Chafee’s 5-Year Fiscal Forecast—Five Key Points
Friday, April 26, 2013
While the cheers in the Senate chamber were fading from the passage of Marriage Equality, Governor Chafee's Five-Year Fiscal Forecast was being heard by the House Finance Committee.
The Governor’s five-year forecast was first required in 1984 as an annual report due in April. In 1996, the General Assembly amended the law to require the report’s submission as part of the budget. The report compares revenue growth versus expenditure growth and how those estimates predict the economic trend of the state through fiscal year 2018.
1: Economic Forecast
The adopted consensus economic forecast uses testimony from Moody’s Economy.com. The firm builds national macroeconomic models from which they calculate Rhode Island forecasts. These models are disclaimed by risks to the forecast including a prediction of “half the sequestration of federal grants taking place, the expiration of the Bush Tax Cuts for incomes over $250,000 and the reinstatement of the full payroll tax."
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTCompared to the national average, Rhode Island’s personal income, jobs wage and salary growth are all lower and slower to recover in the short term, lagging behind the rest of the nation. The slowing of the economy and jobs losses, which began in 2007, are not predicted to recover to normal levels until 2016. However, according to graph analysis, the crossing of jobs growth and the unemployment rate that met during the perfect storm when unemployment skyrocketed and job growth plummeted, are set to meet again, passing one another in the opposite direction sometime late in 2014. Job growth is expected to peak in 2016 and then plummet again through 2018. Unemployment, inexplicably enough, is set to continue on a steady downward slope. This is in spite of the statistical evidence showing Rhode Island has demonstrated consistently higher unemployment.
2: Revenues
Where state revenue is concerned, the forecast is for a slow recovery. Revenue estimates are driven by trends, collections to date and the economic forecasts. For example, 2012 revenues were more than expected. 2013 revenues are ahead of predictions and 2014’s are predicted to be on target. The wrench thrown into the machinery for out-year 2015 take is the effect of gaming in Massachusetts.
Revenue drivers for the state include personal income tax and wage and salary tax, income and sales tax and a slew of other miscellaneous sources. However, the largest source of state revenue for fiscal year 2014 was federal grants, by far. Personal income tax came in second, followed closely by sales taxes. The lowest source of revenue was gas tax. This seems incongruent with the exceedingly high gas taxes paid in Rhode Island.
This state's reliance on federal grants may not be a good thing, according to Edward M. Mazze, Distinguished Professor of Business Administration at URI. “Relying on federal grants is dangerous," Mazze said. “There are sectors of the economy that deal with human services that will continue to receive federal dollars but probably at a lesser amount each year and other sectors such as defense and higher education that face a rapid decline in federal dollars as Congress looks for ways to cut expenditures.”
3: Article 9
Article 9 of the Governor’s FY 2014 Budget Proposal phases out the corporate income tax and, thereby, affects the overall revenue by reducing revenue by $8 million in FY 2014 alone and escalating to $37.6 million by out year 2018. Included in the article is the phasing out of the Jobs Development act that saves $2.4 million in the first year and increases exponentially in subsequent out years. Also the implementation of the Special Investigation Tax Unit: an outsourced, interstate collection agency which seeks recovery of unpaid out of state business taxes to the tune of $1.25 million.
Dr. Mazze thinks this is a good idea for long term business thinking in the state. “By lowering the corporate income tax rate, we are broadcasting to the business community that Rhode Island is open for business," Mazze said. "This is a first good step which needs to be followed by getting rid of the nuisance bureaucratic activities that a business has to go through to do business in Rhode Island. A lower corporate income tax puts us in a better position to attract new businesses and compete in our region.”
4: Expenditures
For fiscal year 2014, the Governor’s budget anticipates general revenue expenditures by function to allocate 39.3% to human services and 34% to education with the remainder split fairly evenly between general government costs and public safety. By category, the revenue is spent 1) in assistance, grants and benefits (36.7%), 2) local aid (29.5%) and 3) personnel and operating costs (27.9%). Over five years, the 2014 amount of $3.4 billion is to increase to just under $4 billion.
Personnel and operating costs have been scrutinized and the General Assembly has made efforts to control escalating costs. Longevity was ended in 2011. Pension changes were enacted in 2005, 2009, 2010 and (the most controversial) in 2011. Nonetheless, even without a cost of living increase, salaries and benefits incur a predicted general revenue increase in expenditures of 3.9%. Much of this results from many new positions. But many contracts expire at the end of the current fiscal year. Furthermore, $250,000 has been dedicated to a merit system and another million dollars used to review and streamline the state’s jobs classification system. All in all, personnel costs break down simply to 66% toward salaries and 44% as benefits.
Hospital and medical grants and benefits are experiencing a lower growth rate than projected in Rhode Island. There is also an expected reduction in uncompensated care at the hospitals from patients being insured as of January 1st, 2014. Furthermore, both Services for the Developmentally Disabled as well as DCYF services may have a lower growth rate than forecasted.
5. Budget Year & Out Years Obstacles
According to Chafee, the gaps between revenue and expenditures continue to be a function of both cyclical economic and structural issues. Some of the major changes already enacted have been limiting choices such as the case of high tax – low revenue yield structures. An example given at the hearing was that of the sales tax. This, among other similar revenue to expenditure comparisons demonstrate examples of expenditure base growing at a significantly more rapid rate than the economy supports.
“In a small state, every international and national economic event will affect some or all of our businesses," said Mazze. "We need a focused/diversified economic development strategy that will help the state go through these economic challenges. Without such a strategy, the state will continue to lose jobs, lose population, become more dependent on federal human resource program funding, have larger underfunded public pension and health programs and have more "local" discussions about bankruptcy as an economic development tool.”
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