Moody’s Investors Service is criticizing Providence leaders – and, implicitly, Superior Court Judge Sarah Taft-Carter – for running a $15 million operating deficit during the 2011-12 fiscal year, but softened its criticism based on other steps the Taveras administration has taken.

“The shortfall is credit negative as the city’s financial position has weakened considerably over the past four years,” Moody’s analyst Vito Galluccio wrote in a note to investors. “However, its balanced budget for [fiscal] 2013 indicates some progress toward restoring fiscal stability.”

Galluccio cited two big drivers of the $15 million operating deficit: Taft-Carter’s mathematically flawed ruling last year that the city didn’t need to move its retirees to Medicare, and various types of tax revenue failing to meet the city’s projections. The deficit would have been even larger if the city hadn’t shorted its 2012 contribution to the Providence pension fund by $5.4 million, he said.

“The 2012 results follow several years of operating deficits that have left the city in a precarious financial position,” Galluccio said. He blamed the fiscal crisis on a $125 million reduction in state aid during former Mayor David Cicilline’s second term and “rapidly growing expenditures related to employee salaries and benefits.”

(more…)

When is a surplus not a surplus? When lawmakers already spent it.

Rhode Island finished its 2011-12 fiscal year with a $115.5 million surplus, State Controller Marc Leonetti told lawmakers in a letter [pdf] last week. But before reduction-ravaged state agencies start popping champagne corks, they should take a closer look at the numbers.

The budget lawmakers adopted in June included a projected $93.9 million surplus, so they already allocated that extra cash to various programs in this year’s spending plan. The additional surplus revealed last week – that is, the amount of money lawmakers weren’t expecting and thus didn’t already spend – is a lower $21.7 million.

The budget surplus is a good sign as far as it signals a stronger-than-expected economy is producing more tax revenue and the tax-and-spending blueprint isn’t out of whack. But considering Rhode Island’s large projected deficits in future years, an extra $21.7 million isn’t a game-changer.

Update: Another way to look at it – the $21.7 million surplus will cover less than 15% of the $148.9 million deficit already projected for next year (2013-14). There’s still a $127.2 million deficit projected for next year even with this additional money.

By Ted Nesi

PROVIDENCE, R.I. (WPRI) – Legislative leaders unveiled a state budget proposal late Thursday night that would send $33 million more to school districts and raise some taxes but would not increase the restaurant tax as proposed by Governor Chafee.

Read the rest of this story »

Update: Lots of random trivia about the budget on my Twitter feed. Which boards and commissions will keep paying their members? Who will be the new Chancellor of Education? Will Central Falls’ pension system get moved to MERS? Find out here.

In 2011, Governor Chafee proposed a state budget that was big and bold. It flopped with lawmakers.

Lesson learned: Chafee’s 2012-13 budget is less big and bold, more modest and managerial. Beyond targeted spending on his top priorities – notably more than $38 million for education – his vision is a relatively austere $7.9 billion tax-and-spending plan for a state that’s spent five long years in the economic doldrums.

Last year’s budget debate left Chafee looking ineffective and out of touch with the mood on and off Smith Hill. This is a humbler document after a year atop state government. The governor still thinks broadening and lowering the sales tax is a good idea, for example. But lawmakers aren’t interested, and he left it out. There’s no combined reporting or other major shift in business taxation.

The initial focus will likely be on Chafee’s $93 million in tax and fee increases. While far less sweeping than his doomed sales tax overhaul, there’s still plenty for critics to seize on: a two-cent rise in the meals tax to pay for the education increase will draw howls, as will the expansion of the tax base to cover pricey clothes, limo rides, small cigars, bed-and-breakfasts and vacation homes.

(more…)

State lawmakers return to the State House at 4 p.m. Tuesday to kick off the 2012 legislative session. The AP’s David Klepper offered a solid rundown Monday of the big issues on the table.

One headache lawmakers aren’t facing – to their great relief – is a round of midyear budget cuts and tax increases. That’s because, for the second year in a row, the amount of money coming into the state treasury is working out about as they expected last spring when they passed the $7.7 billion budget for 2011-12.

Rhode Island’s state government took in $1.13 billion in revenue from July 1 to Nov. 30, which is $43 million more than the number-crunchers had projected. That gives the state a surplus of 4% for the fiscal year’s first five months. Personal income tax, the state’s top source of revenue, has come in 5.6% above expectations, while sales tax revenue has been basically on target. That’s mainly because the economy hasn’t veered off track.

Rewriting the budget halfway through the fiscal year, by passing what insiders refer to as “a supplemental,” was a painful perennial problem during Governor Carcieri’s second term. The most memorable fight was in 2010, when the House and Senate passed competing supplementals – a rare public dispute between the two chambers that took place shortly after Gordon Fox succeeded Bill Murphy as House speaker.

So far, though, Governor Chafee hasn’t had to sign a supplemental: the last budget passed under Carcieri (which he didn’t sign or veto) stayed balanced, and it looks like this year’s will, too. But that just means the new administration has only had to do one round of cuts and hikes, rather than two: this year’s budget closed a $331 million shortfall and next year’s is facing a $120 million gap.

And of course, each year’s shortfall is on top of the previous year’s. When you add it all up, Rhode Island lawmakers have closed a whopping $2.3 billion in budget deficits since 2007-08, the Center on Budget and Policy Priorities estimates.

Taveras speaks at City Hall in March

The Taveras administration says negotiations with the Providence Teachers Union have not broken down despite the organization’s decision to call an afternoon press conference blasting the city.

“Negotiations with the teachers union are ongoing,” mayoral spokesman David Ortiz said in an email. “With the new fiscal year quickly approaching, there is definitely a sense of urgency to conclude the process as soon as possible.”

Ortiz’s message arrived just 20 minutes after the teachers union issued a media advisory accusing the administration of turning down more than $16 million in concessions; wrongfully terminating 125 teachers; and telling 97 teachers the school department had not found a position for them next year.

Mayor Angel Taveras’ director of communications, Melissa Withers, declined to address the union’s accusations directly, citing the administration’s policy of not negotiating through the media. She also said the 97 teachers will be able to apply for 90 other open teaching positions in the city for this fall.

“I doubt very seriously that that’s the end of the negotiations,” Withers said of the union’s press conference. “I think they’ve been pretty vocal all along.”

The teachers union is the only one of the city’s four major employee groups that hasn’t concluded its concession negotiations with the Taveras administration. Local 1033 and the firefighters agreed to cutbacks, while 78 police officers are now being laid off after their union couldn’t reach a deal.

If you’re like me, you probably feel more confused about the House Finance Committee budget the more you read about it.

It cuts more than Chafee but spends more than him, too? It eliminates most of his revenue programs but winds up with more money anyway? It slices, dices and chops?

I’m not going to claim to have mastered it all, but I thought I’d set out a few facts that I’ve gleaned from all the documents being released. This list isn’t complete or comprehensive, but here we go.

