Developing a Plan to Reduce an Accumulated Deficit

Legal Requirements

Chapter 45-12 of the Rhode Island General Laws entitled "Indebtedness of Towns and Cities" includes the following sections:

• 45-12-22.1 Municipal Deficits - Purpose
• 45-12-22.2 Monitoring of Financial Operations - Corrective Action
• 45-12-22.3 Year-End Deficits
• 45-12-22.4 Deficit, pension and other post-employment benefit financing — Approval required
• 45-12-22.5 Unbudgeted Expenditures
• 45-12-22.6 Cooperation of School Committees
• 45-12-22.7 Enforcement and Remedies

The purpose of this law is to ensure that municipalities and school districts monitor financial operations on an ongoing basis, execute a rapid response to budget problems and maintain a balanced budget. The following is a summary of certain provisions of this law. To view all provisions, please click the legal references outlined above.

Monthly Monitoring of Financial Operations

Rhode Island General Law 45-12-22.2 requires that:

• The chief financial officer of each municipality and each school district shall continuously monitor financial operations by tracking actual versus budgeted revenue and expense;
• The chief financial officer of the municipality shall submit a report on a monthly basis to the municipality’s chief executive officer, each member of the city or town council, and school district committee certifying the status of the municipal budget from all fund sources, including the school department budget from all fund sources, or regional school district budget from all fund sources;
• The chief financial officer of the municipality shall submit budget-to-actual financial information on or before the 25th day succeeding the last day of the sixth, ninth, and twelfth month of each fiscal year to the Division of Municipal Finance certifying the status of the municipal budget, including the school budget that has been certified by the school department; and
• The chief financial officer of the school department or school district shall certify the status of the school district’s budget and shall assist in the preparation of these reports.

Elements of the Reports:

• The monthly report and budget-to-actual financial information shall be in a format prescribed by the Division of Municipal Finance, the Commissioner of Education, and the State Auditor General.
• The reports shall include the financial operations of any department or fund of municipal government including the school department or regional school district, notwithstanding the status of the entity as a separate legal body.
• The reports shall contain a statement as to whether any actual or projected shortfalls in budget line items are expected to result in a year-end deficit, the projected impact on year-end financial results including all accruals and encumbrances, and how the municipality and school district plans to address any such shortfalls.
• All budget-to-actual financial information required shall be submitted to the Division of Municipal Finance through the use of the Division’s Transparency Portal, in the format required by the Division of Municipal Finance, which will be located on the division’s website.

Corrective Action Plan

If any of the budget-to-actual financial information required under this section project a year-end deficit, the chief financial officer of the municipality shall submit to the state division of municipal finance, the commissioner of education, and the auditor general a corrective action plan, signed by the chief executive officer and chief financial officer, on or before the last day of the month succeeding the close of the fiscal quarter in which budget-to-actual financial information is required.

Elements of the Plan:

• It shall provide for the avoidance of a year-end deficit or structural deficit that could impact future years.
• It may include recommendations as to whether an increase in property taxes and/or spending cuts should be adopted to eliminate the deficit.
• It shall include a legal opinion by municipal counsel that the proposed actions under the plan are permissible under federal, state and local law.

Year-end Deficits

Rhode Island General Laws Section 45-12-22.3 provides that if at the end of the fiscal year, the chief financial official determines, based on available data, that it is likely that the city or town's general fund or combined general fund and unrestricted school special revenue fund will incur a deficit, the municipality must immediately develop a plan to eliminate the deficit.

Elements of the Plan:

The plan must, at a minimum, comply with the following provisions in the law:

• Provide sufficient funds by annual appropriation to eliminate the entire deficit in a period not to exceed five years.
• Provide annual appropriations for deficit reduction in equal or diminishing amounts during the five (5) year period.
• Indicate the necessary governmental approvals and procedures required to implement the plan.
• Include a legal opinion by municipal counsel that the proposed actions are permissible under federal, state, and local law.
• Submit the plan to the Auditor General for approval before it is implemented.

The Auditor General shall determine whether the plan reasonably ensures elimination of the accumulated deficit in accordance with the law in a fiscally responsible manner. The judgment of the Auditor General in applying this standard shall be conclusive.