Report  Fulfilling the Promise of Local Aid by Strengthening State-Local Partnerships

The report found that municipal budgets are heavily dependent on state aid, but outdated legislation, slowly growing state appropriations, and level funding in some categories force an increased reliance on property taxes.

Organization: Office of the State Auditor Division of Local Mandates
Date published: October 13, 2022

Executive Summary

State assistance is a critical lifeblood for municipal finance in Massachusetts. Funds for education, general aid, and reimbursements support over one-fifth of budgets of local communities. For some communities, state aid is the largest category of revenue, but overall it is the second biggest following the property tax levy. Additional assistance comes from a variety of grant programs, typically discretionary, whereby the state helps communities invest in schools, water and sewer systems, libraries, and other municipal services.

Even with the volume of assistance available, there are commitments and authorizations under state law that are not fully kept by the Commonwealth. For example, school transportation monies for most programs are promised but fall short, some by design and some by formulae that require local participation. A few programs are fully funded, such as the school transportation mandate for students in families suffering homelessness. Some formulae for reimbursement are capped at arbitrary reimbursement levels that vary widely. Other categories of reimbursements are not explicitly visible to municipalities and school districts but are instead included in larger, broader funding formulae, such as the Chapter 70 education formula.

There is a continued need for state investment for these programs as municipal finance is constrained by the property tax limits of Proposition 2 ½ ; despite these limits, municipal tax levies have increased faster than state aid. However, the ability of municipalities to raise the tax levy heavily depends on “new growth” revenue that flows from new housing and non-residential construction. Among the concerns mentioned in this report is the uncertainty of the economy in the next few years, as well as rising interest rates and a slowdown in the growth of residential real estate.

Given the strong current fiscal position of the state, the Division of Local Mandates feels that this moment offers an opportunity to discuss many of the major programs that provide financial support to municipalities and school districts and make funding recommendations. This report reviews the major categories of state aid and various reimbursement programs offered to municipalities in the Commonwealth and details the revenue that flows from these categories. We indicate where a program’s appropriation or formula falls short of the amount required to fully reimburse communities, or, alternatively, where the state meets its obligation. Our findings and recommendations build on the work of state agencies, municipal advocates, and legislative commissions and highlight the need for equitable funding and a continued partnership between the Commonwealth and its cities and towns.

Below is a summary of our findings and recommendations, with links to each page listed.

Finding 1
Page
42

Municipal budgets are heavily dependent on state aid, but outdated legislation, slowly growing state appropriations, and level funding in some categories force an increased reliance on property taxes.

Finding 2
Page
43

Reimbursements for various school transportation programs are varied and confusing.

Finding 3
Page
46

Pandemic relief, federal funds, and surges of economic activity in state and local government have had a large impact on revenue growth.

Finding 4
Page
48

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

Recommendation
Page
49

  1. Continue to meet financial commitments through the Student Opportunity Act.

Recommendation
Page
50

  1. Dedicate full funding to overlooked categories of school transportation.

Recommendation
Page
51

  1. Increase Unrestricted General Government Aid by the level of actual state revenues, as opposed to projected estimates.

Recommendation
Page
52

  1. Strengthen other local aid programs to guarantee full funding for lower-income communities.

Recommendation
Page
53

  1. Recognize the financial investment needed to fund other outstanding expenses.

 

A PDF copy of the report Fulfilling the Promise of Local Aid by Strengthening State-Local Partnerships is available here.

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(617) 727-3014

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Massachusetts State House
Room 230
Boston, MA 02133

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