The House’s budget spends more than Chafee. You wouldn’t know it from the soundbites, but the House Finance Committee calls for the state to spend more money in 2011-12 than the governor did. The House budget totals $7.702 billion; Chafee’s totaled $7.661 billion. Small difference – $41 million – but there it is.

The House starts off with $108 million more than Chafee. That’s because the House expects to finish this budget year with a $58 million surplus, while Chafee expected only $16 million, and also  expects next year’s tax revenue to come in $67 million above the amount Chafee did. That extra money alone would cover one-third of the highest deficit projection we’d heard, which was $331 million.

The House raises a lot less new *state* revenue than Chafee. Taxes and fees in Rhode Island will rise $30 million under the House budget, much less than Chafee’s $178 million, mostly by sharply scaling back his high-profile changes to the sales tax system.

The House doesn’t cut social services much more than Chafee. The Finance Committee budget would cut human-service programs like Medicaid by $78 million from this year’s level; Chafee wanted to cut them by $71 million. So the House only made $7 million more in cuts than Chafee did in that area.

The House cuts local aid less than Chafee. The FinCom budget would reduce aid to cities and towns by $26 million; Chafee would reduce it by $30 million. Again, small difference – $4 million.

The House cut everything else much more than Chafee. FinCom Chairman Helio Melo’s explanation of how he balanced the budget includes a line labeled “Departments, Agencies, transfer/surplus change.” Chafee cut that line’s expenses by about $8 million; the House cuts it by $44 million, more than five times as much.

It’s important to note that none of this deals with the many, many changes the Finance Committee made in the structure of all that spending – there’s a lot of ways to dole out $7.7 billion, and they made all sorts of choices that differed from the governor’s. But these top-line numbers can be helpful to have in mind.

Here’s a chart contrasting the two deficit-closing plans, based on information from House Finance:

The striking blue bar in the middle shows how much extra revenue Chafee wanted to raise, mostly through his sales tax plan. But it shouldn’t be looked at in isolation; all three categories on the left side of the chart represent increases in state revenue. The difference is, Chafee’s new revenue came from taking a specific action – mostly raising more from the sales tax – while the House’s new revenue came passively – an improving economy is bringing in more money under the current system, without making any changes.

Got questions? Leave them in comments, send me a tweet or drop me in an email.

What Congress giveth, Congress taketh away.

Back in February, I put up this chart showing why the withdrawal of federal stimulus aid was going to make it a particularly painful process to put together the state budget for the fiscal year that starts July 1.

With House leaders inching closer to releasing their tax-and-spending plan, I thought it would be a good time to update the chart. These numbers are based on Governor Chafee’s proposal from March:

A couple things stick out to me.

Though it’s a little hard to tell from this chart, Governor Chafee’s 2011-12 budget calls for the first decrease in the total size of the state budget since the recession began. State spending grew by about $1 billion, from $6.9 billion in 2007-08 to $7.9 billion in 2010-11, over the past four years.

But that top-line growth masks a big change in where the money that pays for that spending came from.

Total general revenue (that is, regular Rhode Island state tax revenue) dropped 16% between 2007-08 and when it bottomed out in 2009-10, from $3.4 billion to $2.9 billion. But federal funds’ contribution to the state budget grew a whopping 50% between 2007-08 and 2010-11, from $1.9 billion to $2.9 billion.

Put another way, federal funds covered the entire billion-dollar growth in the state budget over the past four years. Much of that extra money is now disappearing; the federal contribution will decline from $2.9 billion to $2.6 billion in 2011-12. The state is making up some of the gap, but not all of it.

Put a third way, the state-covered share of the budget plunged from 49% in 2007-08 to 36% in 2009-10, but is now creeping back up. It’s expected to be around 40% in 2011-12 – higher than last year’s 38% but still far less than the pre-recession level. The federal share was 28% in 2007-08, peaked at 37% this fiscal year, and will decrease to 33% next year.

With less than three weeks to go before the start of the new fiscal year, Rhode Islanders are about to get their first look at legislative leaders’ tax-and-spending plan for 2011-12.

The House Finance Committee will hold a hearing on the budget proposal – and likely vote on it – this Friday at 4 p.m., according to a notice posted this afternoon on the General Assembly’s website.

Once the finance committee approves the budget, the chamber must wait a week to take it up, which means the full House is likely to hold its traditional marathon budget hearing on Friday, June 24.

House and Senate leaders have been meeting for weeks to come together on a revised blueprint after lawmakers rejected the initial version of Governor Chafee’s sales-tax overhaul, a centerpiece of his $7.7 billion proposal. Cuts in social services are among the alternatives reportedly being considered to close a $186 million shortfall.

The actual text of legislative leaders’ budget proposal will be released at Friday’s hearing. Few details about its contents have emerged so far. The tax-and-spending plan isn’t finished yet, but it’s far enough along that lawmakers felt comfortable scheduling the key hearing, House spokesman Larry Berman told WPRI.com.

“In the next 48 hours there’s still a lot of work that needs to be done,” Berman said Wednesday afternoon. The governor’s office has been taking part in the budget talks along with House and Senate leaders, he said.

Both the finance committee and the full House will vote on each article of the budget bill separately; Chafee’s budget proposal contained 43 articles, though legislators’ revised version may have a different total. Theirs will be labeled House Bill No. 5894 Sub A.

Members of the House Finance Committee and the press are usually given briefings about the budget’s contents the morning of the committee hearing. Rank-and-file members will spend the week between the hearing and the full House vote reviewing the document and crafting potential amendments.

If the House approves the budget on June 24, it could then move to the Senate Finance Committee as soon as Tuesday, June 28, and could come before the full Senate a day later on Wednesday, June 29.

If the Senate approves the bill as enacted by the House, it would then go to the governor, who could either sign it, veto it or let it become law without his signature. If the Senate amends the budget, however, it would have to go back to the House first.

If there’s one fact The Poverty Institute’s Linda Katz would like lawmakers to keep in mind as they finish the budget, it’s this: RIte Care accounts for 67% of the Rhode Islanders who use Medicaid services, but only 24% of total Medicaid spending.

Katz and her colleagues are emphasizing the efficiency demonstrated by that statistic – and others like it – as they try to persuade the General Assembly not to close a budget shortfall originally pegged at $331 million partly by dropping the 17-year-old RIte Care program’s health insurance coverage for some low-income adults.

“It’s not that we’re not about a balanced approach,” Katz told WPRI.com. “But really, on the human services part of the budget, there’s no easy way. For all but Medicaid, we’ve cut to the bone – and within the Medicaid program there’s no easy way to make cuts without having those costs bubble up some place else.”

Medicaid is one of the big enchiladas when it comes to what’s driving up the cost of state government. Katz notes Rhode Island no longer spends state tax revenue on Rhode Island Works, the modern successor to traditional cash welfare, and never has on food stamps, while the state’s supplemental disability benefit is $40 a month, far less than Massachusetts and Connecticut provide. The state is also spending the minimum amount on its child-care assistance program that allows it to get federal matching funds.

