THE COLLEGE HILL INDEPENDENT


Budgets in Distress

Unpacking unexpected funding cuts to R.I.’s most at-risk communities

by Leo Gordon

Illustration by XingXing Shou

published October 16, 2020


At the end of July, Rhode Island slashed funding for the Distressed Communities Relief Fund in half, reducing the ability of several RI cities and towns hit hard by COVID-19 to meet the needs of their community members.

Since its creation in 1990, the DCRF has provided financial assistance to cities and towns with the “highest property tax burdens relative to the wealth of taxpayers.” In essence, this program increases state aid to municipalities whose residents have the hardest time paying their property taxes. Currently, seven cities qualify for this funding: Central Falls, Cranston, North Providence, Pawtucket, Providence, West Warwick, and Woonsocket.

At the start of each year, the total dollar amount of the DCRF is an item on the state’s budget proposed by the Governor. That amount is then debated and voted on by the General Assembly before the annual July 1 deadline, the start to the new fiscal year. According to Rhode Island state law, payments are made to eligible municipalities at the start of August and go directly into a city or town’s general revenue. Mayors take their expected DCRF funds into account when proposing yearly budgets for city councils to vote on. They can direct this money towards any area in need of funding, from sanitation worker salaries to affordable housing initiatives to road repairs. Since 2017, the DCRF has received about $12.4 million each year, up from $10.4 million in 2016. Last year, Providence, the biggest qualifying city, received $5.2 million of that funding. 

In January of this year, Rhode Island Governor Gina Raimondo released her proposed Fiscal Year 2021 budget, with the goal in mind of ridding the state of its $200 million deficit. To this end, instead of raising taxes, Raimondo suggested budget-balancing measures such as new municipal fees and “scooping” money from the budgets of quasi-state agencies, as described in the Providence Journal. One of these measures was to cut the DCRF in half, from $12.4 to $6.2 million. The Senate Budget office noted in their budget analysis released this May that this was unusual: it was “the lowest appropriation level since FY 2001.”

While the Rhode Island League of Cities and Towns (RILCT) vocalized their opposition to the Governor’s proposals, their associate director, Peder Schaefer, was not initially fazed by the cuts to DCRF. “There was a lot of comfort that the legislature was going to restore the $12.4 million appropriation level,” he told the Indy, adding that the General Assembly usually ends up approving a slightly higher budget than that of the Governor’s proposed one.

Due to COVID-19, the legislature did not convene again until mid-June, when budget negotiations usually conclude, and missed the July 1st deadline to pass a new budget. Raimondo and the leaders of the General Assembly pushed a vote on the budget back a month, and then another. Until the new year’s budget was approved, state funding was supposed to continue at the same level as the previous year. 

But it didn’t. At least, not for the DCRF. On July 30, Thomas Mullaney, State Budget Officer, sent a memo to Steve Coleman, chief of the Department of Revenue municipal finance division informing him that because the FY 2021 budget had yet to be enacted, RI General Law section 35-3-19 authorized him to “make appropriations available . . . in the same amounts as the final enacted budget for the previous year,” and distribute it monthly instead of in the usual one time payment. But then without explanation, he wrote that the payments had “been entered into the state’s accounting system based on the lesser of the FY 2020 final enacted budget or the Governor’s recommended FY 2021 Budget,” seeming to contradict his previous statement. Suddenly, Raimondo’s proposed halving of the DCRF was live.

Many spoke out against the unexpected move—including Brian Daniels, executive director of RILCT, Cranston Mayor Allan Fung, and progressive Assembly nominees—and rightfully so. It comes at a time when struggles with coronavirus have already strained municipal budgets. As such, the cuts raise some important questions. Why did the State Budget Officer make these cuts? Who will be most impacted by these changes; is it even legal? But before any of that comes a historical question: What can we learn from the creation of the DCRF in 1990?

