PROVIDENCE - After years of ever-higher spending of disappearing COVID dollars, the state is now facing a $398.2 million deficit during the 2025-26 budget year, and a string of increasingly larger deficits in the years that follow, according to a newly released report by the state's Office of Management & Budget.

The report does not blame state lawmakers.

But it dutifully notes their year-after-year reliance on one-time federal dollars - that were not in all cases appropriated to one-time expenses - and new employee contracts with cost-of-living increases that were not included in the record-high $13.9 billion budget approved in June.

The new OMB report discloses for the first time the price tags, ranging from $72 million in the current budget year to $131.8 million next year to $180 million in the third year, of the new contracts the McKee administration agreed to give the majority of the state's workers after lawmakers approved - and the governor himself signed - the current-year budget.

The new contracts promise raises of 5% this year, followed by 4% and 3% increases in each succeeding year. (The cost estimates are cumulative - that is, they represent the additional cost of each year's cost-of-living adjustment - aka COLA - applied on top of the prior year's COLA.)

In sum: "Significant investments in the [current] FY 2025 budget are generally recurring, such as the implementation of the [reimbursement rate increases] for medical and social service providers, pension benefit enhancements, increased education aid, and increased personnel costs due to COLAs."

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The basic problem lawmakers and the governor now face, according to the budget memo:

Revenue is expected to grow at 2.5% annually while expenditures rise at 3.7%, leading to a projected deficit of $683.5 million by Fiscal Year 2030 if "revenues and expenditures follow anticipated trends without policy intervention."

From the time lawmakers closed up shop this summer to now, the projected deficit has grown from $262.4 million in the year that begins on July 1, 2025, to $398.2 million.

On Friday, Gov. Dan McKee provided The Providence Journal with a statement about the dilemma his administration faces in crafting the new budget for the year that begins next July 1, which he will propose to lawmakers when they reconvene in January.

It said, in part: "Our state is in good economic health, with historic lows in unemployment and a high workforce participation rate. ... Despite these positive indicators, we are currently facing a significant projected budget deficit in fiscal year 2026.

"This deficit is primarily attributed to expenditure growth exceeding revenue growth, a challenge that has been experienced nationwide in the years following the pandemic. Given our current economic strength, now is the opportune time to focus on modernizing government operations and increasing efficiencies.

"We must make decisions to streamline operations, eliminate redundancy, and ensure every dollar is used efficiently ... [and] to right-size our operations now so we do not place an unnecessary financial burden on our taxpayers later," he said.

For the record: The tax-and-spending plan that state lawmakers approved in June for the year that began on July 1 was $271 million larger than what McKee had proposed in January.

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Among the takeaways from the budget memo, which sets the stage for the Revenue & Caseload Estimating Conference playing out over the next two weeks:

"In recent years, the State has managed budget gaps by carrying forward prior year surplus(es) ... that were due in part to an economic turnaround from the pandemic that outperformed initial revenue forecasts, as well as the availability of federal stimulus funds, labor shortages, supply chain disruption, and inflation.

"The primary reason for the short-term deficit outlook is the expectation that budget surpluses on theorder of hundreds of millions of dollars are unlikely to continue," the memo says.

The budget office projects deficits in each of the next five years of $398.2 million, $555 million, $599.4 million, $647.7 million and $683.5 million.