McKee praised FY25 budget for ‘smart investments.’ But memo warns of deficits on horizon

Clouds are on the horizon in this view from the brick and marble terrace on the south side of the Rhode Island State House in Providence. (Alexander Castro/Rhode Island Current)

A month ago, Gov. Dan McKee heaped praise upon the state’s $13.96 billion fiscal 2025 budget as he signed the spending plan into law during a ceremonial State House event. 

His administration is now adopting a decidedly different tone, warning of a “substantial deficit” in the years to come and demanding state agencies slow their roll on spending.

“While revenues continue to grow modestly, we cannot expect year-end surpluses of hundreds of millions of dollars as in recent years,” Brian Daniels, director of the state Office of Management and Budget, wrote in a July 18 memo to state agency directors and financial officers. “To avoid the need for broad-based tax increases or major programmatic cuts in FY 2026, we must take steps now to control agency spending.”

Daniels referenced a separate analysis by House budget-crunchers which projects a $262.4 million structural deficit for the fiscal year beginning July 1, 2026. The ominous forecast grows even more dire in future years, with the deficit swelling to $292.9 million by fiscal 2029, according to the House fiscal report.

And that doesn’t account for the labor unions representing state employees, who are  negotiating a new collective bargaining agreement, according to Daniels’ memo. Information about where the negotiation stands and when a final agreement will be reached was not immediately available.

Daniels’ memo seeks to reign in state spending by forcing state agencies to seek extra review and signoff on new hires and purchases over $5,000. The memo also states the budget office will reject any procurements that “do not address immediate health and safety needs; do not support federal- or state-mandated programs; and/or are not critical to agency operations.”

The dire warning stands in stark contrast to McKee’s enthusiastic tone when signing the spending plan a month before, praising its “smart investments in Rhode Island’s future.” 

So what changed?

“The Governor’s Office chose to take a proactive approach to a projected deficit in FY26, employing strategies as early as possible in the new budget year to curb unnecessary spending,” Laura Hart, a spokesperson for McKee’s office said in an emailed statement on Monday. “The deficit is not a reflection of a projected reduction in revenue. Rather, we expect revenue to continue to grow steadily. Both OMB and the Governor feel that the state needs to adjust its mindset in a post-ARPA world, where large budget surpluses will no longer be the norm and cannot be used to cover budget deficits.”

McKee’s initial $13.7 billion spending proposal unveiled in January included a projected $244.3 million deficit in fiscal 2026, shrinking to $218.4 million by fiscal 2029. Updated revenue estimates adopted at the state’s biannual estimating conference in May, combined with a slight spending increase in lawmakers’ updated fiscal 2025 budget, increased the future shortfall by about $18 million.

Hardly a surprise to Michael DiBiase, president and CEO of the Rhode Island Public Expenditure Council. The fiscal policy group issued a report in May warning that McKee’s proposed $13.7 billion budget would contribute to and worsen the state’s structural deficit in the years ahead. The report specifically pointed to the use of $196 million in one-time surplus revenue to patch budget holes, a Band-Aid that will no longer be available as revenue growth slows.

“The reckoning is going to happen eventually, it just wasn’t this year,” DiBiase said in an interview on Monday.

While DiBiase said McKee and lawmakers could have done a better job of distributing excess cash in a way that didn’t worsen the deficit, he praised the state for moving to rein in spending early in the fiscal year.

“I think it’s necessary and appropriate given the deficit they are looking at,” he said. “I give the administration credit for trying to get ahead of it.”

It’s not an uncommon strategy. Similar spending guardrails were a fixture of the state administration in the wake of the 2008 financial crisis, said Gary Sasse, who served as the state administration director and director of revenue under Gov. Don Carcieri in 2008. He headed RIPEC prior to being appointed by Carcieri.

I think it’s necessary and appropriate given the deficit they are looking at. I give the administration credit for trying to get ahead of it.

– Michael DiBiase, president and CEO of the Rhode Island Public Expenditure Council

“This is like back to the future,” Sasse said. “We would issue those kinds of memos all the time.”

Carcieri’s administration corresponded with a record outyear deficit over $535 million, equal to 14.8% of projected revenues in Carcieri’s final budget, according to the House fiscal report. By comparison, the latest deficit projections represent about 4.5% of the state’s fiscal 2025 budget.

But issuing a memo and enforcing it are two different things. Sasse recalled the difficulty he faced in keeping departmental payrolls “under control” even under state-issued hiring restrictions. 

The memo doesn’t outright ban state spending or hiring, but rather requires extra layers of review.

This might not be a bad thing in Sasse’s eyes, particularly after a pair of investigations by the Providence Journal and The Boston Globe revealed questionable contracting practices by the Rhode Island Department of Housing under former Housing Secretary Stefan Pryor.

“That is enough of a red flag that it might suggest we better take a closer look at how the purchasing office is overseeing agency procurement,” Sasse said.

Hart did not respond to questions about whether specific events or agency practices precipitated the budget memo.

On the flip side, extra layers of bureaucracy could hold up important milestones in state services and projects. One forthcoming contract where time is of the essence: the rebuild of the I-195 westbound Washington Bridge, which remains in exploration stages after an initial request for proposals yielded no bidders.

Hart said the bridge contract would not be affected by the new spending restrictions.

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