 

+++

 

COVID-19 won’t be the last budget deficit Rhode Island faces, and it certainly isn’t the first. In fact, the DCRF was established in the midst of another budget deficit 30 years ago. Facing an estimated $200 million deficit for Fiscal Year 1991, the state governor at the time, Edward D. DiPriete, had “proposed [an] $11.2 million cut in nonschool state aid to cities and towns,” as detailed in the Providence Journal. Central Falls at the time bore the state’s highest property tax burden and was slated to be hit the hardest by these cuts, with Warwick close behind, according to a report from the Rhode Island Public Expenditure Council.

In response to the impending cuts, the mayors of these two cities successfully lobbied the State to restore their funding using a formula designed to provide “extra assistance for ‘distressed communities’” created by the 1982 Swearer Commission. The Commission sought to alleviate “municipal over-reliance on the property tax,” as described in the Providence Journal. At that time, most cities and towns in Rhode Island used property taxes to fund a majority of services (and still do todayfor example, 70 percent of Providence’s general revenue comes from property taxes).

One part of the problem was that cities lost money to non-profits and other institutions that did not have to pay taxes on the property they occupied. The Commission’s solution was the precursor to the current state Payment in Lieu of Taxes aid program that provides money to municipalities based on a proportion (currently 27 percent) of the taxes that these tax-exempt organizations would otherwise pay, in effect increasing the amount of property a municipality receives taxes from. Another issue was that when faced with financial crises or expanding need for services, some municipalities could not afford to raise their property taxes to solve these problems. The solution here: a Distressed Communities Relief Fund. 

Cities and towns would qualify for this funding by being in the lowest 20 percent in three out of four categories: 1) per capita income, 2) per capita value of property, 3) ratio of total municipal income to total municipal property value, and 4) ratio of total municipal tax revenue to total property value. As such, municipalities that qualify for this fund are often poorer than their neighbors, either due to lower-income residents or low property value. The same DCRF formula is still used today, and accordingly, “cutting [the DCRF] only serves to penalize communities whose tax base can’t support large tax increases,” as Brian Daniels, head of the RILCT, observed in January, when Raimondo proposed the FY 2021 cuts.

Once qualifiers are chosen, the General Assembly decides on a total dollar amount for the fund; for the past few decades this amount has changed about once every three years. The money is then distributed to each qualifying municipality in a percentage proportionate to their demonstrated need, based on tax revenue. This money goes straight into the community’s general revenue and is distributed between various public services such as parks and recreation, education, and infrastructure. In 1990, this meant that Warwick and Central Falls each received about $500,000. 

If enacted at FY 2020 rates, this funding would have amounted to about one percent of each of the seven qualifying cities and towns’ general revenues (these usually exclude state education funding, which can amount to almost a third of the total revenue, like in the case of Providence). That number may seem small, but to put this into perspective, think of that as the average salary for about one out of every hundred non-school municipal employees. According to the City of Providence Human Resources webpage, the municipality employs over 1,400 people outside of the school district. More than fourteen of those jobs could be funded by the DCRF, so to cut the Fund in half is to take away the money for the salaries of seven employees. Seven layoffs. Seven people out of work. Now add in COVID-19, during which municipalities have already instituted work-share programs to avoid such consequences.

Rhode Island’s administrative response to the deficit in 1990 contrasts with that of today’sback then, instead of cutting funding for municipalities in need, these two “distressed communities” were the ones whose budgets the state bolstered when the crisis hit. But there are also similarities between the two responses: In both, the governor chose not to raise income taxes in favor of cutting spending. DiPrete had a “no-new-tax pledge,” and Raimondo has made it clear that without more federal funding, “everything is on the table” to be cut this upcoming year. And while Raimondo’s approach can be disputed, the reasons for her fear of today’s deficit cannot.

