Today the Rhode Island Public Expenditure Council (RIPEC) released a report reviewing Rhode Island’s current fiscal situation with a focus on state expenditures. The report identifies primary budget drivers, examines how the state’s fiscal trends compare to other states and outlines issues the state may want to consider as it addresses the FY 2012 budget shortfall.
The fiscal soundness of the state budget relies on ongoing resources supporting current operations, state operations appropriately prioritized and adequately funded, and realistic revenue projections. A budget is a state’s central policy document. It must guide the delivery of a finite amount of resources through expenditures prioritized to reflect the concerns and needs of citizens while accounting for out-year fiscal implications of those spending decisions to ensure continued delivery of services. Although Rhode Island’s economy is beginning to recover after multiple years of economic distress the House Fiscal Staff estimate a FY 2012 budget shortfall of roughly $300 million, which is projected to grow to approximately $375 million by FY 2016.
As the national economy emerges from the recession, the need for Rhode Island to rectify its structural deficit is imperative if the state is to grow and attract new investment. Rhode Island will be well positioned to take full advantage of the looming recovery if it demonstrates sound fiscal management by balancing the state’s budget in the short- and long-term.
RIPEC identified three areas in which Rhode Island has historically, and increasingly, devoted resources: grants and benefits, specifically Medicaid programs; personnel benefits; and local aid. Expenditures within these three categories represent the majority of the state’s budget and appear to represent the most significant drivers of the state’s budget:
- Grants and benefits have accounted for an increasingly larger share of the budget over the past ten years. In FY 2001, grants and benefits represented 43.3 percent of total state spending, compared to almost 50 percent in FY 2011E.
- Personnel expenditures accounted for 12.8 percent of the total increase in expenditures between FY 2001 and the FY 2011 enacted budget. The majority of the increase in personnel expenditures – over 40 percent – was related to growth in benefit costs.
- Although enacted FY 2011 local aid is at roughly the same level as it was in FY 2001 the category continues to represent the third largest category of spending. During this time frame, education aid grew faster than the average rate of growth in general revenue expenditures.
State budgets with projected out-year deficits have become a common event in Rhode Island’s fiscal landscape, inhibiting the state’s ability to make strategic decisions that will stimulate economic growth, support a predictable basic services system and provide funding for long-term investments. In order to achieve these goals, the state must adopt a structural response to the current fiscal situation. Such a task requires taking a comprehensive view of the budget process, which should address a number of critical questions for sound budgeting including:
- Do recurring revenues fund ongoing expenditures?
- Are expenditure and revenue projections realistic?
- Does the state’s budget adequately fund services?
- Is the funding of services and programs prioritized to meet the state’s policy objectives?
- Are programs delivered effectively and held accountable for outcomes?
- Do our current programs produce desired outcomes?
The years of excess growth in spending over recurring revenues must be limited and the state has to take a new approach to stay within fiscal limits without using broad-based taxes or one-time revenues to balance the budget. RIPEC believes that if the state moves toward a long-term plan that relies on an investment-based approach, Rhode Island will be able to eliminate the out-year deficits, sustain existing services and reorder priorities so that the state can focus on attracting and retaining economic investment.