Rhode Island state government is the beneficiary of billions of dollars in federal funds and surplus tax revenues. Besides over $1 billion in discretionary relief funds from the American Rescue Plan Act, state surplus revenues are now estimated at a staggering $878 million in the current fiscal year. It is important to recognize that all the ARPA dollars and most of the surplus are one-time funds that are not suited for continuing spending commitments. By making strategic investments with these funds, Rhode Island can insulate the state budget from hard cuts during a future recession or period of fiscal restraint.
While there are many worthwhile proposals to spend these dollars in key areas of need, there are two areas of investment that deserve more attention from policymakers — the unemployment insurance (UI) trust fund and the state’s rainy day fund.
Rhode Island’s UI trust fund serves to pay unemployment insurance benefits and is funded entirely through employer payroll taxes. Rhode Island’s UI fund reached a record high balance of around $550 million before the COVID-19 pandemic. Public health restrictions and state-mandated business closures caused an unprecedented spike in the number of UI claims and a dramatic reduction in the trust fund balance, which as of April stood at less than $200 million. Additionally, $70 million in fraudulent UI claims have been identified, about half of which were paid out of the state’s trust fund.
ARPA funds should be used to replenish the state’s UI fund since its depletion was a direct result of the pandemic. A contribution to the UI Fund fits squarely within the U.S. Treasury’s regulations on allowable uses of ARPA funds and would provide relief to businesses that were forced to lay off employees due to circumstances beyond their control and are still trying to recover from the pandemic. Rhode Island is one of only 20 states that have not yet used federal pandemic relief funds to replenish its UI Fund. In New England, Connecticut, Maine, and New Hampshire have all done so.
Governor Daniel McKee deserves credit for proposing a $30 million ARPA contribution to the UI fund in his budget, but the proposed contribution would only take place if sufficient to prevent an increase in UI tax rates for next year — a condition that makes the contribution less likely to occur. This proposed contribution also is relatively small given the massive loss of reserves during the pandemic. Policymakers instead should consider an unconditional contribution to the UI trust fund of at least $100 million.
Policymakers also should consider allocating surplus revenues to increase Rhode Island’s rainy day fund. Capped at 5 percent of revenues, Rhode Island’s rainy day fund would last only 20.2 days at the state’s current spending rate and is ranked 39th among states as a proportion of state general revenue spending, according to a recent Pew study. In comparison, the median rainy day fund among states could support government operations for 34.4 days. Rhode Island’s rainy day fund served the state well during the pandemic, but a longer recession without a generous and swift federal stimulus would more likely lead to permanent revenue losses and severe cuts in spending. The current availability of one-time surplus funds presents an excellent opportunity to increase the rainy day fund balance from 5 percent to as much as 10 percent, which would place Rhode Island’s rainy day fund above the national median.
While the state’s economic and fiscal outlook is promising, especially considering the events of the past two years, there is significant uncertainty about what lies ahead. Making investments to boost the state’s UI trust fund and its rainy day fund would better prepare Rhode Island to sustain the next economic disruption.
Mike DiBiase is the President and CEO of the R.I. Public Expenditure Council.