RIPEC advises ‘more urgency’ in addressing state FY22 budget deficit

PROVIDENCE – The Rhode Island Public Expenditure Council is advising state legislators to act with “more urgency” in addressing a $513.7 million budget deficit in fiscal year 2022.

In a report issued on Wednesday, RIPEC said that per its analysis, the deficit will remain if FY 2022 expenditures continue to grow as projected and one-time federal funding is not available to plug state general revenue expenditures.

Actions that RIPEC suggests that state’s policymakers could pursue to reduce the deficit include structural changes in programs, such as phaseout of the car tax; expediting and targeting investments to support and accelerate economic recovery; and protecting and advancing progress made in improving Rhode Island’s business tax climate.

Michael DiBiase, RIPEC President and CEO, said that while federal stimulus will help reduce some of the deficit, it is “masking the problem,” and a “day of reckoning” could be coming in the near future. DiBiase said that Rhode Island “regularly has a deficit, even in good times. We’re spending more than we should.”

He said RIPEC’s report tries to establish the state’s “spending appetite” and provide advice in addressing funding and revenue issues. One problem he said the state has is a routine “kicking of the can down the road” regarding the structural deficit instead of addressing its spending woes.

“What the General Assembly did in the last budget is basically roll the spending forward, and didn’t really make any cuts,” said DiBiase.

The so-called “skinny” FY 2021 state budget enacted mid-year by the R.I. General Assembly relies heavily on one-time federal COVID relief funds to pay for ongoing state general expenditures, creating a deficit in FY 2022 since relief funds will need to be replaced with state general revenue funding in the next fiscal year.

Assuming expenditures will grow by three percent for the next fiscal year, the RIPEC report estimates a projected deficit for FY 2022 of $513.7 million, representing more than ten percent of the budget.

The enacted FY 2021 budget generally rejected any tax increases, cuts in services and programs, or new programs proposed by the governor. As a result, the FY 2021 budget in large part maintains the status quo, but importantly, does not freeze taxes and expenditures at the levels appropriated in FY 2020. Rather, the enacted budget increases expenditures and reduces taxes consistent with current law.

To pay for this expansion of financial commitments and produce a balanced budget, the FY 2021 budget relies on over $400 million of one-time federal COVID relief funding.

“While there is a great deal of uncertainty connected with the state’s budget situation for FY 2022, the state faces at the outset a very challenging budget deficit of over $500 million,” said DiBiase. “This deficit gap likely will narrow through the availability of additional federal funding, but there will remain a stubborn gap between the state’s revenues and expenditures that will need to be eventually reconciled.”

In light of this budget picture, RIPEC recommended several areas of priority for policymakers to consider, including:

1. While essential social services should be maintained, the state should act with more urgency to assess spending priorities. There needs to be a serious effort to bring the state’s expenditures and revenues in line, and it would be wise to begin this effort now.
2. Given the eventual need to reconcile expenditures with available revenues, the state should consider structural changes in programs to make them more sustainable for the long term. For instance, it may be worth considering whether the state can afford to maintain the car tax phaseout in its present form.
3. With the availability of ballot initiatives and one-time federal funds, the state should expedite and target investments to support and accelerate economic recovery. 
4. Despite fiscal challenges, the state should remain vigilant to protect and advance the progress made in improving Rhode Island’s business tax climate. Given the economic fallout resulting from the pandemic, it is imperative that Rhode Island’s economic rebound be as strong as possible. While mindful that there will be pressure to consider tax increases affecting business, now is the time to protect and improve Rhode Island’s competitive position so that the state’s economy can grow and prosper.

RIPEC is a nonpartisan and nonprofit public policy research organization dedicated to providing research and analysis that addresses the critical challenges surrounding public finance and the economy in Rhode Island.

Learn more about the organization and its report at ripec.org.

Cassius Shuman is a PBN staff writer. You may reach him at Shuman@PBN.xom