PROVIDENCE, R.I. (WPRI) — Gov. Dan McKee on Thursday released a sweeping state budget proposal for the new fiscal year that would commit more than $1 billion in federal relief money to housing, aid to small business and public health.

“The decisions we make this year have the potential to strengthen Rhode Island’s economic rebound and propel our state into the next decade with strength,” McKee wrote in an introductory letter to lawmakers.

The budget plan contains no increases in broad-based tax rates such as the sales or income tax, and proposes phasing out the income tax on military pensions, as well as continuing the car-tax phaseout. The plan fully funds local education aid, regardless of enrollment trends, and it once again includes a proposal for recreational marijuana legalization.

“This is a big day,” said Jim Thorsen, director of the R.I. Department of Administration, explaining that the state is in an unusual position of having an unprecedented amount of money because of the federal American Rescue Plan Act, along with hundreds of millions of dollars in surplus state revenue.

Most of that extra money is federal funding, notably the $1 billion remaining from ARPA. But state coffers are also overflowing as the economy recovers from the pandemic; the state is projected to finish this fiscal year with a huge $618 million surplus, an amount that doesn’t include the federal funds.

“This is almost three budgets,” Office of Management and Budget director Brian Daniels said, pointing to ARPA, the surplus and the normal operating budget.

Courtesy/R.I. OMB

McKee took office last March when Gina Raimondo left to become U.S. commerce secretary, positioning him to drive the discussion about how all the money should be used. Advocates have also been flooding the State House with ideas and requests for months, and lawmakers have been weighing in about their own priorities.

McKee’s proposal calls for $12.8 billion in spending during the 2022-23 fiscal year, which begins July 1, with $5.3 billion of that amount being federally funded. The ARPA funding would be allocated over a six-year period, with the bulk of it — $431 million — allocated for the upcoming fiscal year. He also proposes adjusting the current-year budget up from $13.1 billion to $13.8 billion.

To put those numbers in perspective, the pre-pandemic state budget was only about $10 billion.

All of the governor’s proposals will now go to the General Assembly, where lawmakers will hold months of hearings to scrutinize the ideas. A final budget usually emerges in June after behind-the-scenes negotiations between the governor, House speaker and Senate president.

So where does the McKee administration plan to spend all that federal money? He’s proposing a host of new initiatives, but the biggest item is housing — an issue that has emerged as a top priority at the State House. The R.I. Association of Realtors reported Thursday that there was less than a month’s supply of homes on the market in Rhode Island last month, far below the group’s target of a six-month supply.

Lawmakers already took new steps on housing in last year’s budget, including creation of a new housing czar position and a dedicated stream of funding for housing development. McKee’s new budget proposes spending $250 million on a suite of new programs to help develop or rehabilitate affordable homes, including a $50 million commitment to give families up to $17,500 in down-payment assistance.

The $250 million investment in housing represents the largest chunk from the ARPA funding proposal — about 25% — but it also falls short of the more than $400 million that housing advocates and the Rhode Island Foundation have estimated as the current need in Rhode Island.

“There are competing priorities in any budget,” Thorsen said when asked about how the administration arrived at $250 million. “Two-fifty was the original amount that was planned when the plan was rolled out, and the governor stayed with that after a lot of deliberations as to whether it should be more or less.”

Homes RI, a coalition of groups that is pushing a $500 million state investment in housing programs, praised McKee “for sending a clear signal of the administration’s commitment to help meet a vast need across the state,” but urged lawmakers to consider raising the amount closer to the group’s goal.

Along with nearly $17 million for administrative costs, the rest of the governor’s proposal for spending the $1.1 billion in ARPA funds breaks down as:

• $211.8 million for economic and workforce development, led by $70 million for “Blue Economy” investments related to ocean industries, $46 million for repairs to the Port of Galilee, and new spending on job training and biotech infrastructure;

• $180.5 million for aid to small businesses and pandemic-hit industries, including $47 million for the Rhode Island Convention Center, $45 million for grants to small businesses, and $30 million to stabilize the unemployment-tax trust fund;

• $152.2 million for ongoing spending related to the COVID-19 pandemic, such as vaccinations and testing, and including $50 million to provide financial support to health care facilities;

• $132 million for climate-related projects, including $60 million for Quonset’s Port of Davisville and East Providence’s South Quay Marine Terminal to ready them for offshore wind development;

• $118.6 million for children, families and early education, including money for pediatric providers, $15 million for 11 of McKee’s proposed Municipal Learning Centers, and help for nonprofits;

• $42.3 million for behavioral health, led by $28.1 million for Certified Community Behavioral Health Clinics, a network of centers that assist individuals struggling with mental health challenges;

• and $26.5 million for public infrastructure and technology, including upgrades to various state IT systems.

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In addition, another $112 million in federal ARPA funds that must be used specifically for capital projects would be directed toward municipal wellness centers ($46.7 million); a new student center at Rhode Island College ($35 million); and broadband infrastructure ($25 million).

Beyond the ARPA money, McKee argued that since the state’s unusually large $618 million surplus represents one-time funds, not recurring revenue, it should be spent on one-time expenses. State officials said they prioritized using the surplus money for addressing “underinvestment in operations and righting past wrongs.”

And while there are several recurring costs — especially those tied to personnel — in both the federal and surplus spending plans, McKee has proposed hundreds of millions on some one-time, big-ticket items.

Some of the largest items: $120.8 million for infrastructure improvements at the Pastore Complex and state offices in Cranston, along with $108 million to fund a new state-run hospital at the Zambarano campus of Eleanor Slater Hospital in Burrillville. The new, 100-bed facility would become home for the patients currently living at Zambarano and replace the existing structure, which was first built in the early 1900s as a tuberculosis treatment facility.

