The warning flags have been raised: Rhode Island legislators are about to return to reality.
After two years of massive surpluses, state budget officials are projecting that the government will finish the 2023-2024 fiscal year with a narrowed surplus of $98 million as federal relief funds have evaporated and tax revenue is shrinking.
And the prospect of structural deficits in the coming years is growing as is the likelihood of the tightening of purse strings by state leaders.
In fact, Brian Daniels, director of the R.I. Office of Management and Budget, recently issued an advisory to state departments, warning that clouded projections on economic factors such as inflation and interest rates require “a conservative and cautious approach to budgeting.”
It’s with that wary outlook that lawmakers launched a new legislative session on Jan. 2, preparing to mull over such money matters as whether desired tax cuts are possible and prudent, how much to boost Medicaid reimbursement rates for health care providers and which steps should be taken next in grappling with a stubborn shortage of affordable housing.
Lawmakers will also likely resume the debate from previous sessions about overhauling the Law Enforcement Officers’ Bill of Rights, which some say offers too many protections to police officers being investigated for misconduct.
Some of these issues will be dealt with while leaders assemble a state budget for the 2025 fiscal year, which begins July 1. Gov. Daniel J. McKee is scheduled to submit his multibillion-dollar budget proposal later this month, a thick document that sets the priorities for the administration for the next fiscal year.
In the fall, McKee told Providence Business News that his top priority is to submit a balanced budget proposal that at the very least avoids raising taxes and fees. Beyond that, he said he was looking to introduce some type of tax relief.
Last year, McKee’s plan to lower the sales tax from 7% to 6.85% failed to get past the General Assembly, but he has hinted he’s considering trying again to chip away at the sales tax rate so it’s closer to neighboring states, or he might try instituting a sales tax holiday.
How much of the governor’s plan will survive close scrutiny from the General Assembly leadership? It’s an age-old annual question.
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GIVING A BREAK? Senate President Dominick J. Ruggerio says he’d like to see the state’s sales tax rate lowered this year.
PBN FILE PHOTO/MICHAEL SALERNO[/caption]
The relationship among the governor, House Speaker K. Joseph Shekarchi and Senate President Dominick J. Ruggerio has been mostly harmonious since McKee stepped into the role in March 2021 when Gina M. Raimondo became U.S. commerce secretary.
But the three Democrats aren’t always in complete agreement.
While McKee is fresh off a political stumble last month when his initial handling of the partial closure of the Washington Bridge drew criticism from the public, Shekarchi, D-Warwick, enters the session with the tailwind of legislative success last year, most prominently shepherding a multi-bill package to streamline housing development.
But one bill to increase density on residential lots through the creation of “accessory dwelling units” was held up by the Senate.
In late December, Shekarchi told PBN he is determined to try again to pass a bill promoting the creation of accessory apartments, part of a multiyear strategy to “flood the market” with additional units, which he said will eventually lower overall house prices.
Meanwhile, Ruggerio, D-North Providence, and Senate Majority Leader Ryan Pearson, D-Cumberland, say they are focused on providing oversight of the significant investments that have already been made in housing and life sciences.
“We passed a lot of laws and appropriated a lot of money, but none of that matters if the execution is not strong,” Pearson said. “I think we are entering what you can call more of a normal period. Running the government will be most of the job.”
Ruggerio says he’s also ready to take up McKee’s cause of lowering the state’s sales tax rate.
Given that lawmakers face an election in November, Wendy Schiller, Brown University political science professor and director of the Taubman Center for American Politics and Policy, expects the General Assembly to stick to fundamental issues that are crucial to voters, such as education, housing and infrastructure.
At the same time, she says, leaders will face increased pressure for belt-tightening.
“The state is projected to end this fiscal year with a surplus,” she said. “But when the [American Rescue Plan Act] money is all spent, it seems like deficits might loom.”
Pearson, a former chairperson of the Senate Finance Committee, says he’s keeping a close eye on line items that represent big portions of government spending, such as those involving Medicaid reimbursement rates and funding to local school districts for an influx of English-language learners.
Senate leadership has expressed the desire to increase reimbursement rates as a way to counteract the departure of primary care doctors from the state, but leaders are also proceeding with caution because of the unsettled revenue projections.
Pearson says increases may have to be phased in over several years. “We only spend what we take in,” Pearson said.
Michael DiBiase, CEO and president of the Rhode Island Public Expenditure Council, says one thing is clear for the 2024 session: there needs to be a change in attitude from recent years when the state was seemingly awash with cash.
“Spending growth rates will need to be throttled back,” he said. “The pressure to increase spending in places like health and human services is likely the most challenging of these situations. McKee has vowed no tax raises and floated tax relief. With deficits likely returning in 2025, it will be a question of whether the state can afford it.”
