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.