Much at stake as state and local leaders adopt their budgets

From the Beacon, May 2023

Budget-setting season is marching along on Beacon Hill and in communities throughout Massachusetts. This springtime ritual has major consequences for the 7 million people who live and work in our cities and towns.

Lawmakers and municipal leaders share the same important goal: passage of spending plans that wisely invest in critical services to support residents, families, and businesses. But the deliberations that are taking place right now are quite different at the state and local levels.

The state is expanding programs and contemplating a $1.1 billion tax cut package. Cities and towns are struggling to simply maintain existing services, and many are being forced to scale back. In other words, the state is budgeting for growth, and cities and towns are budgeting for contraction.

That’s because state tax revenues increased by 34% from fiscal 2020 to 2023, an average growth rate of 11.3% per year. On top of this, the Commonwealth is set to receive at least $1 billion more from the so-called Millionaire’s Tax adopted by the voters in November. During this same period, however, municipal property taxes and local receipts experienced average growth of just 3.7% per year. This disparity is clearly a problem, as the state’s fiscal capacity has increased at triple the rate that communities have experienced.

This is further compounded by inflation, which was 15.6% during this time period, with an average rate of more than 5%. In real terms, the state has experienced net revenue growth of 18.4% and local governments have endured a net loss of 4.5% in municipal revenue capacity.

Communities are in a weaker financial position through no fault of their own. This is simply a function of the dynamic nature of the state’s revenue sources, which are directly tied to the economy, and the static nature of the property tax, which responds much more slowly to economic cycles and is capped by Proposition 2½.

Because costs are outstripping local capacity, municipalities are more reliant than ever on increases in state aid in order to deliver vital municipal and education services, ensure safe streets and neighborhoods, and maintain local roads and critical infrastructure.

These local services are fundamental to our state’s economic success and competitiveness, which means that adequate funding of local aid is directly linked to our state’s economic success and competitiveness.

The governor and the House have offered their spending blueprints, which take a mostly status quo approach toward municipal and K-12 education accounts, funding the Student Opportunity Act, and investing in needed reimbursement programs.

We thank the House for funding year three of six of the landmark Student Opportunity Act, doubling Chapter 70 minimum aid to $60 per pupil, funding the state’s statutory requirement for charter school mitigation payments, as well as regional school transportation, and transportation for homeless students under McKinney-Vento. Rural school aid would receive a 45% increase over the current fiscal year, and Payments-in-Lieu-of-Taxes (PILOT) to cities and towns would hold communities harmless from recent property valuation changes. These are welcome investments that generally follow the contours of recent state budgets.

Our state’s prosperity depends on full and adequate revenue sharing
Yet the challenge remains that a mostly status quo state budget will see too many communities cut back on existing services or forgo necessary investments. This is a huge problem, because without strong localities and robust municipal services, the state’s economy will suffer, and in the long run the Commonwealth will see a reversal in its fiscal fortune.

The state’s prosperity depends on a full and adequate revenue sharing program for cities and towns. This brings us back to the issue of funding for discretionary local aid, officially known as Unrestricted General Government Aid.

For the past eight years, UGGA has followed a revenue sharing compact that increases aid each year by the same rate of growth as state revenues, providing predictable increases in unrestricted municipal aid, with a framework that is affordable for the Commonwealth because it uses a growth index that matches the state’s revenue capacity.

During the past three fiscal years, however, as the state benefitted from record tax revenue collections, the method of calculating state revenue growth was flawed. UGGA increases were substantially lower than the actual revenue growth rate. This was a major reason why the Legislature doubled the initial UGGA increase from 2.7% to 5.4% in its fiscal 2023 state budget, a step that local leaders and the MMA applaud and deeply appreciate.

To avoid this problem in the fiscal 2024 budget cycle, the MMA is calling for the $1.23 billion UGGA account to be increased using a stable measure of state revenue growth. Using a rolling three-year average of state revenue growth would anchor the framework with real data, while evening out large swings and avoiding the flaws that have kept revenue sharing increases below the actual growth in the state’s fiscal capacity.

Instead of the below-inflation 2% increase proposed by the governor, or the smaller 1.6% increase in the House budget, UGGA funding should be based on a more accurate calculation of the recent growth in state revenues. This would generate a 6% increase of $75 million, allowing cities and towns to keep pace with inflation. This would approximate the increase that the Legislature initiated last year and move communities forward with UGGA funding that is much closer to the actual need.

While we all hope that the state’s recent level of tax growth will continue, we understand that state leaders need to be cautious about the future. Our concern for local governments is that if the base of UGGA is not adjusted for fiscal 2024, and subsequent tax collections for future years are more modest, cities and towns will continue to lag far behind.

Preserving the Lottery’s mission to support cities and towns
As we discuss the need for a strong state-local fiscal partnership, the conversation also involves the largest revenue source that the state uses to fund local aid: the Massachusetts State Lottery. Over 50 years ago, the Lottery was established for the sole purpose of supporting cities and towns. According to the State Lottery Commission, in the most recently completed fiscal year (fiscal 2022) the Lottery generated $1.105 billion in net proceeds to the state, supporting approximately 94.6% of the Commonwealth’s annual appropriation for Unrestricted General Government Aid.

An outside section of the House budget would authorize an online Lottery (iLottery), and use those funds for early education and child care operational grants. We appreciate the interest in expanding Lottery operations to compete in a rapidly changing market. But due to the overwhelming needs of local government, it is vital that all Lottery revenues remain with cities and towns.

The MMA has been, and continues to be, actively engaged in conversations with the State Treasurer’s Office about the expansion of the Lottery to an online platform. Authorizing iLottery products has been a subject of debate ever since the state expanded the gaming marketplace and escalated competition from online sports betting. Regardless of the outcome of this debate, we ask that all Lottery proceeds be used to fund local aid. This would preserve the Lottery’s original purpose and maintain the Lottery as the Commonwealth’s most important resource in funding Unrestricted General Government Aid.

The MMA is concerned that an expansion to online platforms would reduce revenue raised by the Lottery’s traditional in-person products. Few states that have started an iLottery are comparable to the size and scope of the Massachusetts State Lottery, and data regarding the cannibalization of in-person games by online offerings is too new to offer a reliable guide. In a mature market such as Massachusetts, it is highly probable that a large portion of iLottery revenues would come at the expense of existing games.

For this reason, as this measure moves through the Legislative process, the MMA respectfully urges that online Lottery proceeds be exclusively used for the Lottery’s intended focus, which is to support cities and towns. This is the Lottery’s mission, and we ask the state to protect this vital revenue stream that accounts for the overwhelming amount of discretionary local aid that cities, towns and taxpayers rely on to fund essential municipal and school services and balance local budgets.