What matters are likely to draw attention in the business community over the next six months? Here are a few likely candidates:
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HOLDING THE LINE: Gov. Daniel J. McKee has taken a hard line against raising taxes or fees.
PBN FILE PHOTO/MICHAEL SALERNO[/caption]
STATE TAXES
In recent months, McKee has taken a hard line against raising any taxes or fees and has signaled he’d still like to lower the state 7% sales tax to compete with Massachusetts (6.25%) and Connecticut (6.35%).
Last year, he proposed cutting the rate to 6.85%, but even that modest reduction couldn’t get the support of General Assembly leadership, and it was removed from the $14 billion fiscal 2024 budget before it was approved by legislators.
This time, Ruggerio has not only thrown his support behind cutting the sales tax, he wants to see it drop to 6.5%.
“I don’t know if we can afford to do it,” Ruggerio said. “We’ll see what we have as far as revenue. But I think if we can do that, it will give people the option of not going to Massachusetts to make purchases.”
Ruggerio is also continuing to signal his opposition to efforts in recent years by progressives to press for increased income taxes for the wealthy. He believes a similar progressive push in the Massachusetts legislature could create an opening to attract more high earners across state lines.
“I’ll take those people in the state all day. And I want them to tell their friends to come here. These are the people that donate to charities and nonprofits,” Ruggerio said. “I don’t want to raise taxes. I don’t want to scare anyone away.”
Shekarchi has been publicly noncommittal about tax cuts so far.
“Everything is always on the table. Whether it’s cuts or increases,” he said in December. “We all have to live within the budget and live within our means. And try and make sure tax cuts are strategic and benefit as many people as possible.”
Schiller thinks there’s a lot riding on the state’s court fight to reactivate the truck tolls on the state’s interstate highways. The state had estimated it would collect about $40 million annually for transportation projects, but a federal judge sided with the trucking industry in its lawsuit and ruled against the toll gantries in 2022.
The state has appealed the decision, and Schiller says if it’s unsuccessful, it will throw the state’s revenue outlook further into uncertainty.
Couple that with the state’s push to phase out gas-vehicle sales by 2035, which threatens to shrink gas tax revenues, and the picture becomes starker.
“Rhode Island is losing money on a daily basis without that toll income,” she said. “So, there are questions about how it will fund its state match for federal infrastructure money moving forward.”
HOUSING
Shekarchi has stopped short of supporting a tougher stance on communities that have yet to reach the 10% mandate of affordable housing stock.
“The General Assembly has a lot of tools at their disposal,” he said. “But the private sector has the expertise and the people to build these homes. It is just the regulatory red tape in many of these communities.”
And while Shekarchi says he’ll revive legislation on allowing more accessory dwelling units, Senate leaders remain on the fence about it, noting that the pushback in local communities shows the idea is widely unpopular. “We just want to make sure it’s done in a way where there are not these unintended consequences,” Pearson said.
The General Assembly over the last two years has devoted $320 million in ARPA money toward the construction of affordable housing. Housing Secretary Stefan Pryor now is asking for a $100 million capital bond issue.
Brenda Clement, director of HousingWorks RI at Roger Williams University, says a $100 million bond is not enough. The state must “continue to put fuel in the engine,” she said. “We need hundreds of additional units each year. We put money into roads, sewers and bridges every year. Why should housing be different?”
Ruggerio sees it another way, saying Pryor should first work with the funding he has now.
“We are reluctant to give [Pryor more money] right now. We want to see results before we move forward,” Ruggerio said. “I want to see that money go out the door and be used for the purpose it was intended for. So, I’m not saying ‘no,’ I’m just saying ‘not yet.’ ”
Meanwhile, progressive Sen. Tiara Mack, D-Providence, says she will reintroduce legislation to cap allowable rental increases at 4% a year, something that has found no support among the General Assembly leadership.
“I’m not sure government getting involved in setting rents would be a situation that would help,” Pearson said.
Shekarchi is also opposed. “The only way you are going to address this crisis that will have any significant impact is to create more supply,” he said. “It’s basic economics.”
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MONEY MINDER: Michael DiBiase says state legislators may need to pull their purse strings a little tighter this year.
PBN FILE PHOTO/MICHAEL SALERNO[/caption]
MEDICAID
Health care advocates are likely to lobby state leaders to approve a $45 million hike in Medicaid fee-for-service reimbursements paid to providers.
The R.I. Office of the Health Insurance Commissioner recommended that increase, but the R.I. Executive Office of Health and Human Services instead phased increases in fee-for-service rates and reimbursement rates for managed care organizations over two years in its fiscal 2025 budget request to McKee.
