MTF proposes new local aid structure

In order to help address the relentless squeeze on municipal finances, the state should dedicate 40 percent of annual revenues from income, corporate and sales taxes to local aid, according to the Massachusetts Taxpayers Foundation’s 35th annual analysis of local revenues and spending.

The MTF study, released on Nov. 22, paints a picture of continuing stress on local finances in fiscal 2005, even with modest increases in state aid. Municipal stabilization reserves declined for the first time in a decade; excess taxing capacity under Proposition 2 1/2 fell for the fourth year in a row; and local operating surpluses decreased as well, contributing to a drop of almost $150 million, or 25 percent, since 2002.

• Massachusetts Taxpayers Foundation’s 35th Municipal Financial Data report (PDF file, 316K)

While sharp increases in health care costs have added to the pressure on municipal budgets, state aid policy has been the primary contributor to local fiscal stress, according to the MTF study. Despite additional aid dollars in 2005, assistance to cities and towns remained $750 million, or 14 percent, below 2002 levels after adjusting for inflation, with aid amounts well below 2002 in almost every community in the state. Even aid increases in 2006 will be mostly wiped out by inflation, the MTF notes.

“Although municipal leaders have raised property taxes, hiked fees, tapped reserves, and cut services in order to maintain fiscal balance over the last four years, local finances are still deteriorating in many, if not most, communities,” said MTF President Michael Widmer.

To address the chronic squeeze on local finances – and to bring constancy to the state’s efforts to support municipal budgets – the MTF recommends that the state dedicate an amount equal to 40 percent of annual revenues from its three major tax sources to formula aid for cities and towns.

The 40 percent commitment recommended by the MTF would restore overall funding for Chapter 70, additional assistance, and Lottery to 2002 levels (after adjusting for inflation) and provide a modest increase of about 5 percent. Had this policy been in place in 2005, it would have resulted in additional aid to cities and towns of more than $1 billion, the MTF reports.

The MTF recommends that the new revenue-sharing policy be phased in over several years and be coupled with a re-examination of state aid distribution formulas.

The MTF recommends that the 40 percent commitment be implemented by dedicating portions of specific taxes, in order to establish for cities and towns a reliable stream of revenues that would be determined outside the state budget process. The new funding approach would also need to include additional provisions to buffer annual aid levels from future declines in the state economy.

The MTF also recommends that the state develop a new system for benchmarking municipal costs in order to ensure that the 351 cities and towns are using taxpayers’ dollars effectively.

The initial findings of a major economic study by Northeastern University on the connection between revenue sharing and the future of the Massachusetts economy, released in October, conclude that the Massachusetts economy will fail to live up to its potential to compete and thrive until local aid to cities and towns is substantially increased.

The study, commissioned by the MMA, is a comprehensive assessment of key economic trends and principles regarding attracting and retaining jobs and people, as well as a detailed examination of the treatment of local aid over the past 25 years. The final report will be released at the MMA’s 2006 Annual Meeting on Jan. 14.