There is considerable uncertainty facing municipal budgets due to inflation and rising interest rates.

Overview

Although the Commonwealth and its localities are currently reaping the benefits of increased revenues, the current high rate of inflation poses a budgetary risk for municipalities. Most notably, property tax collections will not increase at the same pace as inflation due to restrictions set by Proposition 2 ½. There is also further uncertainty about municipal spending levels on capital projects, due to rising construction costs and higher interest rates for borrowing.¹⁸³ New growth revenue has helped to bolster some municipal budgets as residential and commercial construction has continued to grow, but the current path of the Federal Reserve on interest rates may lead to a decline of construction and an associated decline in those property tax revenues.

Many of the programs that assist with municipal capital spending, such as Chapter 90 roadway monies, MassWorks infrastructure spending, and the Massachusetts School Building Authority, will require higher funding because of these trends. The financial support provided by these programs is in high demand, but there is no specific promise in state law for a level of spending or reimbursement. This report does not review the details of these programs, but DLM has commented on their funding in other work, most recently in the 2021 report detailing critical infrastructure needs in Western Massachusetts.¹⁸⁴

183. At the time of writing, interest rate changes had not yet created effects apparent in published data; but DLM expects that the unusually fast rate of change of 2022 will cause some financial instability.

184.  Massachusetts Office of the State Auditor (2021, October 5). Public infrastructure in Western Massachusetts: a critical need for regional investment and revitalization. https://www.mass.gov/report/public-infrastructure-in-western-massachusetts-a-critical-need-for-regional-investment-and-revitalization