RIPEC: State can’t rely on federal funds for future spending

PROVIDENCE – The Rhode Island Public Expenditure Council says the state needs to be vigilant in avoiding spending commitments beyond available resources, given the economic uncertainty ahead and the temporary nature of federal pandemic relief funding.

In its analysis of the $13.6 billion FY 2023 budget and the state’s fiscal outlook released Tuesday, RIPEC said the budget is the third consecutive annual spending plan characterized by a massive influx of federal COVID-19 relief dollars and the second consecutive one marked by large state revenue surpluses.

Fiscal 2023 total annual spending exceeded $13 billion, in contrast to total annual spending below $10 billion in fiscal 2019, the last budget year unaffected by the pandemic, according to the report. A big chunk of the spending comes from both a state surplus of more than $900 million and more than $400 million in relief from the American Rescue Plan Act.

“While Rhode Island’s state budget increased overall, this was mostly due to extraordinary levels of one-time revenues, including surplus funds and federal American Rescue Plan Act allocations,” said Michael DiBiase, president and CEO of RIPEC. “The General Assembly wisely directed these one-time federal and surplus funds to one-time investments, with the exception of some modest items that might implicate future funding commitments.”

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RIPEC said even though state revenue has been strong, general revenue spending has been growing at a rate significantly greater than the historical growth rate. It warns that trend is likely not sustainable. The nonprofit public policy research group added that it is important to constrain spending and minimize structural deficits so that the state is prepared to weather inevitable future economic headwinds.

RIPEC also recommended the state needs to commit greater focus and resources to the planning, oversight and execution of the many new projects and programs contained in the enacted fiscal 2023 budget. The spending plan spreads ARPA funding across 46 separate initiatives; likewise, the use of surplus funds in the enacted budget is spread across many individual expenditure items. As a result, the report concluded that the impact of the state’s ARPA and surplus funding is likely to be more broad-based than targeted. It also added that the multiplicity of initiatives and projects will make the planning, oversight and execution of these investments more challenging.

RIPEC also recommended policymakers should reconcile state education aid consistent with the school funding formula or reprogram excess state resources to reform the formula.

K-12 education received large increases in spending in the budget despite lowered enrollment and large allocations of federal funding currently available to school districts, RIPEC said. Based on actual enrollment figures, state aid per pupil increased by 17.4% between fiscal 2020 and fiscal 2023, an annual average increase of 6.4%. RIPEC said the General Assembly made these large aid increases without imposing any new requirements or accountability measures. Similarly, the assembly has appropriated pandemic relief funds to school districts without any strings attached.

“Since it is likely that school districts may not fully recover their enrollment declines, state aid should be reconciled consistent with actual enrollment levels going forward,” RIPEC said it its report. “Alternatively, policymakers could use this opportunity to reform the funding formula to increase overall state aid and target more aid to disadvantaged districts.”

RIPEC also urged policymakers to constrain the growth in health and human services spending and streamline and restructure the delivery of health and human service programs. The agency found the budget is characterized by large increases in operating expenditures for a broad range of health and human services programs, primarily through provider rate increases. General revenue spending for health and human services has grown from $1.46 billion in fiscal 2019 to $1.90 billion in fiscal 2023 – an increase of 29.7%.

“While the enacted budget includes certain structural reforms in the health and human services area, the budget essentially reflects an additive exercise of funding increases to existing programs, along with some new initiatives,” RIPEC said in its report. “The budget contains very little in the way of consolidating or eliminating programs that may be ineffective or inefficient.”

In its final recommendations, RIPEC said the state should consider increasing its contribution to its rainy day fund and improve its business tax climate. It recommended the state increase its contribution to the rainy day fund over time from 3% to 5% of revenue, and raise the rainy day fund cap from 5% to 10%.

“Despite recent strong revenues and excess funds, now is the time for the governor and General Assembly to develop sustainable long-term plans for our largest areas of spending—health and human services and K-12 education – and commit greater resources to the oversight and execution of the dozens of new projects and programs funded” in the fiscal 2023 budget” DiBiase said.