Raimondo’s $8.6B RI budget targets job growth

Key tax rates unchanged; details cloudy on big Medicaid, personnel cuts

Gov. Gina Raimondo delivers her budget address in March 2015. (photo: WPRI/Dan McGowan)

PROVIDENCE, R.I. (WPRI) – Gov. Gina Raimondo unveiled a state budget Thursday that would create a host of new programs she says will help revive Rhode Island’s lagging economy, funded in part by a new statewide property tax on million-dollar homes.

Raimondo, a Democrat who took office in January, unveiled the $8.6-billion proposal during a televised speech to lawmakers at the State House. She said the budget reflected her three major priorities: increasing Rhode Islanders’ skills, wooing new business investment and streamlining state government.

“The truth is the people of Rhode Island are counting on us to because they are struggling and are losing faith in government,” Raimondo said in her prepared remarks. “They want us to work together and make the right decisions to put Rhode Island on a better path.”

The governor and her aides have said repeatedly that the budget is designed to spur job growth now and in the future. New figures released Thursday showed Rhode Island’s unemployment rate fell to 6.5% in January, but the number of jobs in the state is still well below the pre-recession peak.

“Our biggest problem is that our state’s economic engine is out of gas,” Raimondo said, warning that “our young people are fleeing to find work elsewhere.”

The proposed budget would reduce Rhode Island government’s spending by 2% to $8.6 billion in the 2015-16 fiscal year that starts July 1; about a third of the money would be provided by the federal government. The governor introduced a new website, openbudget.ri.gov, so taxpayers can dig through it.

Half the state cuts – about $116 million – would be made in health and human services, which accounts for 44% of all state spending. However, roughly $46 million in cuts from the Medicaid health program were not spelled out in the governor’s budget Thursday; she has tasked a new working group with filling in the details.

“I realize this working group is different than the way we’ve addressed Medicaid in the past, but I believe the magnitude and complexity of the challenges we face requires it,” Raimondo said.

In addition to the to-be-determined Medicaid savings, $22 million in unspecified personnel savings also need to be negotiated with union leaders. Raimondo said she will cut her own pay by 5% as a good-faith gesture.

“We need to cut in areas where we are inefficient or spend too much, and then invest in economic growth,” she said. “Over time, our growth will lead to even more revenue, which will allow for further investments in education, infrastructure, and an adequate safety net.”

General Assembly leaders – who are working with the first fellow Democrat elected governor in 24 years – gave the budget a generally warm reception.

“I like the budget,” House Speaker Nicholas Mattiello said after the speech. “There are no broad-based tax increases; we’re making investments in education; we’re targeting tax cuts for economic development. I believe that it is a good economic budget, it’s a good budget to improve our economic condition and create jobs, so I’m very pleased.”

“We certainly have a challenge ahead of us in the area of Medicaid,” Senate President M. Teresa Paiva Weed said. “However, it’s a challenge that also presents an opportunity to restructure the way that we deliver services to our most neediest population, and the ability to make long-term structural change instead of year after year coming back for cuts. This is an opportunity to save money and deliver better outcomes.”

“Other states have done it, and I’m confident Rhode Island can do it as well,” she added.

State Rep. Mike Chippendale, who was tasked with responding to Raimondo’s budget proposal on behalf of House Republicans, said the GOP sees some areas where it can find “common ground” with the governor but disagrees with her on other points, notably HealthSource RI.

Raimondo’s budget contains a large number of new initiatives large and small.

It would eliminate income taxes on Social Security benefits for couples making up to $60,000, a priority for House Speaker Nicholas Mattiello, who said he would like to see the threshold increased. It would create a new authority to construct public schools, increase the earned-income tax credit, and give new Commerce Secretary Stefan Pryor $44.5 million to use in promoting economic development.

Raimondo began the budget-writing process facing a deficit of $190 million for 2015-16. While her aides emphasized that most of the deficit is being closed through spending cuts, she is also raising nearly $12 million by creating a new statewide property tax on second homes valued at more than $1 million; the tax would apply to the entire value of the property, not just the amount above $1 million.

Other tax increases include $7 million each from raising the cigarette tax by 25 cents and requiring online rental companies like Airbnb as well as bed and breakfasts and vacation homes to pay taxes. Raimondo’s aides said less than 8% of the deficit was closed through higher tax revenue.

To pay for HealthSource RI, Rhode Island’s state-run Obamacare insurance marketplace, Raimondo proposes a new 1% to 4% fee on all individual and small-group health premiums in the state, whether purchased through HealthSource or not; the new fee would bring in $6.2 million during the first half of 2016. Aides said the assessment mirrors what Rhode Islanders would have to pay if the state used the federal HealthCare.gov website.

Some taxes would be cut under the budget. The taxes businesses pay on their utilities would be phased out in an effort to reduce the high cost of energy in Rhode Island, as would surcharges on imaging procedures such as X-rays and outpatient services, which the governor described as “nuisance taxes” uncommon elsewhere. The sales and income taxes would stay the same.

