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When Will R.I. Get Serious About Its Crisis?

The Providence Journal Commentary Section
June 2011

Moody's recently lowered its credit outlook for Rhode Island from stable to negative. The other ratings agencies may soon follow. While this news hardly came as a surprise to anyone, it should serve as a warning that the time for meaningful structural change here is running out. The "bond vigilantes" have moved a step closer.

This change of status moves up the timetable within which Rhode Island must demonstrate viable long-term fiscal discipline. Gone is the possibility of waiting until some unspecified later date before engaging in meaningfully longer-term deficit reduction. And, as Moody's indicated in its statement concerning our status change, our state's past practices are well known, most notably a long history of reliance on one-time "fixes."  Our recent ratings downgrade is actually a positive factor in one sense - we can no longer rely on "smoke and mirrors" as the basis for fixing our longer-term fiscal problems. The adults are now watching!

Our state's fiscal situation continues to be in disrepair, as we face budget deficits for as far as the eye can see. Unlike the nation, we must balance our budget every fiscal year. When has Rhode Island actually been balancing its budget? Not when budgets are originally presented then amended, before the beginning of the fiscal year to which they apply. For the past several years, approximately half of the originally identified deficit has remained as of January. So, even with the often contentious budget debate that occurs this time each year, we have typically generated only six-month "balances." How will Rhode Island get ever along without such reliance on smoke and mirrors?

First and foremost, our leaders must recognize that we are in the midst of a serious crisis. While they often say that they are aware of this, actions speak much louder than words. In other words, the pace at which we should be dealing with our structural problems should more closely resemble crisis management during the flight of Apollo 13, not what has been "business as usual" here.

Second, Rhode Island must quickly move to institutionalize due diligence. For as long as I can remember, major programs or changes here have been proposed with little or no explicit economic analysis of likely impacts. We recently witnessed this, for example, with the Governor's sales tax modification proposal. Clearly, the historical absence of due diligence has not served our state well. Consider, after all, where we are now. If Rhode Island is to effect meaningful structural change from this point forward, we must identify and analyze the key economic forces that will impact the likely success of proposed economic changes. This also means less reliance on static economic analysis, which all too often tends to overstate the short-term benefits associated with changes that have negative longer-term consequences. In other words, Rhode Island must end what I have come to refer to as the practice of Due Presumption.

Third, as our state's rate of economic growth continues to slow, our leaders must avoid the temptation of assuming that state revenues will continue to exceed expectations. Even if revenue does continue to rise, which is highly likely in a recovery, the rate at which it increases may well begin to diminish. So, any commitment to spending increases in such a tenuous revenue environment is not well advised at this point.

Finally, Rhode Island needs to make substantial and well-designed spending cuts before it can ever expect to regain control of its economic destiny. And the types of cuts are critically important. I am not referring to ad hoc rules, such as fixed ratios of spending cuts relative to tax increases. What needs to be addressed is the critical distinction between consumption-oriented and investment-oriented spending.

Not all spending cuts have the same implications for long-term economic growth and future tax revenue. Consumption-oriented spending, which adds little if anything to our state's future productive capacity and income, should be targeted as the primary basis for attaining budget balance. Investment-oriented spending, which increases future income and economic activity, should be spared to every extent possible, since this type of spending raises both future economic activity and tax revenue, partly paying for itself.

Clearly, one of the reasons for Rhode Island's underperformance (Moody's noted our lagging status in its report) is that we have tended to overemphasize consumption-oriented spending over the years, perhaps because this type of spending has extremely vocal followings, and under-allocated investment-oriented expenditure. Even with our investment-oriented spending choices, such as highway maintenance and repair, our state has gotten far too comfortable with debt finance, a practice that has come to haunt us, one that Governor Chafee is correctly attempting to remedy. 

Absent meaningful economic policy guided by due diligence, Rhode Island will continue to kick the proverbial "can" down the road, a practice it has engaged in for far too many years, that has evolved into "pin the tail on the taxpayer." Following my suggestions will inevitably lead to healthy debate that is capable of ultimately guiding the process of attaining longer-term fiscal objectives. There is a heightened urgency with which we now find our need to do this in light of our revised credit rating outlook. Should we fail to act decisively now, the only question is when, not whether, Rhode Island will finds its ratings outlook downgraded even further.

by Leonard Lardaro


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