“The main excuse for devastating cuts that will harm our state is always that there is no alternative, that there is no way to avoid it. That is why it is so important to demonstrate that there are many alternatives…”
With our state budget facing a hole of nearly a billion dollars, there is great risk that essential programs might be gutted. There is a serious risk of mass layoffs hitting our public school system, our state agencies, and our municipal governments. We could even see Medicaid slashed or massive tax increases hitting those who can least afford it.
In my view, the most important solution to our state budget gap is repealing the 2006 tax cuts for the rich, which would raise several hundred million dollars, depending on the specifics. Over the years, various proposals have been floated to work on rolling back the tax cuts for the rich. This year, there is a prominent compromise proposal for partial repeal by Senate Finance Chairman Billy Conley, Representative Karen Alzate, and a broad coalition of pro-growth advocacy groups. I in no way want to distract from the campaign to repeal the tax cuts for the rich. Because it’s so important.
However, the gap we’re facing in this budget cycle is bigger than can be closed by repealing the tax cuts for the rich, unless we get federal revenue. One idea, of course, is to go beyond repealing the tax cuts for the rich to raise taxes on the rich higher than they were before the cuts. This is a good idea, and we should do it. But there are also other budget solutions. As we fight against brutal cuts and for investments in economic relief for struggling Rhode Islanders, it is important to lay out as broad a menu as possible of options for paying for crucial investments. In that vein, I am also proposing eighteen other ideas that we can use to solve these problems:
1. The PAYGO Shift
Perhaps the most important way to address our budget problems is to restructure the capital expenses in the budget from the pay as you go (PAYGO) model to the more fiscally responsible approach of bonds on the ballot. Take, for instance, transportation. While Rhode Island has never put a transportation bond on the ballot for more than $100 million, other states take a different approach. For instance, in Massachusetts, the state passed $12.7 billion transportation bond bill in 2014, and an $18 billion transportation bond bill for this year proposed by the Massachusetts Governor just passed the Massachusetts House of Representatives and is slated to soon pass the Massachusetts Senate. Adjusted for Rhode Island’s population being 6.51 times smaller, those numbers would be $1.95 billion and $2.77 billion–each individually more than $1.26 billion, the total amount of outstanding general obligation bonds Rhode Island had as of July 1, 2019.
Currently interest rates are very low, making this an especially favorable time to shift the budget onto the ballot. It’s hard to exactly predict what the interest rate will be, but we can make a rough estimate from prior bonds. For instance, for a tax-exempt Series A Rhode Island general obligation bond issuance dated April 3, 2018, the 20-year yield was 3.459%, compared to a federal daily treasury 20 year yield on that day of 2.90%. For another tax-exempt Series A Rhode Island general obligation bond issuance dated April 25, 2017, the 20-year yield was 3.31%, compared to a federal daily treasury 20 year yield on that day of 2.71%. From these examples, we can estimate that Rhode Island bonds will pay an interest rate roughly 0.58% higher than the federal daily treasury yield. With 20-year daily treasury yields currently bouncing between 1.0% and 1.2%, current rates would predict Rhode Island yields slightly under 2%. With the Fed keeping rates low to boost the economy, this current bonding cycle presents an incredible opportunity for the state. Such a low rate would likely be below the long-run inflation rate, meaning that the bond would actively earn the state money, even before an adjustment for long-term economic growth.
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One of the common objections to using general obligation bonds is that the Rhode Island constitution requires that they receive voter approval, and many politicians don’t want to risk the voters rejecting the bonds. Personally, I think that this is best solved by doing things the voters want with the budget, and it’s worth noting that Rhode Island voters very rarely vote down bonds. However, it is also possible to put language into the ballot so that voters are only voting on whether general obligation protections should be issued, not on whether the bonds themselves should be issued, so that the bonds could be issued without general obligation bond protection if the voters reject it.
In theory, there is no limit to how much Rhode Island could shift the budget onto the ballot, but there are practical considerations. If we started shifting vast sections of the budget into general obligation bonds, markets might punish us, and voters might reject general obligation protection. I think a good approach is to start by shifting expenses such as transportation, state facilities construction, school construction reimbursement, real estate construction subsidies, etc. that Rhode Island typically covers on a PAYGO basis, and other states often cover with bonds.
