RI Faces Severe Budget Challenges From COVID-19 Crisis Without More Federal Aid

PROVIDENCE, R.I. (April 2020) – A new Rhode Island Public Expenditure Council report released today finds that unless more federal assistance is provided, the State of Rhode Island will likely have severe budget challenges as a result of the economic fallout connected with the COVID-19 public health emergency. The report, “The COVID-19 Economic Crisis: Federal Assistance and Rhode Island’s Budget,” analyzes the federal funding provided to Rhode Island under recent legislation. It is the first in what will be a series of RIPEC reports on how COVID-19 impacts Rhode Island’s fiscal stability and economic security.

“While the nature of Rhode Island’s budget challenges will depend in large part on the longevity of the crisis and the availability of additional federal assistance, state policymakers will need to make important choices about how to use the limited federal and state funds available,” said RIPEC President and CEO Michael DiBiase. “The COVID-19 crisis will create both challenges and opportunities. Lawmakers and policy staff have difficult work ahead of them and they must be willing to consider the short-term and long-term implications of how they begin to solve this budget challenge.” 

Federal assistance is likely to cover most, if not all, of the state’s unbudgeted expenditures in response to COVID-19, but federal assistance will not offset the substantial revenue losses expected to result from the crisis as the laws are currently written. Small states like Rhode Island have received larger per capita relief from the federal government under the CARES Act. Despite this, Rhode Island would benefit from more flexibility to direct unused relief funding to make up lost revenue caused by the COVID-19 shutdown.

RIPEC’s report emphasizes that Rhode Island leaders are wise to utilize one-time federal and state funding to make investments to support and accelerate economic recovery. While the state needs to maintain essential social services for those in need, particularly those most affected by the COVID-19 crisis, it also needs to continue to protect and advance Rhode Island’s progress in improving its economy. 

There remains great uncertainty as to the length and impact of the crisis, but under any scenario the state is expected to experience large losses in revenues from the income tax, sales tax, gambling, and other revenue sources. Unless subsequent federal legislation provides additional assistance to the states, Rhode Island will likely need to use its so-called “rainy day” fund to bridge the shortfall in the current year. However, because of an atypical statutory requirement that requires the state government to make up any funds transferred back to the general fund the following year, tapping the rainy day fund in the current year would increase budget pressures in the next fiscal year. This challenge is compounded further by the fact that Rhode Island’s rainy day fund is only five percent of the state’s general fund expenditures, putting the state among the bottom quartile of all states. By comparison, Connecticut’s rainy-day balance can cover 15.3 percent of general fund expenditures and Massachusetts’ can cover 9.5 percent.

Rhode Island has only utilized its rainy day fund one other time. In order to close a deficit of $42.9 million at the end of FY 2008, Governor Donald Carcieri recommended a transfer from the rainy day fund—which held a balance of $103.1 million at the time—but the General Assembly declined. The following year, however, the General Assembly appropriated $22 million from the rainy day fund to close a budget gap expected at the end of FY 2009.

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