That leaves Medicaid, which spent $1.96 billion in Rhode Island in 2007-08, just over half of it from state tax revenue. (The state’s share fell during the recession but will be higher again in 2011-12 now that federal stimulus money is gone.) Medicaid “is by far the largest payer and purchaser of health care services in Rhode Island,” and served a total of 217,000 residents during that year, according to the state’s most recent report on the program.

In addition, a small number of Medicaid beneficiaries account for a huge amount of its cost. In 2007-08, the top 7% of its enrollees accounted for 63% of the program’s $2 billion in spending, according to the report. The state spent an average of $72,000 on each of those 15,000 beneficiaries, more than 40 times as much as it did on each of the other people who used Medicaid that year.

The problem, Katz argues, is that the smartest way to reduce Medicaid spending is by continuing to invest in moving elderly enrollees from nursing homes to community- and home-based care and by pushing initiatives to reduce the cost of caring for the most expensive patients.

“So there are ways to save funds in the Medicaid program, but none of that happens on a very short-term basis,” Katz said. But lawmakers are focused on finding $186 million in tax increases or spending cuts by the July 1 start of the fiscal year – less than three weeks from now. “RIte Care is the easy thing to target and it’s the easy thing to cut,” she said. “If you roll back eligibility, you immediately achieve savings.”

Dropping some adults from the RIte Care rolls would also jeopardize millions of dollars in state funding under the provisions of the state’s Medicaid waiver, according to Katz, and drive up emergency-room spending. “It’s cost-shifting, not really cost savings,” she said. “We need to look for where savings can be achieved that don’t jeopardize the well-being of the population that’s being served.”

Instead of further cuts to Medicaid, The Poverty Institute is proposing the creation of an additional income-tax bracket on wealthier households – levying a 7% rate on household income above $250,000 a year. The group says that would bring in $30 million a year.

Considering state lawmakers were using inaccurate Medicaid data at budget hearings as recently as last week, Katz hopes any proposed cuts to social services will be properly vetted before getting voted through. ”I always try to be optimistic,” she said. “I just hope the people who are working on the budget understand all this.”

(chart: Center on Budget and Policy Priorities)

Why is Rhode Island’s state budget always out of whack?

That’s what I was wondering last week after taking a look at RIPEC’s latest study, which expressed concern about whether the state can afford some of the new policies in Governor Chafee’s budget proposal. But these are the numbers that really stuck out to me:

The General Assembly hasn’t even passed the budget for 2011-12 yet, let alone the one for four years from now, yet already we’re on course to spend $411 million more than we take in by the time 2015-16 rolls around.*

Put another way, revenue is supposed to grow from $3.2 billion to $3.4 billion, but spending is supposed to grow from $3.2 billion to $3.9 billion. That’s a problem.

But it also paints a different picture of how we wind up with chronic budget shortfalls – instead of lawmakers heading up to the Statehouse and adding new spending like drunken sailors, the main culprit is the fact that key cost drivers, like health care and employee pay, are on autopilot.

“It’s the social services and the cost of employees,” RIPEC’s John Simmons told me. “Pensions, health care, wage adjustments – they’re all rising faster than general revenue.”

Start with social services – notably Rhode Island’s Medicaid programs (RIte Care, Rhody Health Partners, Connect Care Choice, etc.). Like everything else in America that touches the medical sector, Medicaid costs are rising far faster annually than inflation and tax revenue. As Simmons points out, there’s no way 2% increases in revenue can keep up with 10% increases in health care costs, and medical programs make up around one-third of the state budget.

Rising medical costs hit us on the personnel side, too – the cost of providing health insurance for state employees and retirees rises steeply each year, just as it does for private-sector workers. On top of that, collective-bargaining contracts include a variety of mandatory wage increases and other payments like longevity bonuses that can outpace tax revenue even when it’s going up.

And then there’s the rapidly escalating cost of contributions to the state pension fund, which are calculated by the state’s actuaries based on a formula that doesn’t take into account how much the state can afford. (Note too that the chart above does not include the new, higher pension contributions required starting in 2012-13 after the Retirement Board’s big vote in April.)

Another recent RIPEC study compared the 2001-02 state budget with next year’s and broke down what accounted for the increase in spending, which rose from $5.2 billion in 2001-02 to $7.7 billion in 2011-12. Here’s what they found:

Nearly 70% of the increase in spending went toward social services (“grants and benefits”) and personnel costs. Local aid actually decreased.

“This is where you get into the problem of these built-in costs – things happen without changing it,” Simmons said. “It’s on autopilot.”

Another way to look at it is that many of these costs are determined separately from the annual budget process – state lawmakers decide who and what RIte Care should cover, but they don’t get to decide how much hospitals and doctors will charge us to do so. Employee compensation is decided in union talks that deal with multiple years, not based on what the House Finance Committee thinks the state can afford to pay each June. Nor is this just a problem for Rhode Island – Massachusetts, Connecticut and other states face the same pressures.

“We believe that the legislature, the governor, somebody has to step back at some point and say, wait a minute, this is no longer sustainable,” Simmons said. “We’re always in a structural problem that has to be reexamined. What do we really want to provide?”

* Update: A reader inside state government rightly pointed out to me that the numbers in the chart above, which came from RIPEC’s report, are a bit out of date. They use the projections included in Governor Chafee’s March budget proposal, which in turn are based on forecasts made at last November’s estimating conference.

New forecasts were done last month, and those would improve the picture a bit. For example, revenue would be about $68 million higher in 2015-16, which would narrow the projected deficit for that fiscal year. The Budget Office tells me they’ll do a full update of the figures after the actual budget is enacted.

While it’s true Moody’s downgraded its outlook for Rhode Island’s credit rating last Tuesday, a close read of the agency’s report shows some surprising optimism on the part of analysts there (emphasis mine):

Even prior to the recession, Rhode Island faced persistent revenue under-performance and spending challenges. These were exacerbated by the downturn and by the state’s practice of balancing its budgets with one-time solutions and increasing its short-term borrowings for cash flow purposes. The state appears poised to reverse these practices in its FY2012 budget, which is likely to be adopted very close to the July 1 opening of its new fiscal year.

Governor Chafee’s budget proposal did indeed seek to reverse those practices. But doing so partly depended on enacting his sales tax proposal, and it remains to be seen whether legislative leaders will follow his lead when they release their revised proposal.

For what it’s worth, Moody’s has been a rare source of support for the Chafee administration’s fiscal policies. In March, the agency heaped praise on his MAST Fund proposal that aims to shore up underfunded local pension and retiree health plans, which the governor’s office happily trumpeted.

