The Governor’s FY 2016 Budget as Proposed

PROVIDENCE – On Friday, May 29, the Rhode Island Public Expenditure Council (RIPEC) released comments on the Governor’s FY 2016 budget as proposed. The full report is available here. As the General Assembly debates the budget proposal, RIPEC believes that there are several components that deserve particular attention. These important considerations include the Governor’s proposed economic development initiatives, reforms to the Medicaid program, the use of one-time revenue sources to balance the budget and the impact of the improvement in the state’s fiscal condition resulting from projections at the May 2015 Revenue and Caseload Estimating Conference. A structural deficit in the state budget is expected to persist in future fiscal years. To address the structural deficit, policymakers should focus on two of the largest cost drivers in the budget: Medicaid and personnel.

Rhode Island’s economy has shown some recent signs of recovery but continues to demonstrate lingering weakness from the impact of the Great Recession. With this in mind, the budget process offers policymakers an opportunity to improve the state’s business climate and adopt policies that will enhance Rhode Island’s economic competitiveness. The availability of revenues greater than initial estimates means that the state has greater flexibility to make vital investments that will promote economic growth. This funding allows for the possibility of making meaningful investments in infrastructure, education or other economic development initiatives. It also makes it possible for the state to establish economic development programs, such as those proposed by the Governor, that will provide policymakers with the tools needed to attract and retain businesses. At the same time, sufficient checks and balances, including reporting requirements and legislative oversight, must be in place to protect taxpayer investments.

In addition to taking steps that will improve the state’s economy, policymakers also must be cognizant of the long-term structural deficit that exists in the state budget. As part of her approach to reducing this deficit, the Governor has proposed a number of reforms to the state’s Medicaid program that are intended to curb rapidly growing costs. While these reforms are undoubtedly necessary, consideration should also be given to the capacity of state government to implement these reforms as well as the ability of health care providers to absorb the proposed expenditure reductions. The state’s readiness to assist health care providers identify potential areas of savings that can be partially recouped through a new incentive program will be an essential component of Medicaid reform. The state must be ready and able to assist providers as the health care system transitions from a fee-for-service model to alternative payment methods.

The budget process also affords policymakers with the opportunity to examine Rhode Island’s state personnel system. A specific area for consideration involves the classification system that determines whether state positions are subject to civil service merit requirements or appointment by the Governor. Any chief executive must have the ability to appoint individuals to key decision-making positions to ensure that the state bureaucracy is responsive to his or her policy agenda. To this end, the state should review the current classification system to ensure that this ability is afforded to the Governor. Additionally, policymakers should be mindful of the impact that the recent state employee pension settlement will have on the structural deficit. An analysis of the proposed settlement by the state’s actuaries indicates that the total employer contribution (split between the state and municipalities) will increase by $31.6 million in FY 2017.

A review of the past ten years of inflation-adjusted expenditure categories demonstrates that the state’s total expenditures have increased by 9.9 percent. This growth is primarily driven by the grants and benefits expenditure category, which increased by 21.7 percent over the past ten years, and general operations expenditures, which increased by 5.5 percent during the same time period. Capital expenditures and debt service combined also resulted in expenditure growth, increasing by 18.0 percent and 10.9 percent, respectively. By contrast, local aid expenditures have declined by 14.1 percent on an inflation-adjusted basis since FY 2006. These trends suggest that grants and benefits and the state’s general operations budget should, therefore, be the focus of cost containment efforts.

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