RIPEC: McKee’s FY25 budget proposal makes structural deficit worse

The Rhode Island Public Expenditure Council is raising red flags about Gov. Dan McKee’s proposed fiscal 2025 budget, warning it would contribute to and worsen the state’s structural deficit in the years ahead.

In a report published Thursday, the business-backed research organization said McKee’s proposed $13.7 billion spending plan fails to reflect the state’s economic reality, increasing spending faster than revenue. While the $196 million in surplus state revenue projected for the fiscal year that ends June 30 can make up the difference temporarily, it’s not sustainable long term.

“The budget does not reflect the tight revenue situation,” Michael DiBiase, president and CEO of RIPEC, said in an interview on Friday. “Wherever you are using that surplus money for now contributes to the deficit later. You’re creating more of a problem for next year.”

While the governor’s budget projects a slight surplus, just shy of $1 million, for fiscal 2025, the trend reverses course in the following year, with a projected $244 million deficit in fiscal 2026, growing to $265.4 million in fiscal 2027. 

This projected outcome is not entirely unexpected; lawmakers and economists have warned that market forces like inflation will slow revenue growth, while costs in key areas like education and health and human services continue to rise. Yet the latest forecasts appear far gloomier than what analysts expected a year ago, according to updated projections from the state budget office included with McKee’s fiscal 2025 budget proposal. 

The governor’s spending proposal makes the projected deficit worse by relying on one-time surplus funds to cover continued operating expenses, according to RIPEC’s report. Just $15 million of the $196 million in general revenue surplus funds are explicitly identified by the governor’s office as reserved for one-time expenses. The rest of the surplus funds seek to make up the shortfall in rising, continued costs for education, affordable housing, transportation and health and human services.

“Wherever you use that money now, you’ve got to find it next year somewhere else,” DiBiase said.

RIPEC in its report acknowledged the critical needs presented by the state’s lack of affordable housing, growing Medicaid budget and resource-strapped urban school districts. While spending hikes in these areas cannot be avoided, at least to some extent, DiBiase stressed the importance of smarter and more efficient spending.

For example, RIPEC projections indicate that the $254.8 million in state subsidies for affordable housing will produce just over 1,600 new, net units once the remaining federal pandemic aid is allocated, leaving the state well short of the 24,000 new units needed to meet the growing demand.

Meanwhile, the state’s Medicaid program, which comprises three-quarters of its health and human services budget, continues to balloon, with a $4.6 billion price tag, including state and federal funds, in the proposed fiscal 2025 budget. While state spending has increased, problems with provider reimbursement rates and coverage for beneficiaries persist, suggesting the extra money is doing little to relieve the pressure on the system, DiBiase said.

“Can we be more efficient is the question,” he said. “We’re not calling for cuts, and we need to increase [reimbursement rates] but that doesn’t mean we shouldn’t look at the system overall.”

Indeed, a new audit published on April 30 by the state auditor general found numerous deficiencies with the state Medicaid program in fiscal 2023, including payments to managed care organizations for patients who have died, or no longer live in the state.

Despite cautions for more financially sustainable long-term spending plans, RIPEC also stressed the need to avoid broad-based tax increases especially for its business community. Of particular interest to the business advocacy group: the governor’s proposal to give businesses more flexibility in applying operating losses to future years’ income.

Existing state law limits the carryforward period to five years, the shortest of any state, according to RIPEC. McKee has proposed matching Rhode Island’s policy with its neighbors in Massachusetts and Connecticut, which both let businesses apply reported losses to future net operating income over the next 20 years. The change to Rhode Island’s law, if approved, would take effect in tax year 2025.

“It’s kind of an esoteric thing, but we are an outlier,” DiBiase said of the state’s carryforward provision. “Changing this helps our business climate.”

Derek Gomes, a spokesperson for the Rhode Island Department of Administration, responded by email on behalf of the governor’s office Friday afternoon.

“The state has had to strike a balance between fiscal discipline and providing the services upon which Rhode Islanders rely, and the fiscal year 2025 budget proposal is no exception,” Gomes said.

He also pointed to prior state budget forecasts which show long-term structural deficits have “long been a reality of state budgets,” including prior to the COVID-19 pandemic.

Updated to include a response from Gov. Dan McKee’s office.