 

+++ 

 

Rhode Island, like all states, faces a massive financial crisis due to COVID-19 shutdowns. The state’s unemployment rate spiked to 18 percent in April. While it has since stabilized at about 12 percent, returns on income and sales taxesthe state government’s main sources of revenuehave shrunk significantly, leading to huge budget deficits. House Speaker Nick Mattiello’s office estimated in early September that the state had a deficit of $835 million, up from the previous year’s $200 million.

While Rhode Island received $1.25 billion from Congress’s Coronavirus Relief Fund, this money cannot be used to make up for losses in revenue; according to current restrictions, it can only be put towards COVID-19-related spending. So far, this federal money has helped finance the $1.8 billion increase in spending for COVID-19-related expenses like hospital construction and personal protective equipment purchases included in the final revised state budget for FY 2020 which the Assembly passed in mid-June. 

But as written in the Providence Journal, Raimondo has yet to use much of the federal aid, “in case Congress doesn’t come through with more money and decides to let the state use leftovers from the first round of funds.” The state has between $409.9 and $592.3 million left to spend of the COVID aid, depending on how much money the state receives in FEMA funding, according to an R.I. Office of Management and Budget presentation given on September 2. Other states have taken different routes; for example, New Jersey bit the bullet and authorized borrowing of up to $4.5 billion to shore up their budget, a massive hole from which to escape. If Congress allows more flexibility in spending the Coronavirus Relief Fund money, Raimondo’s inaction could lift pressure off of state budget officers to attempt similar moves.

Schaefer explained to the Indy that while it is tough for municipalities to not know how much state aid they’ll receive in the coming months, the alternative could be much worse. Raimondo has said that barring new federal funding, a new budget “will absolutely have layoffs, will absolutely have cuts to social services, will absolutely have all the stuff we’re trying to avoid.” Schaefer’s take: “We want them to make a decision, but we don’t want the worst decision. So it’s a two-edged sword.” He said he understands that the government is in a tough spot when it comes to making budgetary decisions, and that they needed to cast the DCRF overboard in an effort to find the money to stay afloat themselves. But others are far more critical of the decision.

Newly elected progressive leaders, including District 4 Representative-elect David Morales, see the inaction and cuts as emblematic of an “austerity budget.” On September 15, he and two other progressive Assembly nominees, Leonela Felix and Meghan Kallman, spoke on this issue on the steps of the State House at a news conference hosted by Reclaim RI, a progressive advocacy group. At the conference, Kallman, Pawtucket’s Democratic nominee for State Senate, said that “raiding funding to communities that are already struggling betrays those in our community who most need support, which is morally unacceptable.”

Examining the data from the Rhode Island Department of Health, six out of seven cities with the highest positivity rates for COVID-19 qualify for DCRF funding, and the seventh, Johnston, qualified for DCRF funding as recently as 2019. Central Falls has the highest COVID positivity rate (18 percent) of any Rhode Island municipality and received $201,648 in funding from the DCRF last year, which amounted to over one percent of the city's budget. Providence has the second highest rate (13 percent) and received $5,155,694 in funding from the DCRF last year, which amounted to about 0.67 percent of the city’s budget.

There seems to be a correlation between DCRF qualification and positivity rates for COVID-19, which Morales and others see as an obligation for the state to not only restore the funding, but to give more. The proposed reductions could lead to layoffs and take funding away from basic services like public works, affordable housing, and parks and recreation. Morales highlighted the fact that non-profits, which serve as key wraparound services for many municipalities, may lose funding. Clearly, these cuts make budgetary decision-making processes for cash-strapped communities tighter during already stressful times.

Of last month’s news conference, Morales told the Indy that they “wanted to send a clear message to the governor’s administration that we would not tolerate an austerity budget that would force the state to cut funding for social services, Medicaid, funding to distressed cities—ultimately, programs that benefit our most vulnerable and low-income communities.” 