Speaking of the budget, House Finance Chairman Helio Melo and his Senate counterpart Daniel DaPonte “are working diligently every day” to complete it, House spokesman Larry Berman told me this afternoon. They’re fleshing out the details together while working out the big issues with their respective leaders, Gordon Fox and M. Teresa Paiva Weed, he said.

The revised budget must be posted online at least 48 hours ahead of a committee vote, so the soonest it will be made available is Wednesday to prepare for a Friday roll call, Berman said. But it didn’t sound likely the budget will be done that soon – we’re more likely to get it sometime next week.

The Taveras administration is warning that city firefighters could be the next group of workers to face layoffs in Providence.

“The clock is ticking,” Melissa Withers, a spokesman for Mayor Angel Taveras, told WPRI.com on Thursday. “We’re running out of time. This has to get resolved.”

No layoff notices have been issued to fire personnel and there are no plans for a press conference to announce such an action on Friday, she said.

But “the mayor has said on the record everything is on the table for everybody, and people who think they’re immune need to think again,” Withers said.

Taveras is seeking a $6 million cut in the fire department’s budget for 2011-12. The administration is seeking the same amount of savings in the police department and has already announced plans to lay off 60 to 80 police officers to achieve that.

“We have to get to $6 million,” Withers said. “There’s nothing else we can do in terms of that number. The number is the number. We’ve got to get there.”

House Democrats are on track to release their version of the state budget for 2011-12 within the next two weeks, a spokesman said Wednesday.

The budget is still in the House Finance Committee and the next step will be having the full panel vote on it once a draft is released, House spokesman Larry Berman told WPRI.com.

“Probably the soonest it would be is a week from Friday,” or June 10, he said. “It could be a little later.”

The budget will set out the state’s tax and spending policies for the new fiscal year that starts July 1.

The House version could differ substantially from the proposal Governor Chafee released in March, since Speaker Gordon Fox has effectively killed the administration’s original sales tax proposal and more tax revenue is now projected to be coming in.

The Rhode Island Public Expenditure Council just released its post-Revenue Estimating Conference analysis of Governor Chafee’s 2011-12 budget proposal. Here’s a quote from the press release:

The budget must guide the delivery of a finite amount of resources through expenditures prioritized to reflect the concerns and needs of citizens while accounting for out-year fiscal implications of those spending decisions to ensure continued delivery of services.

That’s a very sensible sentence, but boy – they’re not making this policy reporter’s job any easier with prose like that. On the plus side, RIPEC recently put up a snazzy new website that I’m digging.

The report says the state will end this year with a $65 million surplus, though that doesn’t include putting $22 million back into the Rainy Day Fund. If memory serves, Chafee’s budget suggested deferring the repayment and putting the surplus toward next year.

With state leaders heading back to the drawing board to craft a plan for closing the $331 million shortfall in next year’s budget, it’s a good time to revisit the results of last month’s Brown University poll, which included a series of questions on the topic. What do voters want the politicians to do?

First off, it’s a myth that Rhode Islanders are dead set against any increase in taxes. (It would also be a myth to say they’re opposed to any spending cuts, but I haven’t really heard people assert that.) Nearly three-fourths of registered voters prefer a mix of lower spending and higher taxes:

As always, though, the devil is in the details. Which taxes should be raised? Which spending should be cut? Brown offered eight options, and here’s how voters responded:

The most popular option by far is reducing spending on government employees’ pensions, which will cost the state $233 million next fiscal year and much more in subsequent years. In fact, that’s the only one of the eight choices with a majority in favor – 66% of voters support the idea.

After pension cuts, the next three options with the most support are increased taxes on sales (41%), businesses (38%) and incomes (33%), followed by cuts to higher education (32%). Of course, there are many more types of taxes and spending in the nearly $8 billion state budget, so those questions don’t exhaust the possibilities.

Finally, Brown took a closer look at the sales tax question by testing support for adding 10 items to the list of those that get taxed – a key question since a broadening of the sales tax at either 7% or 6% remains on the table, although Chafee’s 1% proposal appears to be dead.

Only two of the 10 – dry cleaning and tickets to movies and concerts – are supported by more than half of voters:

The telephone survey of 425 registered voters in Rhode Island was conducted March 11 to 13. The margin of error is plus or minus 4.7 percentage points. If you’re wondering how these priorities match up with the state’s current taxing and spending policies, check out these charts.

Greater Providence Chamber of Commerce chief Laurie White took a victory lap in the Projo on Saturday after effectively killing off the original version of Governor Chafee’s sales tax proposal. This caught my eye (emphasis mine):

The community-wide outcry over Governor Chafee’s proposal to widen the state sales tax base to “capture” $281 million in new tax revenue has real and very personal consequences.

Thankfully, Assembly leaders have put the brakes on this wrongheaded proposal as Rhode Islanders representing a wide swath of the jobs-producing sector of our economy descended on the State House to fight it off — hopefully permanently! We must be vigilant.

$281 million? Where’d that come from? The net cost of Chafee’s proposal is always reported as $165 million, 41% less than the figure White cited.

I asked the Chamber how they got that figure, and they explained that White specifically used the term “new tax revenue” to only include the additional taxes Chafee’s proposal would collect by adding the new 1% tax and broadening the goods and service taxed at 6% – leaving out the revenue that would be lost (or, for taxpayers, the money they would save) by reducing the rate from 7% to 6% on items currently taxed.

Here’s how much cash the three parts of the Chafee plan were forecast to have raised or lost next year:

White added together the first two pieces – taxing more items at 6% ( +$198 million) and 1% ( +$85 million) – and voilà: that’s $281 million in new taxation. (There’s some rounding.)

Across the economy, though, Chafee’s plan would only have resulted in $165 million in additional taxation on sales because the rate would fall from 7% to 6% on all the items that are already covered by the sales tax. So the Chamber is describing the proposal as if it were all pain and no gain, which is a somewhat incomplete picture of how the governor’s proposal would have worked.

On a related note, relations between the Chamber and the Chafee administration may not be quite as hostile as last week’s contretemps would make you think.

In a story over the weekend about Chafee’s first 100 days, The AP’s David Klepper quoted some relatively kind words about the governor from White. “He’s inherited a very difficult situation,” she said. “I believe [the sales tax plan] was a sincere proposal, and I believe he truly does want to work with us.” White is also scheduled to join Chafee on a fact-finding mission to Baltimore later this month.

Governor Chafee’s original sales tax plan may be gone, but it’s not forgotten. One of the problems the proposal ran into was that it had many critics and few defenders.

Take The Poverty Institute, which advocates on behalf of government support for low-income Rhode Islanders, and therefore often backs efforts to raise tax revenue rather than cut programs.

The organization did wind up coming out in support of Chafee’s proposal last week. But included in the group’s explanation of its position was this chart showing how much more sales tax different groups of Rhode Islanders would pay if the plan passed:

The analysis was done by The Institute on Taxation and Economic Policy, which is nobody’s idea of a right-wing think tank. If you look at the percentages, rather than the flat dollar amounts, this shows Chafee’s plan was unquestionably regressive – the less income you have, the bigger a share of it you’d wind up paying.