Under the plan, Rhode Island would implement new Medicaid rates for all reimbursement models on Oct. 1, in fiscal 2025, at an estimated additional cost of $80.5 million. Another rate increase would take place in fiscal 2026.
It remains to be seen if the plan for phased-in increases will be part of McKee’s budget proposal.
Legislators will have the final say. Pearson says the Medicaid program is a major chunk of expenditures in the budget. Indeed, Rhode Island’s Medicaid spending in fiscal 2024 will exceed $3.5 billion, with about two-thirds of those costs covered by the federal government.
“There is no fiscal cliff or fiscal calamity coming for the state,” Pearson said. “But I know we are going to have to substantially raise Medicaid rates. With that as a backdrop, we are going to have to figure out ways to cut and shave in other places.”
CANNABIS LAW
Progressive Rep. David Morales, D-Providence, is taking the lead in pushing for changes to the state law that legalized the sale of recreational cannabis as regulators look to start issuing new retail licenses this year.
Advocates are expressing concerns that some of the criteria to qualify for one of the six so-called “social equity” licenses are vulnerable to being exploited by unqualified applicants.
Morales wants to close two perceived loopholes: First, the language stating that a social equity applicant only needs to have 51% of their workers identify as former drug offenders and living in affected communities, while the applicant does not have to. Second, the provision that opens a social equity license to those who have shown they’ve promoted “economic empowerment in disproportionate areas.”
Advocates also want more of the state’s revenue from cannabis sales directed into a fund to assist social equity applicants and waive or reduce license fees for those applicants.
Shekarchi is open to amending the law.
“The legislation is meant to be a living, breathing document,” he said. “I would like them to get the social equity aspects off the ground sooner faster than later. I do think there will be some tweaks to the law. We’ve always intended that.”
Ruggerio and Pearson said they were open to changes, but the issue has not been on their radar.
Without giving details, McKee told PBN in the fall he might include some type of cannabis reform in his budget plan, beyond the social equity matters.
“There are some issues that I’ve talked to the cannabis industry about that could put them on a level playing field,” he said. “We are evaluating that and seeing if we can absorb that in the budget.”
PROPERTY TAXES
A year after the state passed legislation that exempts businesses from the first $50,000 they would typically owe in tangible property taxes, Senate leaders are floating another property tax relief plan.
While details are still being hashed out, Ruggerio and Pearson say they want to give municipalities the opportunity to offer homestead tax exemptions and cover some of the lost revenue by authorizing the use of a 1% municipal tax on abandoned properties. The potential legislation would also provide a standing authorization for communities to conduct tax amnesties.
There are currently only nine communities in Rhode Island that have homestead exemptions on the books. And state law requires General Assembly approval before local officials institute or amend an exemption, or institute a tax amnesty.
“It gives them the authority to clean up their books and bring in some extra revenue and take pressure off local property taxes in the meantime,” Pearson said. “It gives the locals a bit more control.”
‘SUPERMAN’ BUILDING AND ARMORY
The first phase of the $223 million development of the Industrial Trust Tower, known as the “Superman” building, began in October with a $25 million interior demolition.
The project calls for 300 residential apartments, along with office, retail and event space.
The deal involves $26 million in state incentives and contributions; a $10 million loan from the city’s Housing Trust Fund and a $5 million city grant; bridge financing from the Rhode Island Foundation, as well as millions in federal tax credits. The Providence City Council in 2022 approved a 30-year tax agreement projected to save developer High Rock Westminster LLC $29 million in property taxes.
But will High Rock seek more financial assistance in the coming legislative year? A spokesperson for the company declined to comment.
Meanwhile, General Assembly leaders said they have not heard from High Rock. “There has not been any additional ask to us at this point,” said Greg Pare, Ruggerio’s spokesperson.
Larry Berman, Shekarchi’s spokesperson, said the speaker “has not been contacted by anyone involved in the Superman project seeking any additional funding.”
Also, the fate of the state-owned Cranston Street Armory in Providence remains unsettled.
Last July, the McKee administration canceled a contract with Philadelphia-based Scout Ltd. to redevelop the historic property months after the developer accused two state officials of inappropriate conduct during a visit to Scout in Philadelphia.
Since then, the state has signed a six-month lease with a film studio to use the building as a movie set.
In October, Mayor Brett P. Smiley shifted $1 million in ARPA funds to invest in its redevelopment. The administration has been in conversations with the state regarding transferring ownership.
Smiley spokesperson Josh Estrella said negotiations have been “collaborative and productive” but are likely to continue for several months.
