PROVIDENCE – On Tuesday, April 23, the Rhode Island Public Expenditure Council (RIPEC) will release comments on the Governor’s FY 2014 budget as proposed.  The budget as proposed contains a number of investment-based initiatives designed to promote the long-term welfare of the state, such as spending for capital projects, workforce development programs, and education, as well as a cut to the corporate tax rate.  However, future risks – such as the full impact of the Affordable Care Act (ACA) and sequestration – stand to increase the already-significant out-year deficits.  If Rhode Island is to find itself on the path of fiscal sustainability, these issues must be taken into account as the FY 2014 budget is finalized.

The state must take a two-pronged approach to managing out-year deficits.  First, the state should be careful to not commit to programs today that will be unsustainable in the future, simply because the budget situation appears to be better than it was a few years ago.  Second, it should proactively work to find areas in which programmatic change may result in a slowing of expenditure growth.  The magnitude of projected current services deficits, even without taking into account potential risks to the budget, call for constrained budgeting in the near future.

In contrast to prior years, there is no supplemental budget and the state projects a larger-than-anticipated closing for the current fiscal year.  Although the FY 2014 budget is notable in that it does not include any tax increases, almost 85 percent of the forecasted deficit was resolved through one-time revenues, including the FY 2013 surplus and revenue increases related to the November Revenue Estimating Conference.  Given the myriad out-year risks to the state’s revenues, such as the impact of casino gaming in Massachusetts, reductions in federal funding, and a tepid economic forecast, the state should be careful not to commit to future obligations that rely on continuation of these funds for on-going support.

As with revenues, there are a number of out-year expenditure concerns, chiefly, the budgetary impacts related to the ACA and the potential costs to the state if it does not prevail in the pension reform litigation.  Out-year expenditures are projected to grow at almost twice the rate of inflation, putting continued pressure on state revenues.  While all areas of the budget should be considered, medical assistance expenditures in particular are the primary driver of the state’s budget, and should be examined for possible cost savings.  Areas for consideration, some of which are contained in the budget, include continuing to look at vendor payments, more effective service delivery, and changes to eligibility.  At the same time, concentrating expenditures on core governmental functions like education and infrastructure will help the state develop a foundation for sustainable growth.  Complimenting these investments should be initiatives to reinforce effective and efficient spending, such as regulatory reform and the development of an economic development plan.

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