In Rhode Island, running for governor and from fiscal reality

Rhode Island’s gubernatorial candidates Gina Raimondo and Allan Fung have been crisscrossing the state suggesting creative solutions to the economic challenges facing the Ocean State. However, they have not been as creative in proposing fiscally responsible ways to pay for them.

If any state could benefit from a meaningful change election, it is Rhode Island. A recent poll conducted for the Hassenfeld Institute for Public Leadership at Bryant University found that only 16 percent of Rhode Islanders felt that their state government was effective. In August, Rhode Island had the third-highest unemployment rate in the United States. Until this past June, Rhode Island had the dubious distinction of having the highest unemployment rate in the nation for nine consecutive months. Since the Great Recession ended, the state has recovered only 55 percent of the jobs it lost.

The salient question for voters in November is, which gubernatorial candidate has the best plan to create an environment to unleash the productive use of Rhode Island’s private and public resources? As Harvard University’s Michael E. Porter said, “Competitiveness is the productivity with which a state utilizes its human, capital and natural endowments to create value. Productivity determines wages, jobs, and the standard of living.”

While there are some differences, Raimondo and Fung have hit on many similar ideas for rebuilding the Ocean State economy. These include restoring the state’s crumbling infrastructure, improving educational opportunities, revitalizing manufacturing and the innovation sector, linking work-force and higher education programs to market needs, and reducing the cost of doing business.

What the campaigns still need to do is to enumerate their priorities and funding plans. As former Governor Pierre Du Pont (R-DE) so aptly stated, “Being governor is the greatest job in the world. You can do anything you want-but you can’t do everything.” The National Governors Association advises governors that “Success in the governorship depends first and foremost on focus.”

When asked how promised new and expanded programs will be financed, the candidates sometimes suggest the resources can be found within an $8.7 billion budget.  However, this is not as easy as it sounds and reflects a naiveté about how the state budget works. Over half of Rhode Island’s $8.7 billion budget is derived from federal revenues, university and college receipts, employment security and temporary disability payments and other restricted receipts. As a House Finance Committee report concluded, less than half of the total funds received are considered general revenues. While these funds can be used for any legitimate purpose, a significant share is budgeted to match federal health care dollars and finance collective bargaining agreements with state employee unions.

The next Rhode Island governor’s ability to finance new initiatives will also be limited by the existing structural budget imbalance. The House Finance Committee notes, “beginning with the fiscal year 1996, budgets were recommended with increasingly large structural deficits. While deficits cannot constitutionally occur (in Rhode Island), they indicate the extent to which unresolved structural issues will carry through budgets, and to the extent that the problem in any given year is solved without addressing the underlying structural problem, the deficits amplify each fiscal year.”

The fiscal year 2015 budget was only balanced by using a prior year operating surplus, and the State Budget Office projects a $172.9 million budget shortfall (4.8% of usable revenue) for the fiscal year beginning July 2015. The next governor will have to solve this budget shortfall when he or she submits their first budget in January.

During this campaign season, Rhode Island’s budget problems are the elephant in the room, which candidates seem determined to ignore even though their proposed initiatives and the state’s fiscal health are crucially linked.

An urban myth that may be being perpetuated on Rhode Island voters is that the state can grow its way out of its deficits. Certainly, an improving economy would have a positive impact on state revenues. For the current fiscal year, the State Budget Office has revised its projected growth in personal income downward from 6.3% in January to the current 5.8%.  If this rate of growth in personal income is attained in FY 2015, it will be the strongest such rate of growth since FY 2007, the fiscal year immediately preceding the Great Recession and in which the unemployment rate was 4.9 percent.  For fiscal year 2016, the state forecasts that personal income will increase by 6.6%, which would be the strongest rate of growth in personal income since FY 2001, when the unemployment rate was 4.3 percent. And even with these historically high rates of personal income growth, budget shortfalls are still being projected. If the economy exceeds estimates, any unanticipated revenues will be needed to close growing out–year forecasted shortfalls.

There is still an opportunity for Raimondo and Fung to outline their plans to break the cycle of the structural budget problems that have limited Rhode Island’s ability to use public dollars to leverage private investments and grow jobs. In selecting Rhode Island’s next governor, voters need to make a judgment about each candidate’s fiscal fitness. Denial of budget realities has contributed significantly to Rhode Island’s existing fiscal and economic struggles.

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