issue in the state budget. Policymakers should assess whether the transformation plan proposed by the governor would place ESH on a more fiscally responsible and sustainable plan.

• The state should consider increasing the rainy day fund and the Rhode Island Capital Plan Fund (RICAP). The current availability of one-time federal and surplus funds presents an excellent opportunity to increase the contribution to the rainy day fund over time, and to also increase RICAP to respond to the state’s large unmet capital needs.

• The state should seek to improve its business tax climate and resist efforts to increase taxes. The current general revenue surplus and abundance of federal funds should encourage policymakers to focus on improving Rhode Island’s business tax climate, which ranked 40^th among states in a recent Tax Foundation analysis, and resist proposals to raise taxes on businesses.

An executive summary is available here.