While business opposition to the sales tax proposal garnered the most attention, I think this was another key reason for its demise – while the governor was proposing to raise revenue instead of relying solely on cuts to balance the budget, his chosen method for accomplishing that wasn’t particularly liberal.

That’s likely why, in The Poverty Institute’s case, its support for the sales tax plan was tied to passage of a more generous Earned Income Tax Credit, which boosts poor and working-class Rhode Islanders’ incomes – but which was not really a part of the discussion, particularly with the state already facing a large deficit next year.

The dynamic was on display at The Poverty Institute’s annual state budget conference last month, where the Center on Budget and Policy Priorities’ John Shure admitted it would have been preferable for Chafee to have proposed raising the income tax rather than the sales tax.

But “I’m also not here to let the perfect be the enemy of the good,” he said that day. “In states where the only option seems to be to raise the sales tax, you need that money,” and he argued governors who are willing to propose higher taxes needed liberal groups’ support either way.

Similarly, another organization that spoke in support of Chafee’s plan last week – the union-backed advocacy group Ocean State Action – sounded perfectly willing to throw it overboard late last week and pivot nstead to a more general call for raising taxes on upper-income Rhode Islanders.

“In light of growing opposition to Gov. Chafee’s sales tax plan we need real solutions to our fiscal crisis,” the group said in a press release Friday that called for “closing corporate tax loopholes, reforming our regressive personal income tax structure, and taxing our state’s top earners at a reasonable rate.”

With battle-ready enemies and fair-weather friends, then, perhaps it’s no wonder Chafee’s original proposal crashed and burned.

House Minority Leader Bob Watson says he thinks lawmakers should approve civil unions for same-sex couples amid uncertain prospects for legalizing gay marriage outright.

“I support that as an alternative that I believe has enough support in the General Assembly to pass and become law this year,” Watson said Friday morning during a taping of WPRI 12′s “Newsmakers.”

The East Greenwich Republican defended his opposition to gay marriage, brushing aside arguments about civil rights while citing the importance of maintaining the traditional definition of the word “marriage.”

“I happen to believe in the power of the word ‘marriage,’ and I believe it has a historical connection, and I believe that currently our current political environment is such that I think the public would be more supportive of civil unions, and I support that, as well,” Watson said.

Watson also discussed a sharp exchange he had on the House floor earlier this week with Speaker Gordon Fox – a riveting video of which will air as part of the “Newsmakers” episode – after the GOP leader called for a quick vote on gay marriage so attention could shift to the budget; the speaker had his microphone turned off.

“I don’t like it when they turn my microphone off, and I also don’t like it when we keep secrets in that building,” Watson said of the Statehouse. “There’s no reason why we can’t discuss the travel and the tracking of the gay marriage bill. It is a distracting issue. It’s been a preoccupation throughout the course of the session, and I just hoped and expected when we came back off of April vacation we would be focused on the budget exclusively.”

Watson also discussed whether lawmakers are still likely to increase sales tax revenue; the prospects for further pension changes; how the budget could be balanced exclusively with social-service spending cuts; and the need for more oversight of legislative staff pay.

I jumped in for the second half of the show to discuss pensions and my Chafee interview with Tim White, Ian Donnis and Arlene Violet. The full episode will be posted online today and air at 10 a.m. Sunday on Fox Providence.

• Nesi’s Nightcap

In a statement issued early this evening, House Speaker Gordon Fox declared Governor Chafee’s sales tax proposal “unacceptable,” and described taxing some of the proposed items at 1% – including home heating oil, water and manufacturing supplies – as “particularly offensive.”

“After speaking with House members, we will not support the current proposal,” Fox said.

That sounds pretty clear. But Fox’s statement may be more nuanced than it appears at first glance.

In combination, Chafee’s sales tax changes were forecast to bring in $165 million in the fiscal year that starts July 1 – half the money needed to plug Rhode Island’s $331 million shortfall. So dropping it entirely would blow a huge hole in next year’s proposed budget.

If you read Fox’s statement closely, though, he doesn’t rule out raising more revenue from the sales tax – he rules out “Chafee’s proposed multi-tiered sales tax approach,” and he only singles out the idea of a 1% surtax for special condemnation.

So it looks like the 1% tax – which Chafee announced on the first day of his candidacy – is dead. But Fox’s statement doesn’t say anything about whether he could support broadening the number of goods and services taxed at 7% (or at 6%, if Chafee’s proposal to lower the rate passes). And the revenue that would be brought in by taxing more items at 6% far outweighs the amount generated by the 1% tax.

“The House will not pass the budget in its current form,” Fox said. “We will instead develop alternatives to this proposal and will continue to work with the governor to amend his budget submission.”

I don’t know what’s going to happen next – all I know is, somehow or other, the General Assembly is all but certain to find a way to eliminate the $331 million deficit and pass a balanced budget for 2011-12.

Update: Chafee responded with a terse statement of his own issued just before 8 p.m.: “I look forward to working with Chairman Melo and Speaker Fox to advance an honest, responsible budget that fixes our chronic structural deficits and puts Rhode Island on a path to prosperity.”

This is the first in a series of articles based on my interview with Governor Chafee.

The Providence Journal is “hurting Rhode Island” with its barrage of negative editorials, advertisements and articles about the Chafee administration’s sales tax proposal, the governor told WPRI.com on Monday.

Governor Chafee offered a robust, spirited critique of the Projo and other state leaders during a 45-minute interview in his office. He defended his budget proposal as responsible and measured while accusing the paper of lambasting it because he proposes to end the newspaper’s decades-old exemption from the state’s sales tax.

“There’s so much negativity that outsiders reading this must think, ‘What a bleak picture is this’ – inaccurate – ‘portrayal of the Chafee tax plan; it’s going to just turn out the lights and drive a stake in the heart of Rhode Island’s economy,’ ” the governor said.

Chafee repeatedly emphasized that he entered office facing a large budget deficit – now estimated at $331 million – for the fiscal year that begins July 1. The Journal and his other critics have offered “not a syllable of constructive alternative to the deep hole that I did not create, I inherited,” he said.

Chafee pointed to other examples of tax increases that did not derail nascent economic recoveries, noting that Massachusetts raised its sales tax from 5% to 6.25% in August 2009 but has nevertheless weathered the recession better than Rhode Island, and that Bill Clinton signed a law in 1993 that included tax increases even as the boom of the 1990s was just getting going.

Chafee also tempered his suggestion that there was nothing left to cut in state government after former Gov. Don Carcieri’s efforts. “I guess I would rephrase that,” he said. “The easiest cuts have been done.”

