Providence, R.I. – The Rhode Island Public Expenditure Council (RIPEC) released a report today analyzing the state’s fiscal year (FY) 2023 budget and the fiscal outlook in future budget years. The FY 2023 budget is the state’s third consecutive annual budget characterized by a massive influx of federal COVID-19 relief dollars and the second consecutive annual budget marked by large state revenue surpluses.
“While Rhode Island’s state budget increased overall, this was mostly due to extraordinary levels of one-time revenues, including surplus funds and federal American Rescue Plan Act allocations,” said Michael DiBiase, President and CEO of RIPEC. FY 2023 total annual spending exceeded $13 billion, in contrast to total annual spending below $10 billion in FY 2019, the last fiscal year unaffected by the pandemic. State general revenue spending also reflects substantial growth (up 28.2 percent over the FY 2019 enacted budget).
In the enacted FY 2023 and revised FY 2022 budgets, the General Assembly adopted many of Governor McKee’s ARPA spending proposals (totaling $1.24 billion) while making some changes in the amounts of spending and adding some new spending items. The budget also utilized $877.5 million in one-time surplus funding, with most of this surplus transferred to the Rhode Island Capital Plan Fund (RICAP).
“The General Assembly wisely directed these one-time federal and surplus funds to one-time investments, with the exception of some modest items that might implicate future funding commitments,” DiBiase said.
The Assembly’s spending plan spreads ARPA funding across 46 separate initiatives; likewise, the use of surplus funds in the enacted FY 2023 budget is spread across many individual expenditure items. As a result, the report concluded that the impact of the state’s ARPA and surplus funding is likely to be more broad-based than targeted. Moreover, the multiplicity of initiatives and projects will make the planning, oversight, and execution of these investments more challenging.
RIPEC also found that the budget is characterized by large increases in operating expenditures for a broad range of health and human services programs, primarily through provider rate increases. General revenue spending for health and human services has grown from $1.46 billion in FY 2019 to $1.90 billion in FY 2023—an increase of 29.7 percent. In its report, RIPEC found that, while the enacted budget includes certain structural reforms in the health and human services area, the budget essentially reflects an additive exercise of funding increases to existing programs, along with some new initiatives. RIPEC also found that the budget contains very little in the way of consolidating or eliminating programs that may be ineffective or inefficient.
K-12 education also received large increases in spending in the FY 2023 budget despite lowered enrollment and large allocations of federal funding currently available to school districts. Based on actual enrollment figures, state aid per pupil increased by 17.4 percent between FY 2020 and FY 2023, an annual average increase of 6.4 percent. RIPEC reported that the Assembly made these large aid increases without imposing any new requirements or accountability measures. Similarly, the Assembly has appropriated pandemic relief funds to school districts without any strings attached.
The enacted budget contains no major changes to broad-based taxes but does include one major revenue initiative—a one-time child tax rebate program expected to cost $43.8 million. The budget also utilizes $64.4 million in surplus general revenues to advance the final year of the motor vehicle excise tax phase-out.
With respect to the state’s budget outlook, RIPEC concluded that the projected decline in state revenues from FY 2022 to FY 2023 is likely overly conservative. Noting that recent revenue assessment reporting is already ahead of May estimates, RIPEC indicated that the structural revenue gap for future budget years would be substantially reduced or eliminated if this trend continues. RIPEC also noted that a recession or economic downturn would alter this calculation, as would increased expenditure commitments due to inflation or other factors.
“Despite recent strong revenues and excess funds, now is the time for the governor and General Assembly to develop sustainable long-term plans for our largest areas of spending—health and human services and K-12 education—and commit greater resources to the oversight and execution of the dozens of new projects and programs funded in the FY 2023 budget,” said DiBiase. “To the extent that there are excess continuing revenues, the state should take the opportunity to improve our business tax climate, which is ranked 40th in the nation, and increase the state’s rainy day fund,” he added.
RIPEC offers to policymakers the following considerations:
- Given the economic uncertainty ahead and the temporary nature of federal relief funding, the state needs to be vigilant in avoiding spending commitments beyond available resources.
- The state needs to commit greater focus and resources to the planning, oversight, and execution of the many new projects and programs contained in the enacted FY 2023 budget.
- Policymakers should reconcile state education aid consistent with the school funding formula or reprogram excess state resources to reform the formula.
- Policymakers need to constrain the growth in health and human services spending and streamline and restructure the delivery of health and human service programs.
- The state should consider increasing the rainy day fund.
- The state should seek to improve its business tax climate.