RIPEC PRAISES KEY INVESTMENTS IN STATE BUDGET APPROVED BY THE HOUSE FINANCE COMMITTEE BUT RAISES LONGER TERM FISCAL CONCERNS

Key Budget Items Backed by RIPEC Analysis Include K-12 Education, Transportation, Housing; Cautions on Spending Growth, Projected Deficit, & Pension Changes

From: RIPEC – The Rhode Island Public Expenditure Council

The fiscal year (FY) 2025 appropriations act, approved on June 7 by the House Finance Committee, contains several positive elements, according to the Rhode Island Public Expenditure Council (RIPEC). Key investments are supported by RIPEC’s research and recommendations, including additional funds for K-12 schools, more multilingual learner funding and incorporation of such funding in the education formula, professional development funds for teachers, an expansion of carryforward tax rules for businesses, and additional transportation funding to match federal allocations. The budget is soon to be considered by the full House of Representatives.

“The budget as released and currently before the House deserves praise, particularly for increased investments in K-12 education, transportation, and housing,” said RIPEC President and CEO Michael DiBiase.

However, RIPEC found that the overall growth in state expenditures in the spending plan, as well as pension changes for state employees and teachers, raise longer term fiscal concerns. “The budget before the House relies on one-time surplus funds to continue to grow state spending at a relatively high rate as much tighter fiscal times are just ahead,” DiBiase stated.

RIPEC applauded the decision to add $35.2 million over the governor’s recommended funding for K-12 schools. This addition is primarily due to a shift from the governor’s proposed cap on increases to the core instructional amount—the starting point for the state funding formula for education. In a recent report, RIPEC found that the proposed cap most disadvantaged urban core districts, already facing serious fiscal challenges.

RIPEC also praised an increase in bonus funding for multilingual learners (MLL) from 15 to 20 percent of the core instructional amount, as well as the provision to move MLL funding into the funding formula. In a policy brief on MLL funding published last fall, RIPEC found that a larger bonus would bring Rhode Island more in line with most states and that incorporating MLL funds into the formula would provide more flexibility to school districts and help ensure these additional resources do not get left on the table. While the governor had proposed to increase the MLL bonus to 25 percent, the increase included in the House Finance Committee spending plan represents important progress in responding to the needs of the state’s rapidly growing population of multilingual learners.

In addition, RIPEC cited the inclusion of $5 million in state general revenue funding for math and English language arts coaches as a positive initiative in the approved budget. While less than the $15 million proposed by the governor, the $5 million represents the first significant state dollars appropriated for teacher professional development in many years. RIPEC has continuously called for greater state investment in teacher professional development in its reports on K-12 education, having found that teacher quality is the greatest single indicator of student success after student background.

Transportation funding also has been a particular focus for RIPEC. Given declining gas tax revenues, suspended truck tolls, and the cost to replace the Washington Bridge, RIPEC found in its recent budget analysis that more surplus funds should be dedicated to transportation, and that the state needs a more sustainable plan for funding transportation over the long term. RIPEC cited positive investments in transportation in the budget approved by the House Finance Committee—$35 million in federal State Fiscal Recovery Fund dollars and $45 million in Rhode Island Capital Plan funds—which would essentially fully prefund the state’s share of the projected $455.2 million cost to replace the Washington Bridge.

The budget approved by the House Finance Committee improved the state’s business tax climate by adopting the governor’s proposed extension of the period that businesses can carry forward net operating losses from five to 20 years. RIPEC found in a tax climate policy brief published earlier this year that Rhode Island’s five-year carryforward period is the least generous in the nation, and that 20 years was more consistent with other states, including Massachusetts and Connecticut. In contrast, the approved budget missed the opportunity to improve the state’s tax competitiveness for financial institutions by rejecting the governor’s proposal to extend single sales factor apportionment to these institutions—a change supported by RIPEC.

With respect to affordable housing, RIPEC praised the increase for the housing bond referendum from $100 million to $120 million. In its recent report on the budget, RIPEC recommended greater investments in affordable housing in light of both the level of need and the state’s history of underinvestment. However, the budget approved by the House Finance Committee appears to continue the same pattern of investment of these funds—which, RIPEC’s analysis found, produces relatively few affordable units at high cost. As with the recent investments, the bond provides relatively little funding to support affordable housing for those with moderate incomes and does not appear to provide support to increase the production of market-rate housing.

While the budget approved by the House Finance Committee contains many positive investments that respond to the needs of Rhode Islanders, the continued use of one-time revenues to fund continuing state expenditures, and the overall growth in the level of state spending, raise concerns given the more constrained revenue outlook ahead. In a recent report, RIPEC found that the governor’s proposed budget relied on substantial surplus funds and, to a lesser extent, federal dollars, to pay for continuing state expenditures, contributing to a projected deficit of nearly $250 million for FY 2026. It does not appear that the budget approved by the House Finance Committee—which increased state spending by nearly $100 million over the governor’s recommended budget and by nearly five percent over spending for FY 2024—has significantly improved this structural issue.

“The budget approved by the House Finance Committee appears to have missed the opportunity to address structural issues resulting from the use of substantial one-time revenues to pay for continuing state expenses proposed by the governor in his budget,” DiBiase said.

Finally, RIPEC raised concern that the pension changes contained in the budget approved by the House Finance Committee add to these long-term fiscal challenges. Many retired state employees and teachers have endured financial hardship in the absence of cost-of-living increases since comprehensive pension reform was enacted in 2011, particularly given heightened inflation over the past few years. While the relief contained in the approved budget was appropriately targeted to help those retirees most disadvantaged, the size of the overall pension package, which increases the pension fund’s unfunded liability by over $400 million, or by nearly ten percent, raises concern in the current fiscal climate.