The dark financial clouds forecast for Rhode Island are no longer on the horizon. They’re here.

The state is staring down a nearly $400 million shortfall for the fiscal year that starts July 1, 2025, according to an Oct. 24 memo by the Rhode Island Office of Management and Budget. The projected $398.2 million fiscal 2026 structural deficit is 50% higher than what the House fiscal office predicted in June, just after lawmakers passed a nearly $14 billion annual budget.

And it’s not shrinking anytime soon.
The latest state budget forecast shows the deficit swelling to more than $680 million by fiscal 2030, forcing policymakers into a financial reckoning not experienced in the Ocean State in at least a decade.

“This is a very serious deficit situation,” Michael DiBiase, president and CEO of the Rhode Island Public Expenditure Council, said in an interview Monday. “We’d have to go back more than 10 years for something proportionally this big.”

It’s not that revenues flowing into state coffers are down. In fact, the state budget office now projects a $5.6 million surplus for the current fiscal year. The problem is that the state is spending faster than its coffers can get replenished.

And without the windfall of federal pandemic aid, which state lawmakers have used to close the structural deficit in recent budgets, including this fiscal year, cuts can no longer be avoided.

“To address the growing deficit and avoid future service cuts, Rhode Island must align expenditure growth with revenue,” the memo states. “The McKee Administration has already taken steps to control spending for the current fiscal year, including the implementation of tighter spending and hiring controls.”

Plan A and Plan B

Brian Daniels, state budget director, put state agencies on notice in July, requiring additional signoff on new hires or spending over $5,000.

Meanwhile, state agencies were required to turn in their fiscal 2026 spending requests by Oct. 1, offering up two plans: one to maintain a “base level” of service and a “constrained” version 7.5% less.

“OMB strongly discourages submission of new and expansionary requests in light of the projected deficit outlook,” Daniels wrote in a separate memo in August. “Agencies should instead focus on improved efficiency and cost-effectiveness of their existing operations, including a review of outdated or underperforming activities.”

The same month, Gov. Dan McKee’s administration reached a new, three-year contract with state public employees unions, laying out wage increases and other benefit changes. The new agreement will cost $180 million over the next three years, with $72 million in the current fiscal year, according to the state budget memo.

Meanwhile, costs associated with state medical and social assistance services and aid to local schools and municipalities are rising.
In particular, the price tag associated with state Medicaid services is expected to grow under provider reimbursement rate increases included in the fiscal 2025 budget.

Rhode Island Health and Human Services Secretary Richard Charest in a Sept. 30 budget memo to McKee asked for $1.5 billion in state general revenue to fund its fiscal 2026 agency budget, including $4.4 million in new revenue to meet federal Medicaid requirements and for the state benefits eligibility determination program, RIBridges.

A constrained budget of $1.47 billion in state general funding in fiscal 2026 would leave a $40 million hole (excluding federal funds) needed to maintain a “base level” of service, according to Charest’s memo.

An ‘unconscionable’ move
McKee has yet to put pen to paper on the fiscal 2026 spending proposal, which will be unveiled in January, but already, advocates are sounding the alarm over potential Medicaid.

The Senior Agenda Coalition of Rhode Island, along with a group of partnering advocacy organizations for older adults, has called on McKee to stave off critical cuts to Medicaid and senior services.

“It is unconscionable that at a time when our older population is growing — projected to reach one out of every four Rhode Islanders in a few years — to propose budget cuts for programs proven to keep them healthy and safe and that in the long term can save taxpayers money,” Diane Santos, Senior Agenda Coalition Board Chair, said in an Oct. 22 statement.

Sen. Sam Bell, a Providence Democrat, blasted potential cuts made to state Medicaid under a constrained budget in an Oct. 27 post on X.

“It’s not about saving money,” Bell wrote. “It’s about cruelty.”

Bell doubled down in an interview Monday night.

“It demonstrates a fundamental misunderstanding of the basics of budgeting process or it demonstrates willful manipulation,” Bell said, adding that rising Medicaid costs stem primarily from federal recommendations. “This is the process to justify budget cuts.”

Olivia DaRocha, a spokesperson for McKee’s office, said in an email Monday that the administration is still reviewing the health and human services budget request, along with those from other state agencies.
McKee saw the need to “prioritize financial responsibility and protect Rhode Island taxpayers,” he said in a separate emailed statement on Monday.

“As I made clear to my cabinet earlier this year, now is not the time to stray from agencies’ existing priorities and core services, and my budget instructions to state agencies reflect that strategy,” McKee said. “Rather than expanding our portfolio of activities, now is the time to evaluate our existing programs for efficiencies and improvements. Every state is grappling with this post-pandemic financial reset, but in Rhode Island, we are taking action to manage our available resources strategically rather than undergo a blunter cost-cutting exercise in the future. We will work to right-size our operations now so we do not place an unnecessary financial burden on our taxpayers later.”

Charest also pledged to work with state and federal partners to “find cost-saving opportunities that have low-impact on delivery of services to our Medicaid beneficiaries,” according to an emailed statement Monday.

State aid to local school districts and to reimburse city and town governments for lost motor vehicle excise tax revenue were also singled out in the state budget memo as fastest-growing expenses.

Farewell, federal pandemic aid
Lawmakers need to say “no” much more often in the upcoming budget deliberations, said Gary Sasse, a state budget-watcher who formerly led RIPEC and later served as director of the Department of Administration.
“For those of you who think they can tax their way out of this, you’re wrong,” Sasse said. “They are going to have to make cuts to spending.”

While the state budget memo stops short of criticizing lawmakers for using federal pandemic aid to prop up recent spending plans, Sasse did not.

“When the legislature and the governor appropriated money, they didn’t give enough long-term consideration to the implications of what they were doing,” Sasse said. “They were not conservative financially, period.”
Lawmakers allocated $1.3 billion of one-time surplus funds to state programs from fiscal 2021 to fiscal 2025, ranging from a new medical debt forgiveness program to reviving cost-of-living adjustments for certain state retirees, according to the budget memo.
Alan Krinsky, director of research and fiscal policy for the Economic Progress Institute, countered that tax changes, including the long-championed millionaire’s tax, would be an effective way to close the budget gap.
Legislation introduced but stalled in the 2024 legislative session calling for a 3% surtax on income over $1 million would have generated $178 million more in revenue in fiscal 2026, if enacted.

It’s a better option than cutting funding for critical health and social services, which may do more harm than good in the long run, Krinsky warned.

“We need to think about investing in the most vulnerable Rhode Islanders if we want to grow the economy,” Krinsky said.

Higher wage growth projected, but higher unemployment too
While inflation and a housing shortage dampen the state’s post-pandemic recovery, there are signs of hope according to economists with Moody’s Analytics and the Rhode Island Department of Labor and Training. Experts shared their latest predictions with state budget-crunchers at the State House Monday as part of the biannual Revenue & Caseload Estimating Conference.

Projections through the end of the decade show mild improvements in wage and personal income growth, alongside an ever-so-slight uptick in expected housing production, compared to a prior forecast six months ago. However, the state’s total jobs count and unemployment rate are now expected to be slightly worse than previously, due in part to what experts believe were overreported jobs numbers at the beginning of the year.

House Speaker K. Joseph Shekarchi declined to comment on the state budget memo, awaiting updated revenue forecasts from the Revenue & Caseload Estimating Conference, which ends Nov. 8.

Editor’s Note: Nancy Lavin is senior reporter covering state politics, energy and environmental issues for the Rhode Island Current. Rhode Island Current is part of States Newsroom, the nation’s largest state-focused nonprofit news organization.