Proposed ideas for savings ‘bizarre’

During the interview, Chafee walked over to his desk and fished out a copy of the editorial page in Sunday’s Journal, which included three suggestions for closing the deficit – renegotiating union contracts as Providence Mayor Angel Taveras has done; repealing unfunded mandates on cities and towns; and eliminating the Coastal Resources Management Council (CRMC).

The governor then critiqued them one by one.

Chafee said the first suggestion – renegotiating contracts – is nearly impossible because of a two-year ban on state worker layoffs agreed to by Carcieri in late 2009. “Mayor Taveras is not saddled with a no-layoff contract,” Chafee said. “He can go to his union and say there will be layoffs – and they know that there will be layoffs. I can’t do that.”

Asked whether he had approached Council 94 and other unions about concessions anyway, Chafee said he didn’t see the point when he could not threaten layoffs and might just add to the existing unhappiness about previous furloughs and his proposed hike in employee pension contributions.

“I’ll look for savings, but I don’t want to go into a meeting with no cards in my hand,” he said.

The editorial board’s next suggestion – repealing unfunded municipal mandates – is unlikely to lead to significant savings if it even passes, according to Chafee, and he thinks the latter outcome is unlikely considering how long the idea has been on the table. “I’m not going to budget huge savings on the thin hopes” that the General Assembly finally acts on those proposals, he said.

Chafee saved his harshest criticism for The Journal’s proposal to eliminate the CRMC, which has a $10.2 million budget and 30 full-time employees this year. He described the suggestion as “bizarre,” because the ban on layoffs would require him to move those workers elsewhere and possibly continue paying to lease the agency’s office.

“It’s just so irresponsible – it’s almost farcical,” Chafee said. “And they’re our established, statewide paper.”

“I want constructive dialogue,” he added. “We’re in a crisis. This isn’t a time for just temper-tantrums.”

‘I don’t like any taxes’

The governor defended his overall sales tax proposal – which would lower the rate from 7% to 6% while exempting fewer items, some of which would be taxed at a new 1% rate instead of 6% – as part of his broader plan to stabilize Rhode Island’s shaky finances.

Asked whether he would reconsider, for example, his particularly unpopular proposal to tax home heating oil, Chafee said: “Let’s make it clear: I don’t like any taxes. Any taxes. This has not been a good year, and none of these decisions has been easy.” He went on to say he was willing to listen to alternatives on that and other issues.

Chafee described the increased sales tax revenue as necessary to pay for other priorities. Those include ending the practice of borrowing to fund transportation projects – which he said will force the state to spend an “outrageous” $40 million on DOT’s interest payments this year – and his proposed new Municipal Accountability, Stability and Transparency (MAST) Fund.

Chafee also said it was important to him that the sales tax rate be brought down to 6%, and he had originally pushed to get it even further down to 5.75%. “I wanted to get lower and really send a message: This is the place to shop,” he said.

“These are tough decisions,” Chafee said. “But in order to have my children not paying for DOT interest and not paying for Coventry’s police and fire pension system down the road, I’m willing to take some hits on this tax.”

Still, Chafee left the door open to a compromise or a different plan, saying he was open to other ways of closing the $331 million deficit and funding his various priorities. “Absolutely, I’ll be open-minded,” he said.

Keep checking back during the week for more from the interview – including why Chafee is hesitant to endorse President Obama next year and whether he’s really open to reducing promised pension benefits.

(photo: Ted Nesi/WPRI)

I’m still making my way through the budget – page 27, baby! – in search of insights and tidbits.

Here’s a minor policy proposal that’s a sign of times – the governor is looking to broaden a telephone service fee so it covers cell phones in addition to landlines.

Chafee proposes decreasing the Telecommunication Education Access fee from 26 cents a month to 15 cents, but applying “this reduced fee to wireless phones.” Cell phone subscribers would pay a combined $1.3 million, while landline subscribers would pay $591,480 less.

Funding from the fees goes into the Telecommunication Education Access Fund, which provides a subsidy to help schools and libraries cover the cost “to access the Internet and other network-based data and image resources,” according to the Department of Education.

Verizon paid for the fund out of its own corporate pocket from the 1990s until 2003, but now it’s a surcharge, and it appears the department is looking to keep up with changing phone habits and protect its funding stream.

It’s not really a Chafee idea – Governor Carcieri proposed the same thing last year, but the General Assembly rejected it. We’ll see if the new governor has better luck.

Governor Chafee’s budget proposal wouldn’t eliminate the state’s deficits over the next five years, but it would shrink them substantially compared with Governor Carcieri’s policies.

Carcieri’s final budget proposal in February 2010 forecast years of red ink for Rhode Island’s state government, with the expected budget deficit growing from $362 million in 2011-12 to $536 million in 2014-15.

The cost cuts and tax increases Chafee unveiled Tuesday wouldn’t eliminate those long-term deficits, but it would make them much smaller. The administration forecasts deficits of $126 million in 2012-13 and $411.4 million in 2015-16.

Here’s a comparison of Carcieri’s February 2010 deficit forecasts with Chafee’s new ones (the small operating deficit for next year will be offset by a $16 million surplus leftover from this year):

These forecasts are, of course, just that – forecasts. They “reflect policy assumptions as well as economic and demographic forecasts,” as the budget document puts it.

Chafee’s aides say they have more ideas for cutting expenses and raising revenue down the road. “This is the beginning of the attack on the structural deficit,” Administration Department Director Richard Licht told me yesterday. “We have to go further.”

But the easiest way to eliminate the deficit isn’t through tinkering with revenue and expenditures – it’s through healthy economic growth. A growing economy simultaneously boosts tax revenue as employment increases and profits rise while easing demand for social safety-net programs like jobless benefits.

“All of our challenges are made easier by a growing economy,” Chafee said in his speech last night. “If we demonstrate fiscal discipline, our economy will prosper. … I firmly believe that the reason the nation is in its current economic state is that we lost our discipline and let our deficits soar.”

Lincoln Chafee got lawmakers to push back the due date for his first budget. He didn’t waste the extra time.

Chafee’s $7.66 billion tax-and-spending proposal for 2011-12 is a surprisingly bold statement of the new governor’s vision for state government – so surprising it’s hard to know where to begin in analyzing it.

Broadly, the budget is a reminder that Chafee is still the frugal Rockefeller Republican he always was – a rare breed these days. The budget would raise some taxes and lower others; it prioritizes future-focused spending on things like infrastructure and education; and it seeks to address festering problems like unfunded state and local pension liabilities and an overreliance on borrowing.

“This is the beginning of the attack on the structural deficit,” Administration Department Director Richard Licht told me, flashing the zeal of a convert. “We have to go further.”

Indeed, it’s clear the governor and his aides want to show they’re not looking to kick the can down the road. Actually, make that “cans” – Chafee and co. have got enough of them in this document to fill a Campbell’s Soup factory.

