RIPEC Analyzes the Governor’s FY 2024 Budget and the State’s Fiscal Outlook

Providence, R.I. – The Rhode Island Public Expenditure Council (RIPEC) released a report today analyzing Governor Daniel J. McKee’s proposed fiscal year (FY) 2024 budget, revisions to the FY 2023 budget, and the state’s fiscal outlook.

RIPEC found that the governor’s proposed FY 2024 budget represents the continuation of a level of total spending and state general revenue spending that is dramatically higher than just five years ago, as illustrated in Figure 1.

“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,” said Michael DiBiase, President and CEO of the Rhode Island Public Expenditure Council.

RIPEC reports that FY 2024 also marks the beginning of more constrained revenues forecasted for the next several years. “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,” DiBiase continued. “Policymakers will need to avoid unsustainable spending commitments and be prepared to curtail the level of spending growth.”

As depicted in Figure 2, state budget forecasters anticipate that revenue growth will continue to be constrained at an average annual growth rate of 2.5 percent between FY 2024 and FY 2028. This forecasted revenue growth significantly lags the pre-pandemic (FY 2014 – FY 2018) average annual growth rate of 3.5 percent and is dramatically lower than the average annual growth rate of 6.6 percent for FY 2019 through FY 2023. 

In its analysis, RIPEC noted Governor McKee’s responsible approach to allocating all but $87.7 million of $610.0 million in one-time surplus funds to one-time, non-recurring items in his FY 2024 spending plan, given relatively tight revenues. RIPEC also credited the governor for recommending several proposals to provide tax relief to Rhode Islanders and improve the state’s competitiveness.

The governor’s proposed budget also included other recommendations to improve the state’s fiscal position and enhance the economy, including an effective increase in the state’s rainy day fund from 5.0 percent to 6.0 percent of general revenues, new investments in bioscience, and additional funding for the South Quay terminal in East Providence.

The governor’s FY 2024 budget proposal seeks to address the school funding formula, which has not operated as intended over the last two fiscal years. DiBiase noted that “while the governor has recommended some positive changes to the formula, the state should address education funding comprehensively instead of introducing 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.”

Based on the report’s findings and analysis, RIPEC makes the following recommendations to policymakers:

  • Given the constrained revenue outlook for FY 2025 and beyond, the state needs to avoid spending commitments beyond available resources and prepare to curtail the level of spending growth.
  • The General Assembly should approve the governor’s proposed creation of a supplemental rainy day fund and should consider further increases to the fund. At 6.0 percent of revenues, Rhode Island’s rainy day fund would still be well below the median percentage among states of 11.9 percent of general revenue expenditures.
  • Policymakers should reconcile state education aid consistent with the funding formula and reform the formula to direct more aid to economically disadvantaged and multilingual students.
  • Transportation funding deserves special focus to ensure that a sufficient state match is available to access increased federal infrastructure funding. Rhode Island is set to receive $885.0 million in transportation funds under the federal Infrastructure Investment and Jobs Act, but this aid requires an increased allocation of state matching funds. At the same time, the state’s commercial truck tolling program has been ruled unconstitutional, resulting in substantial potential lost toll revenues, and gas tax revenues are projected to decline given the increasing prevalence of electric and hybrid vehicles.
  • Policymakers should focus on the health and human services delivery system since spending demands in this area likely will present the most challenging issue for the FY 2025 budget. Inflationary forces will likely lead to considerable pressure to increase expenditures and rates, which will be difficult given future revenue constraints. Policymakers should focus on consolidating programs and streamlining delivery systems.
  • The state should seek to improve its business tax climate. Rhode Island’s business tax climate was ranked 42nd highest (ninth worst) by the Tax Foundation. The governor has proposed tax relief measures, but the leading recommendation—to slightly reduce the sales and use tax—relates to a tax in which Rhode Island is already relatively competitive. The state should consider mitigating the relatively high property tax burden on businesses, and in particular should consider approving pending legislative proposals to provide a statewide tangible tax assessment exemption. 
  • There are several expenditure issues that will require attention for FY 2025 and beyond. Several spending items will need to be assessed given the constrained revenue forecast, including a plan to more than double the number of pre-K seats, the high per-patient cost of state hospitals, the sharp increases in the projected cost of the South Quay terminal project in East Providence, and the structural gap between revenues and administrative expenditures in the workers’ compensation fund.

An executive summary of the report is available here.

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