Ultimately, bonds do have to be paid for. This isn’t a perfect solution. But it is preferable to making savage short-term cuts that would devastate our economy when it is hurting most. And it is probably the only thing big enough to get out of this budget with the space to make real investments, not devastating cuts, unless we get federal aid. Additionally, the amount of bonding needed can be reduced by cutting several unnecessary and wasteful capital expenses in the budget.
2. Cancel or delay the new state police barracks
The current budget proposes building a new state police barracks in West Greenwich for $35 million, replacing the current three smaller barracks spread out across the southern part of the state. Even if you think this is a good idea, which I do not, it is certainly something that we can postpone until the budget situation is better.
3. Cancel the new privatized IT infrastructure contract for child welfare and finance
The budget proposes to spend $90.7 million (with a small portion coming from federal funds) on hiring a private company to build new IT infrastructure systems to replace the state’s outdated child welfare and human resources/financial management systems. As we saw with the UHIP debacle, these large privatized contracts typically don’t work and wind up wasting vast amounts of money. Instead, it makes much more sense to build and maintain the system in house. At the very least, this is something we can delay.
4. The Medicaid shift
This is a big one. Basically, the way it works is that we raise the taxes we levy on Medicaid-funded healthcare facilities, then reinvest those funds in increased Medicaid spending. Because Medicaid spending gets matched by federal money through four different reimbursement rate schemes that average out to roughly a 2:1 federal:state match, the increased federal funds mean that the healthcare providers wind up with more money at no cost to the state. At a time when one of the most important pressures on our budget is the need to truly invest in healthcare, this mechanism is absolutely crucial. Moreover, it is a proven technique. We did this last year, raising the hospital license fee and reinvesting those funds in Medicaid. There’s really no reason we can’t do this to make the investments our nursing homes desperately need as they slowly recover from this crisis.
5. The Medicaid shift for developmental disability facilities
Developmental disability facilities also receive federal funds, and because many are privatized, increased revenue can be raised from fees, then reinvested with matching federal funds to increase investments at no cost to the state. In this case, the increased investments should be shared with the public portion of the system, and we should fight any efforts to privatize it.
6. Eliminate the $15.7 million for insurance companies in the Medicaid budget
I’ve written before about a proposal in the budget to spend $15.7 million on insurance companies. See here for more details. I think that is something we can skip this year.
7. Raise the insurance company tax
Insurance companies in Rhode Island don’t pay corporate income tax. Instead they pay a special tax based on their premium revenue. Insurance companies can afford to give back, and raising this tax will provide revenue for the state.
8. Create a progressive corporate income tax
Currently, Rhode Island has a flat corporate income tax, where every corporation pays a 7% rate no matter how big the profits. Many other states have a progressive corporate income tax, where corporations that make bigger profits pay a higher rate. Rhode Island could do the same, for instance adopting a 10% bracket for profits over a million dollars.
9. Legalize recreational marijuana, without the over-criminalization proposed in the Governor’s budget article
With recreational marijuana legal in Massachusetts, Rhode Islanders already just go over the border to buy cannabis. It is long past time for our state to end the practice of marijuana prohibition for reasons that go far beyond revenue, but we also do need revenue now. (That being said, we do need to fix the Governor’s proposal. In my view, it contains far too much criminalization and does not allow the communities that were harmed by prohibition to benefit fully from legalization.)
10. Eliminate the South County hospital license fee carveout
Currently, the two hospitals in South County, a wealthier part of the state, pay a 37% lower hospital license fee than the hospitals in the rest of the state. We can eliminate this special carve-out to raise substantial revenue for the state.
11. Refinance of all taxpayer-supported debt, not just general obligation bond debt, ideally as general obligation bonds
This is a bill I’ve introduced, based on something Governor Raimondo did in her first budget. In that budget, she took advantage of low rates to refinance general obligation bonds, extending their term and lowering their interest rate. This provided a strong short-term benefit to the budget, and it saved the state money on a net present value basis. Now that interest rates are once again very low, it is time to take this idea up again. This time, however, I think it should be expanded to include refinancing all the more expensive debt that doesn’t pledge the general obligation with cheaper general obligation bonds.
