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Governor Lincoln D. Chafee Unveils First Budget in Address to General Assembly

Providence, RI – Speaking before a joint session of the General Assembly tonight, Governor Lincoln D. Chafee unveiled his administration’s first budget, using as his theme “A Path to Prosperity.” The $7.661-billion budget introduced tonight has several main objectives, including:

To fully close the $295 million deficit projected for FY 2012, and to reduce the state’s chronic structural deficit;

To promote economic growth in Rhode Island by reducing the corporate income tax rate and lowering the state sales tax to a level at or below neighboring states;

To adequately invest in education through increased funding for higher education and full funding for the state education formula;

To initiate a range of budget reform measures to address Rhode Island’s financial challenges at both the state and the municipal level.

In his address to the General Assembly, Governor Chafee stated: “I intend to show the people of our state that they can again count on their government to make wise financial decisions, protect the common good, and build a 21st century Rhode Island that makes us proud….a Rhode Island that can be great again.

“We face high unemployment and large budget deficits. Our democracy has certainly been lively, but not always functional. Once again, we need to find a new path to greatness. We have to retool and rethink our place in the world. That will not be easy. But not one of us in this room was sent here to do a job that we thought would be easy. This is a challenge worthy of all of our talents and energy.”

“And so I ask you tonight to think about leadership, and the hard decisions that it can demand,” Governor Chafee continued in his address. “We have those hard decisions before us, but I believe our better future starts today. By directly confronting our challenges, we may take the first steps on a path to prosperity.”

-Closing the Deficit and Enacting Structural Reform

Governor Chafee proposes to close the FY 2012 deficit through a near-even combination of revenue enhancements and expenditure cuts.

His proposed revenue enhancements include applying a 1% sales tax on many items currently exempt – but that will not apply to food, prescription drugs, medical devices or gasoline. The Governor presented the 1% sales tax initiative as a temporary measure that would automatically be repealed if and when Congress passes the Main Street Fairness Act, which allows states to collect sales tax on Internet and other remote purchases.

Governor Chafee also proposed a Sales Tax Modernization Plan designed to correct an imbalance in the categories of taxable items. The average household now spends about 70% on services and 30% on goods, yet the state sales tax covers very few services. The budget would expand the sales tax to a number of services, including dry cleaning, beauty salons and recreational activities such as movies, not currently taxed. The broader tax base would allow Rhode Island to lower the sales tax rate from 7% to 6% – lower than both Massachusetts’ rate and the new rate proposed for Connecticut.

Governor Chafee proposed a range of expenditure cuts, largely in the area of health and human services, which is the largest and fastest-growing component of state spending. Governor Chafee’s proposed budget recommends cuts of $60 million in the state’s provision of health and human services. These reductions are achieved largely through service delivery reforms, payment standardization and improved management techniques. Significant changes to eligibility and benefits require additional study and are not included in this budget.

The proposed budget includes $20 million in reductions to other government departments and agencies. The Governor’s Office and the Budget Office will begin a process of program evaluation for Cabinet departments and other agencies to assess spending on individual programs and the outcomes they produce. This process will help determine which government initiatives are worthy of continued investment and which should be modified or eliminated.

-Promoting Economic Development in Rhode Island

Governor Chafee’s proposed budget is also focused on developing an improved climate for business growth and expansion through several initiatives.

The budget institutes combined reporting, eliminates the state’s motion picture tax credit, and phases out the preferential corporate tax rate provided under the Jobs Development Act, which is used by only fourteen companies.

These changes will allow the state to reduce the minimum corporate tax from $500 to $250 for more than 30,000 small businesses. The state’s corporate income tax rate will also be lowered over a three-year period from 9.0% to 7.5%, placing us below Massachusetts and even with Connecticut. These combined changes will make the state corporate tax structure more transparent and fair and will place Rhode Island’s rate at or below its neighboring states. These proposals, collectively, will encourage businesses to expand or relocate here – creating jobs for Rhode Islanders.

Rhode Island’s economic development requires a well-educated workforce, and the FY2012 budget invests in our public schools and higher education system. It honors the historic legislation passed by the General Assembly last year by including full funding for the education formula to cities and towns, as well as for the increase in school construction aid. The budget also reverses the long decline of state aid to Rhode Island’s higher education system by including $10 million over the FY2011 enacted level.

-Addressing Long-Term Challenges

The budget includes several multi-year initiatives that will address both long-standing and emerging challenges.

To address the state’s $5 billion unfunded pension liability, the budget recommends that state employees apply their upcoming 3% cost-of-living adjustment, scheduled to take effect in July, toward the state’s pension system. Teachers and others contributing to the system would match the higher state employee contribution rate of 11.75% (an increase of 2.25 percentage points for teachers). The new funds would not reduce the state share and would add $40 million in new funds to the system. The increase would be temporary and last until the state passed comprehensive pension reform legislation, to be developed in collaboration with public employee unions, the General Assembly, and other interested parties.

To encourage responsible budgeting by municipalities, Governor Chafee’s budget creates the Municipal Accountability, Stability and Transparency (MAST) Fund to encourage cities and towns to adopt fiscally prudent budgeting practices and to fund their pension and retiree health care obligations. The MAST Fund will provide $18.2 million to municipalities, distributed according to the 2009 General Revenue Sharing formula. Municipalities will receive MAST funds only if they adopt certain uniform standards for the reporting of their financial information and make the Annually Required Contributions for pension and retiree health. The requirements are phased in over time, but if municipalities do not comply by FY2014, they risk forfeiting a portion of the state contribution toward their teacher retirement benefits.

Rhode Island’s reliance on debt funding to pay part of the state share of federal highway projects leads to significant annual interest payments that could be better spent on transportation enhancements. The budget transfers Department of Motor Vehicles fee revenues to a dedicated transportation fund over the course of five years. By FY2016, the fund is projected to provide $64 million to DOT.

Finally, the state’s Employment Security Fund is borrowing funds from the federal government to pay unemployment insurance (UI) benefits, and total borrowing is expected to reach $291 million this spring. The state must make an interest payment on the federal loan this year, and a continued negative fund balance will lead to tax penalties for employers. The budget follows the recommendations of the Employment Security Advisory Council (ESAC) to increase employer contributions and adjust benefits over time in order to restore fund solvency by 2015.

Governor Chafee concluded his address with an appeal to lawmakers to join with him in turning state finances around.

“The many challenges facing our state are intimidating, but not insurmountable,” Governor Chafee said. “This budget proposal does not promise to solve all of our woes in a single year. Instead, it represents the first step on a bold new path to prosperity. Long-term vision is exactly the form of leadership that we need at this turning point in Rhode Island’s history.”

“The 21st century can be another great century for Rhode Island. We must begin to think anew. Getting Rhode Island on the right path will mean making some difficult decisions, but I am confident that we will work together to restore the greatness that still radiates from this State House,” the Governor concluded.

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