Education emerged once again as a big winner in the proposed budget.

Raimondo proposes to increase K-12 school spending by $35.5 million to fully fund Rhode Island’s education funding formula. She also proposes $1.4 million to expand all-day kindergarten across the state and $1 million to add more pre-K classrooms. On the college front, she proposes a new $10-million “last-dollar” scholarship fund, as well as programs to allow high-school students to enroll in college classes.

The construction of schools, which Raimondo mentioned frequently on the campaign trail last year, is a key component of the budget. She proposes to use $20 million to start a new School Building Authority that would subsidize local education facilities; such projects have been mostly on hold since a moratorium was put in place during the recession.

The $20 million for the School Building Authority would come from the proceeds of refinancing and restructuring the state’s debt – a creative but complicated financial transaction that Raimondo aides say will take advantage of lower interest rates and yield $84 million over the next two years. The state would make lower debt payments in the short term and larger ones in future years to get the cash.

The $84-million debt refinancing is also the key source of funding for a suite of new economic-development programs Raimondo wants to create to be used by Pryor, Rhode Island’s first commerce secretary, and his team.

“It is time for our economic development strategy to turn heads, change perceptions, and put Rhode Island back in the game,” Raimondo said. Alluding to the 38 Studios debacle, which is costing state taxpayers roughly $90 million, she added: “Now I know we’ve made mistakes in economic development in the past. We must learn from them and never repeat them. We must move forward.”

The biggest portion of the money – $25 million – would go into a new fund overseen by the I-195 Redevelopment District Commission that they could use to subsidize key projects on the former highway land, such as attracting a major institution or company there. The money could not be used to help pay for the proposed new Pawtucket Red Sox stadium there, the administration said.

Pyror’s office would also get $5.4 million to assist small businesses; $5 million for a “First Wave” program to woo new businesses; and $3 million to build affordable housing. Additional chunks of the $84 million from the debt transaction would fund streetscape improvements, a new infrastructure bank, and tax credits to get suppliers of Rhode Island’s large companies to move here. New tax credits for real-estate projects and to subsidize job creation, as proposed by Raimondo ally Rep. Joe Shekarchi, are also in the works.

The former R.I. Economic Development Corporation, redubbed the R.I. Commerce Corporation in the wake of 38 Studios, would see its funding restored to 2001 levels after years of cuts. The budget said the money will be used to create a “one-stop shop” for businesses to navigate the state and local bureaucracy.

Another focus carried over from Raimondo’s campaign: tourism. The budget would shift money away from the state’s regional tourism councils to launch a roughly $4-million statewide campaign to advertise Rhode Island to would-be vacationers elsewhere. Raimondo has argued the state is missing an opportunity by failing to spend more on a state-focused ad buy.

A small but intriguing piece of the budget calls for the state to repeal 30 professional licensing requirements to make it easier for residents to enter new occupations, following through on a pledge Raimondo made during an interview for the Eyewitness News series Rhode Island’s Red Tape.

All told, the proposals would make progress on reducing Rhode Island’s structural deficit – the perennial gap between revenue and expenses – but not eliminate it. Raimondo’s aides estimate her ideas lower the 2016-17 deficit from $256 million to $75 million, and lower the 2018-19 deficit from $496 million to $286 million.

Roberts, the new health and human services secretary, said the administration is trying to work with hospitals and nursing homes to find creative ways to reduce Medicaid costs, which along with increased casino competition are a major driver of those future deficits.

“We told them, what you are going to see in this budget is what we are able to do to propose a balanced budget 60 days into an administration,” she said. “We would much rather – in partnership with you – find a sustainable approach to managing the Medicaid costs for the state.”

Thursday night’s release of the governor’s blueprint kicks off the the months-long budget process at the State House. The House Finance Committee, chaired by Bristol Democrat Ray Gallison, will spend the coming months evaluating and taking testimony on the proposal.

Luckily for lawmakers, state tax revenue is running $44 million ahead of projections so far this budget year, which could give them more money to use to make the numbers add up by the time they finish their work in late spring. The governor, however, wasn’t allowed to use those rosier-than-expected figures in her proposal – she had to use the original, gloomier estimates.

“I’m certainly hoping that revenues hold and that they’re better and I hope that they continue to grow,” Mattiello said. “That’s what we’re hoping for: more revenue, less expense, more efficiency. … But it’s too early to say whether those revenues are going to be there in June. So we’ll make the difficult decisions – I commend the governor on her balance right now, and hopefully we can make better, easier decisions come June.”

If past practice holds, the finance committee will unveil and immediately approve a revised budget late one evening sometime in late May or June. The budget then will go before the full House, which usually holds a marathon debate before approving it, and from there on to the Senate, before finally reaching the governor’s desk for her signature.

Ted Nesi (tnesi@wpri.com) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

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