12. Increase the state share of gambling revenue
Although Twin River will fight it tooth and nail, we can demand a larger share of their profits. This is a state-controlled monopoly, and Twin River can’t credibly threaten to leave the state. Given the incredible power of the gambling interests, it would probably be more politically difficult than any other idea on here, but it should be on the table.
13. Remove FTE caps
One of the most wasteful provisions in the budget is what is known as an FTE (full time equivalent) cap, a limit on the number of people state agencies can hire. Because of the FTE cap, agency directors can’t choose hiring staff if it’s the cheapest way to deliver a service. Instead, they opt for two budget-busting alternatives: privatization and overtime. By privatizing services and hiring overpriced consultants, we wind up spending much more than if we’d just hired people to do the work ourselves. By requiring employees to work brutal overtime to cover for understaffing, we have to pay more because of the higher pay rates for overtime. Overtime is also hard on workers and their families, and it leads to worse services. It’s gotten so bad that workers at the state prison sometimes have to work 32-hour shifts.
14. Cancel the 6/10 project and reconnect the neighborhoods instead
A very substantial chunk of the budget goes into the extremely expensive project to rebuild the troubled 6/10 highway that slices through the heart of my district. When we were talking about how to address the highway, the community sentiment was to remove it, replace it with a boulevard, and open up wide swaths of land for new housing and businesses. This would have been much cheaper. Instead, community voices were ignored, and the highway rebuilding began. Years later, we are still a long way from the project being finished, and it would almost certainly still be cheaper to build the boulevard instead. It would also address our future deficits through driving economic growth.
15. Downscale other expensive highway projects, such as the Henderson Bridge
In this era of tight budgets, we may not be able to afford expensive overbuilt infrastructure that drives excess traffic and harms neighborhoods and the environment. Instead, we should look towards neighborhood-scale, human-scale roadway infrastructure. A good example is the Henderson Bridge that connects Providence’s East Side to East Providence. Originally built as a the start of a highway that was never built, it is wildly overbuilt for the neighborhood and closes off acres of prime land from development. The rebuilding plan saves some money by slimming down the bridge, but it is still far more expensive than moving back to the old arrangement, a neighborhood-scale bridge at the narrowest point of the estuary. Around the state, there are many highway projects that could easily be brought down to a more growth-oriented neighborhood scale, saving large sums of money.
16. Increase environmental enforcement fines
In recent years, as the Bureau of Environmental Protection has suffered under severe underfunding, environmental enforcement has gotten laxer and laxer. Increasingly, environmental enforcement takes a no-fines approach. However, if we crack down on violations, raise fines for polluting businesses, and increase enforcement staff, we can raise revenue while keeping our state cleaner and healthier.
17. Reduce executive salaries
While many argue that high salaries for top administrators are necessary to attract top talent, I question that. I think that high salaries, in fact, tend to attract more corporate-type administrators, the kind of administrator who is looking for money and prestige, not doing it out of a sense of service. More than that, though, good managers should cut their own pay before asking their workers to make deeper sacrifices. When Providence faced the need to make brutal cuts, Mayor Angel Taveras cut his own salary first. Rhode Island should trim at the top before we go after rank and file workers earning middle class salaries. Crucially, this kind of reform is easier to implement because it doesn’t have to be collectively bargained.
18. Furloughs before layoffs
If all else fails, and we must make cuts, it is much better to do temporary furloughs than permanent layoffs. The pain is less when it is spread. Furloughs should be a last resort, but they are preferable to layoffs.
The main excuse for devastating cuts that will harm our state is always that there is no alternative, that there is no way to avoid it. That is why it is so important to demonstrate that there are many alternatives. I hope that these ideas will be helpful to the conversation as we consider options to address this budget gap. But this is by no means a complete list. If you have other ideas for avoiding severe budgetary pain, I encourage you to propose them. We need to hear from everyone.