 

+++ 

 

Aside from moral questions, the abrupt cuts to the DCRF also raise legal ones. As reported in the Providence Journal, Daniels asserted in an August 27 letter to the head of the state’s Division of Municipal Finance that the Administration did not have the legal grounds to make this budget change “arbitrarily.” He pointed to R.I. General Law 35-3-19, which states that if the General Assembly does not pass the annual appropriation bill, funding will continue at the same level of appropriations from the prior year, which in fact Mullaney acknowledged in his July 30 memo. Mayor Fung threatened litigation.

When the Indy reached out to Robert Dulski, the spokesman for the R.I. Department of Administration, to ask about the legality of the cuts to the DCRF in the Governor’s recommended FY 2021 level, he did not answer directly. “While we wait for further guidance [from the federal government], the Budget Office has authorized monthly disbursement at FY20 levels to allow for maximum flexibility until we know more,” he said, adding that “the legislation authorizes the budget officer to determine allotments . . . but does specifically say the amounts must be equal to 1/12 or 1/4 . We acknowledge that this is not a typical budget year and given this situation, we are applying the laws that have been passed by the legislature.”

While this explains the monthly payment schedule causing municipalities cash-flow problems, the Administration’s legal rationale for the funding cuts remains ambiguous, as $6.2 million is decidedly not the amount specified in FY 2020. Their general justification for the reductions is also unclear. Jonathan Womer, state Office of Management and Budget director, was quoted in a Providence Journal article from January when Raimondo’s recommended budget was released saying that “the economy has improved so much that ‘distressed communities’ aid may now be obsolete.” But some find this not to be the case.

Morales interpreted this quote as emblematic of the lack of accountability in the Rhode Island government. “Who decides when the economy has bounced back to the degree that cities no longer need to depend on state funding to provide adequate services?” he asked rhetorically in an interview with the Indy. “There are tens of thousands of people across the state who are still earning starvation wages of $11.50. That to me does not show signs of a stronger economy.”

Furthermore, a report from the Rhode Island Public Expenditure Council (RIPEC) from before the pandemic found that “despite improved economic conditions and job growth in Rhode Island over the last few years, GDP growth has been slower in Rhode Island than in the New England region and the nation, and thegrowth gap remains wide over time.” Rhode Island’s economy isn’t actually much to write home about. But even if the state’s economy was booming, how would that make the DCRF “obsolete?” Seven cities still qualify for DCRF based on the same criteria that has been in place since 1990; these seven cities have legitimate difficulties with respect to their property taxes and can use the extra financial flexibility that DCRF aid provides. But until legal action is taken, the DCRF will continue to be distributed in lower amounts.

According to Morales, none of this controversy should be necessary. He not only disputes Womer’s claim but also the Governor’s insistence to resort to such budget-balancing measures in the first place. Instead of “scooping” and fees, he wants the state to raise revenue in other ways: make wealthy non-profit institutions pay taxes, repeal the 2006 tax cuts to the wealthiest citizens, and borrow money using revenue bonds. He says that administrators should “reject cutting funding for distressed communities and instead focus on the cost of living adjustment” made necessary by the inflation that pushes up the cost of real estate and essential goods each year.

Morales states that it’s crucial the public understands the consequences of government actions so they can hold officials accountable. That’s why he spoke on the steps of the state house on September 16 to call attention to this issue. He urges residents in the places impacted the most by cuts to the DCRF to contact their legislators and call on them to pressure the governor’s office. “A lot of these well-paid government administrators can go on record to say ‘the economy is doing just fine, these cities don’t need the funding,’ because no one is going to question them and put their feet to the fire like they should.”

If these officials were questioned more often, the Indy thinks that maybe the public would see the lack of empathy in their actions, see that state administrators expect their most vulnerable communities to make do with unapproved levels of funding. And they would understand that even—no, especially—when dealing with the financial repercussions of a global pandemic, now is not the time to cut the DCRF. 


 

LEO GORDON B’23 has not looked at this many numbers since high school math.