PROVIDENCE – The Rhode Island Public Expenditure Council on Friday released a report outlining the fiscal challenges now facing lawmakers ahead of the fiscal year 2026 budget.
The state is projected to open fiscal 2026 on July 1 with a $330 million deficit despite ending the current fiscal year with a $77 million surplus. The November 2024 Revenue Estimating Conference, which projects the budget gulf could widen to more than $680 million by 2030, cited new collective bargaining agreements with public sector unions and expenditures rising faster than revenues in several categories, including education, Medicaid and other health and human services as reasons for the projected 2026 shortfall.
After several years of historic spending fueled by federal pandemic relief funding and budget surpluses, RIPEC said in its report that it is time for policymakers to trim spending.
While the projected deficit is approximately $100 million less than what had been outlined during the Revenue Estimating Conference, as it stands the shortfall still represents more than 5% of total state expenditures, a "problematic" situation, according to RIPEC CEO and President Michael DiBiase.
Overall, state spending has spiked more than 50% over five years, from $9.38 billion in fiscal year 2019 to $14.13 billion in 2024.
A major driver of the deficit is the decision of the administration and General Assembly to use a substantial amount of one-time revenues to pay for recurring expenditures in the current budget, RIPEC said. The budget gap has been compounded by the rising costs of health and human services, which RIPEC called the state’s “greatest challenge." Those costs are projected to grow at twice the rate of available revenues.
The largest component of health and human services spending is on Medicaid, now projected to increase by about 6.5% in fiscal year 2026, “despite only a modest expected increase in enrollments," according to the report.
Indeed, the November 2024 data shows 305,816 Rhode Islanders are enrolled in Medicaid, down from 373,376 a year earlier.
“After years of abundant federal funding and large state surpluses, the governor and General Assembly must now closely evaluate spending to bring expenditures in line with available resources,” DiBiase said.
Other notable drivers include spending on K-12 education, projected to grow by 4.6% by the start of the next fiscal year, despite enrollment dropping almost 5% over the last several years, while available revenues are expected to increase by only 2.5%.
RIPEC says the state aid to school districts “has become less equitable over time, with urban core districts receiving a smaller proportion of additional state funding over the past four years.”
These urban core districts of Central Falls, Pawtucket, Providence, West Warwick, and Woonsocket have seen state aid fall. Of the additional funding, their proportion fell by nearly 10 percentage points.
In addition, because of unfunded cost-of-living increases approved last year, spending on state personnel has also contributed to the deficit, though the report qualifies this as a short-term gap. But RIPEC cautioned that current projections do not include any future collective bargaining agreements.
The report said that general fund expenditures on personnel are anticipated to grow by $72 million in fiscal year 2025 over the current budget and could balloon to $114.6 million by 2027.
Because revenues are keeping pace with inflation, the situation is not a result of declining revenues but a “spending problem,” said DiBiase.
As evidence, the report breaks down major sources of revenue that fund state budgets, including personal income tax revenues which saw a 20.6 % increase between fiscal years 2020 and 2022 and grew at an average annual rate of 5.5% over five years. Revenues from sales and use taxes, representing about one-third of total general revenues, increased year-over-year by an average of 7.6% between fiscal years 2019 and 2024. General business tax revenues have increased by 11.9% annually.
“Faced with fiscal constraint for the first time in several years, policymakers should now focus on evaluating the effectiveness of program expenditures,” he said.
RIPEC made the following recommendations to tackle the projected deficit:
- Curtail spending growth and limit the use of one-time revenues to pay for recurring expenditures.
- Focus on better management of the growth in health and human services spending.
- Reform the school funding formula to make spending more sustainable and equitable.
- Closely monitor expenditures on personnel to ensure that spending does not contribute to future deficits.
- Focus on evaluating programs through more robust and transparent performance management.
(UPDATE: Minor corrections in 10th, 12th and 16th paragraphs.)
Christopher Allen is a PBN staff writer. You may contact him at Allen@pbn.com.