“It really needs to be replaced,” said Richard Charest, director of the R.I. Department of Behavioral Healthcare, Developmental Disabilities and Hospitals.

The hospital’s Benton facility in Cranston would become a standalone psychiatric hospital for people ordered there for mental health reasons by a judge, and Charest was optimistic that could become operational by September, pending General Assembly and regulatory approvals. The state would separately spend millions on infrastructure improvements and to create an electronic medical records system that would replace the hospital’s antiquated paper-based system of recordkeeping.

The proposal comes roughly one year after McKee submitted a similar, $65 million proposal for a new facility at Zambarano. He later asked the General Assembly to nix the plan after discovering a multimillion-dollar funding gap at the hospital that he blamed on the Raimondo administration.

Fast-forward a year, and the price tag has increased from $65 million to $108 million, which Charest said stemmed from some changes to the plan.

“It includes some infrastructure upgrades, it includes some things that may not have been included in the original plan, so we went through a planning process to determine based on patient type what facility type would be needed and this is the estimate that was arrived at,” Charest said.

In addition to the Eleanor Slater surplus spending, McKee has also proposed $62 million to pay off deferred pension contributions from the 1990s. Other capital, IT and infrastructure projects are also on the governor’s wish list for the surplus money.

As part of the state’s normal operating budget, the governor is offering various new initiatives, including a host of business-related proposals. The wish list includes lowering the corporate minimum tax by $25 and creating a new position in the R.I. Division of Taxation to help businesses navigate the state’s tax system.

Municipalities would also be given authority to waive some or all of local tangible taxes, a decision that currently requires legislative approval on a case-by-case basis. Individuals would be allowed to make baked goods in their home kitchens and sell them through retailers, with annual sales capped at $25,000. The pandemic-era policy of allowing restaurants and breweries to sell to-go alcohol would also be enshrined in law.

McKee once again included a proposal for recreational marijuana in his budget, though the details are likely to change as the House and Senate negotiate how the legal market will be structured.

For now, McKee’s proposal is almost the same as last year’s plan — a roughly 20% tax rate on cannabis, keeping regulation in the R.I. Department of Business Regulation — with one addition: automatic expungement of marijuana convictions. A spokesperson said the legislation would apply to misdemeanor and felony possession charges, but not possession with intent to deliver.

The state Senate passed a legalization bill last year that would have put regulation of the industry under an independent Cannabis Control Commission, but it did not pass the House. The issue of who should oversee the industry has been a sticking point in negotiations, but leaders of both chambers of the General Assembly have said they expect marijuana to be legalized this year.

On education, McKee’s budget would fully fund the state’s public school districts under the existing funding formula, and will not reduce education funding for districts that have seen enrollment drop during the pandemic. The proposal will likely come as welcome news to many public-school districts – including Providence – that have lost students over the last two years.

North Providence Mayor Charlie Lombardi, who leads the Rhode Island League of Cities and Towns, praised the decision on school funding while saying municipal leaders will need to review the details. He also said they support the proposed changes to the tangible tax.

McKee is also proposing the creation of a new Rhode Island Higher Ed Academy that would offer four- to eight-week programs which would assist adults in getting on track to obtain a degree or other credential. McKee touted the idea in his State of the State on Tuesday, along with proposed initiatives to stabilize and grow the health care workforce.

New borrowing is also envisioned in the budget. McKee wants voters to approve $350 million in bond questions on the November ballot: $250 million for another round of K-12 school construction, following a similar bond approved in 2018; $62 million for projects at URI and CCRI; and $38 million for a “Green Economy” bond covering environmental, energy, open space and recreation programs.

One group that criticized the budget plan was Nourish Rhode Island, a coalition of organizations that have proposed using federal ARPA funds to launch a statewide pilot program that would give individuals on food stamps a 50% discount on fresh fruits and vegetables. The governor’s team did not include the SNAP pilot idea in the budget plan.

The Black Lives Matter Rhode Island PAC noted that its former executive director, Corey Jones, is now a member of McKee’s staff, and said of the budget, “this allocation of resources will have a positive impact on the people of Rhode Island for generations to come.”

The governor’s 2022-23 budget proposal would close with an $8 million surplus, an unusually large end-of-year surplus for state budgets in recent history. But officials warned the surplus is projected to quickly turn back into a $215 million structural deficit beginning in the following fiscal year, due to the long-term gap between the cost of Rhode Island government’s ongoing programs and its regular revenue.

When asked why the governor decided to use the unprecedented influx of money to cover new and existing costs instead of lowering taxes for residents, state budget officer Joseph Codega said McKee “in a perfect world would love to do something like that,” but that now wasn’t the right time.

“I think he took a realistic approach that we had a lot of one-time funding, so he wanted to make the targeted cuts that he had,” Codega said. “He knew that this was neither a time for tax increases to balance the budget or major expenditure reductions to balance the budget.”

The Rhode Island Working Families Party, a progressive advocacy group, criticized McKee from the other perspective, arguing that the budget should include an increase in taxes on higher-income Rhode Islanders. However, the group did praise a number of the budget’s other provisions, including its expansions of child care and Medicaid coverage for children and new mothers.

Eli Sherman (esherman@wpri.com) is a Target 12 investigative reporter for 12 News. Connect with him on Twitter and on Facebook.

Ted Nesi (tnesi@wpri.com) is a Target 12 investigative reporter and 12 News politics/business editor. He co-hosts Newsmakers and writes Nesi’s Notes on Saturdays. Connect with him on Twitter and Facebook

Steph Machado (smachado@wpri.com) is a Target 12 investigative reporter covering Providence, politics and more for 12 News. Connect with her on Twitter and on Facebook.