Take the sales tax. Everybody knew Chafee was going to include his long-discussed 1% tax on exempt items in the budget. But nobody thought he was going to propose reducing the regular sales tax rate from 7% to 6% – lower than Massachusetts’ – and pay for it by broadening the base of items that get taxed. (One of those newly taxed items? Medical marijuana.)

Or look at pensions. Unions are already howling about Chafee’s proposal to raise the share of state workers’ pay diverted into the pension fund from 8.75% to 11.75%. (The governor’s aides point out those same workers are getting two delayed raises this year.) But that money isn’t being used to reduce the state’s yearly contribution to the pension fund; it’s extra cash to help shore up the system. It’s also a strategic choice, since it can be implemented without having unions reopen their contacts.

Most telling to me, though, is the proposal on transportation funding.

For years, Rhode Island has borrowed money to cover the cost of repairing highways, roads and bridges, rather than funding it out of current revenue. The result? Nearly half of RIDOT’s gas tax revenue now goes to debt payments instead of projects, Director Michael Lewis told me. Chafee’s budget includes funding so that practice will end by 2016.

“It’s the most fundamental reform on transit funding in Rhode Island in decades,” Lewis said.

The imprint of Chafee’s oft-cited experience as mayor of Warwick – and the financial collapse of Central Falls, which is set to get a $6.7 million state bailout – is clearly in evidence, too. The proposal for a new Municipal Accountability, Stability and Transparency (MAST) Fund is especially interesting.

As administration officials describe it, the goal of MAST is to get cities and towns to improve their budgeting practices and adequately fund their pension and retiree health care obligations. They want to employ a carrot-and-stick approach – the carrot is new MAST aid; the stick is a threatened cut in the state’s match of teacher pension funding if cities and towns don’t comply. It’s a bit like a municipal-finance version of Race to the Top.

The business community’s reaction to the budget will be interesting to see. Chafee is proposing a number of major changes to how companies get taxed in Rhode Island – cutting the corporate tax rate from 9% to 7.5%; lowering the $500 minimum tax in the manner suggested by The Poverty Institute’s Russ Dannecker; and implementing combined reporting for multistate businesses. How will businesses respond? Will there be a split between larger and smaller firms?

Those highlights just scratch the surface of what’s in this budget. It fully funds the state’s long-awaited school funding formula and restores some of the money URI, RIC and CCRI have lost in recent years. It reduces jobless benefits starting next year. It calls for a study of whether to put tolls on the state’s highways, including I-95.

And then there’s the politics.

A budget rarely survives first contact with the General Assembly. Just about every interest group will find something to dislike in Chafee’s proposal – for labor, the pension contribution increase; for big business, some of the tax changes; for conservatives, the broadened sales tax; for liberals, the reductions in some safety-net programs.

With that in mind, then, will anybody vote for it? “I can assure you it won’t pass as is,” Licht said with a laugh this morning, before adding that he thinks “major portions will pass.” We’ll find out.

More budget coverage on Nesi’s Notes:

• Why Rhode Island’s deficit jumped from $295m to $331m

• Chafee’s budget shrinks Carcieri’s long-term deficits

• Former Projo columnist M. Charles Bakst on the budget

• RI’s 6% sales tax would be below Mass. for first time

• Chafee proposes adding $0.15 fee on RI cell phones

• Chafee’s barber Ernie speaks out on the budget

• Honey, I shrunk the state work force – considerably

• Does Chafee know he didn’t fix the structural deficit?

It’s time for the moment we’ve all been waiting for – the unveiling of Governor Chafee’s first budget proposal. Tonight the new administration will offer its blueprint for closing a roughly $295 million deficit in the next fiscal year, which starts July 1, and allocating the state government’s resources.

Chafee will deliver his budget address to the General Assembly at 7 p.m. this evening and WPRI will show the speech in full on TV and online. I’ll be tweeting some commentary live during Chafee’s speech, with background and links, and then digging into the budget throughout the week right here on Nesi’s Notes.

Before Chafee’s pre-inaugural budget summit in December, I posted three charts slicing and dicing Rhode Island’s $7,864,145,810 budget for this year (2010-11) by revenue and department. You might find them worth revisiting as we get ready to take a gander at Chafee’s priorities. Last month, I also put up this chart showing how the federal government’s bill for Rhode Island’s budget has grown in recent years.

Since it’s finally Budget Day, though, there’s one more chart I thought I’d post.

There are a number of ways to categorize spending. In December, I looked at it through categories like education, transportation and public safety. But you can also break spending down by a second set of categories that overlap among the first set – personnel, for example, since salaries are paid in all those departments.

So here’s how the budget looks when you break it down across departments using those broader categories:

Governor Chafee’s best option for raising more revenue is to increase the income tax on high-earners, rather than hiking the sales tax as he is expected to propose next week, a budget expert suggested Friday.

“In a perfect world, you’d raise the state income tax,” John Shure, deputy director of the Washington-based Center on Budget and Policy Priorities’ State Fiscal Project, told me this morning at The Poverty Institute’s annual state budget conference.

Increasing the income tax – particularly on higher-earning residents – would provide more revenue as the economy recovers and would be less damaging to residents on limited incomes, who spend a greater share of their wages on goods that fall under the sales tax, Shure said.

He pointed to Connecticut Gov. Dannel Malloy and Minnesota Gov. Mark Dayton as two leaders who are proposing income tax increases for next year. Rhode Island reduced the rates for its 40-year-old income tax last year.

Gov. Chafee is expected to propose next Tuesday a new 1% state sales tax on items that are currently exempt from Rhode Island’s 7% sales tax. The governor has suggested the new tax could raise $89 million a year and argued it represents the least economically harmful way to generate additional revenue.

Despite his preference for income taxes over sales taxes, Shure suggested that supporters of government services should rally behind Chafee’s proposal even if it isn’t the ideal solution.

“I’m also not here to let the perfect be the enemy of the good,” he said. “In states where the only option seems to be to raise the sales tax, you need that money.” He also said broadening the range of goods and services subject to the sales tax – and making sure Internet purchases are also taxed – should be considered.

(Father knows best? Chafee’s father, Gov. John Chafee, lost the 1968 election for governor in part because he advocated an income tax opposed by his opponent, Frank Licht. Gov. Licht flip-floppped after taking office and got the income tax created. Frank Licht’s son nephew, Richard Licht, is now the director of administration for John Chafee’s son, Gov. Lincoln Chafee.)

Taveras speaks at City Hall today

The final 24-page report from Providence Mayor Angel Taveras’ emergency fiscal review panel probably won’t rival the 9/11 Commission’s report as a popular bestseller. But for anybody who follows government closely, it sure makes for a fascinating read.

The broad conclusion of the report – that Providence’s “existing fiscal foundation is crumbling and is not sustainable,” to use the mayor’s words – is now well-known. The city’s $639 million annual budget could be as much as $29 million short this year and $110 million short next year.

The culprits cited are many: a lack of revenue from sources beyond the property tax, notably nonprofit institutions; an overgenerous compensation structure, particularly on pension and health benefits as well as overtime; poor financial management; and a lack of planning.

Here are a few of the more interesting statistics, examples and suggestions included by the report’s authors, sorted by topic. All quotes come directly from the report. Continues after the jump.

Mo’ money.

• The report argues Providence isn’t getting its fair share of state aid considering how many people who work in the city are employed by nonprofits like colleges and hospitals. “Those employees contribute significantly to income taxes paid to the state, yet minimal benefits accrue to the city due to the employer’s exemption from the property tax,” it says.

• More parking tickets? The report argues Providence should increase its enforcement of parking and traffic violations, “especially at night, to enhance safety and serve as a revenue generator.”

• The city refunds its fee for reviewing a building project’s plan if the project gets denied – even though the staff does the review no matter the outcome. The report says that should stop.

• The car tax rears its unpopular head. The report says the city should look at reducing its $6,000 exemption since the state no longer makes up the difference. (See my story from last year for background.)

• “The city should consider an on-street overnight parking permit fee as a new revenue source. Residents could purchase a monthly or quarterly pass that would allow overnight parking in permitted areas.”

Higher ed and hospitals

• Colleges, hospitals and other tax-exempt institutions own about a third of the city’s total property by assessed value – nearly $3 billion worth. That’s after deducting exemptions.

(more…)

The state government has no plans to step in to deal with Providence’s financial crisis the way it has in Central Falls, Governor Chafee’s spokesman told me this morning.

Mayor Angel Taveras briefed the governor and his staff late Wednesday on the findings of his emergency fiscal review panel and the steps he plans to take to stabilize Providence’s finances.

“The governor and his advisers continue to recognize the severity of the situation in Providence, and the governor believes that today’s announcement represents a good first step toward financial recovery,” Trainor said.

Revenue Department Director Rosemary Booth Gallogly and Susanne Greschner, head of the department’s municipal finance division, “will be taking a very close look at the [review panel's report] during the day today,” Trainor said.

State leaders quickly passed a new law for handing insolvent municipalities last spring after Central Falls’ sudden collapse into receivership. That law sets out five triggers that could lead to the state taking control of a city’s finances. Only one of those triggers – repeated budget deficits – has been met in Providence, Trainor said; two are required to put the receivership law in motion.

“So there’s no way under the statute that the state could – or should – step in to Providence,” he said. “But the mayor agrees with the governor that some very close monitoring and cooperation between the state and the city is critically important at this point in time.”

Chafee and Taveras appear to be establishing a closer working relationship than the one which existed between former Gov. Don Carcieri and former Mayor David Cicilline. The pair took a fact-finding trip to Houston together last month. Taveras declined to endorse Chafee’s opponent Frank Caprio – Taveras’ fellow Democrat – in last year’s gubernatorial race.

Chafee, of course, will unveil his own state budget proposal on Tuesday. Rhode Island’s deficit for 2011-12 was projected at $295 million last fall.

Taveras speaks at City Hall today

Providence Mayor Angel Taveras says he needs to take drastic action to restore the city’s finances to health after his fiscal review panel issued a report this morning overflowing with red ink and grim projections.

The report cited generous pay packages, overreliance on the property tax and management failures – among other factors – to help explain why Providence is $139 million short in its $1.3 billion city budget for this year and next.

After overspending by $14 million last year, the city government is on track to spend $29 million more than it takes in during this fiscal year and $110 million more than it takes in next year, the panel said in its final report.

Taveras – who as I write this is unveiling the report and his response to it at a City Hall press conference, where my colleagues Tim White and Sean Daly are now – outlined 15 separate steps his administration plans to take (or try to take) to deal with the problems outlined by the panel.

Among those, the first steps will include an immediate 10% pay cut for the mayor himself followed by a 10% pay cut next year for his staff; the elimination of 13 non-union jobs; and an immediate freeze on “all non-essential hiring and spending across city departments.” As expected, four to six schools will be closed and some teachers will be terminated.

But the bigger steps Taveras cited are all in the future – and each one will bring him a huge political fight. The mayor says he wants to “renegotiate union contracts” to reduce their cost; “negotiate with tax-exempt universities and hospitals” to get more money out of them for the city; and “actively pursue pension reform.”

I’ll have much more on the report throughout the day, so keep checking back here. The full press release from the mayor’s office is posted after the jump.

Update: Today is not a good day for U.S. Rep. David Cicilline’s 2012 reelection campaign.

Update #2: There’s no formal role for state government yet in the Providence situation, unlike in Central Falls, Governor Chafee’s spokesman tells me in this new post.

Update #3: I’ve gathered a long list of interesting factoids, examples and suggestions from the full report in this new post. Check it out.

Update #4: We’ve posted the full report as a PDF here on WPRI.com. Read it and weep.

(photo: Tim White/WPRI)

(more…)

The big report from Mayor Taveras’ Municipal Finances Review Panel isn’t coming out until tomorrow morning, but a preview released earlier today has already caused a lot of jaws to drop.

Providence faces a two-year structural budget deficit of $180 million – $70 million this current fiscal year, which ends June 30, and another $110 million in 2011-12.

The city is currently on track to finish this fiscal year with an actual shortfall of as much as $29 million. (Without the full report, I can’t say why the actual deficit is forecast to be less than half the structural deficit.)

To give you a sense of just how big those numbers are, keep in mind the size of Providence’s actual budget: $638 million this fiscal year. Based on these early numbers, the structural deficit is equal to roughly 11% of the budget this year and 17% of it next year. That’s a huge gap to close.

One instructive and worrying comparison is between Providence and Central Falls.

The latter city’s budget shortfall was also pegged at about 17% when it filed for receivership during its 2009-10 fiscal year. But because of its small size, the actual amount of Central Falls’ deficit was only $3 million – a rounding error compared with Providence’s $110 million gap.

RIPEC executive director John Simmons cautioned against leaping to any conclusions based on this morning’s sketchy advisory, saying it’s impossible to really understand the Providence projections without knowing how the review panel defined “structural deficit.”

He also said the early numbers released by Central Falls when the city made its first, unilateral receivership filing probably understated its predicament.

Still, while Central Falls is significantly smaller than Providence, Simmons did see “common themes” between the two cities, notably a basic gap between money in and money out. But Providence is ”one of the engines of the economy activity, and having a structural balance in the capital city is important for the state as a whole,” he said.

Update: Anchor Rising’s Marc Comtois points out I should have disclosed that Simmons was former Providence Mayor David Cicilline’s director of administration from 2003 through 2007.

Update #2: PBN got some clarification on why this year’s actual deficit is so much lower than the structural one:

Spokesman David Ortiz said that one-time fixes lowered the projected deficit this year from $70 million to $29 million. Without those fixes, Providence would have ended the year $70 million in the red, he said.

$41 million in one-time fixes is quite a big sum. I’d like to know more about what that includes.