MTF report: Municipalities face budget squeeze due to escalating pension, health and debt costs

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Municipalities face a long-term budget squeeze because the costs for pensions, employee and retiree health benefits, and debt service are rising much faster than revenues, according to the 43rd annual Municipal Finance Data report released today by the Massachusetts Taxpayers Foundation.

Municipal spending for pensions, health benefits and debt service grew by 23 percent between fiscal 2007 and fiscal 2012, while all other spending grew by just 10 percent.

“Spending on employee and retiree benefits will consume an ever-larger share of municipal budgets for the foreseeable future as municipalities face nearly $45 billion in unfunded liabilities,” said Taxpayers Foundation President Michael Widmer.

As a result, he said, schools, public safety and other services are feeling the squeeze. The fiscal pressure has led to the elimination of more than 15,500 full-time positions since 2007, or 6 percent of the municipal workforce statewide.

“The global recession and state fiscal crisis are partly responsible for these layoffs,” the report states, “but the larger and more permanent cause is the escalating spending on pensions, health care and debt service.”

Pension costs grew nearly three times as fast as other municipal spending between fiscal 2007 and fiscal 2012 and more than twice as fast as revenue growth. In fiscal 2012, pension contributions totaled more than $1.3 billion, a 30 percent increase from the $1 billion in 2007.

Like pensions, spending on health benefits for employees and retirees grew much faster than revenues between 2007 and 2011. The widespread adoption of municipal health insurance reform in 2012 reduced costs by $30 million, but health care still accounts for nearly 10 percent of municipal budgets. Spending will continue to climb because, in addition to the health benefits for active employees, municipalities face an overwhelming $30 billion in unfunded liabilities for retiree health care. Spending on retiree health care is projected to jump from $800 million in 2012 to more than $1 billion within five years and $1.5 billion in 10 years.

Debt service costs, the amount municipalities must pay annually in interest and principal for money they have borrowed, grew by 23 percent between fiscal 2007 and 2012, reaching a total of $2.26 billion in 2012, 10 percent of municipal spending.

On the revenue side, growth was driven largely by an increase in state aid, which, combined with a small improvement in local receipts, offset the weakest growth in property taxes in nearly three decades.

After three consecutive years of cuts, state aid to municipalities rose to $4.8 billion in fiscal 2013, a 3 percent increase over the $4.7 billion in fiscal 2012. Virtually all of the increase in state aid was dedicated to Chapter 70 education aid, which climbed by 4.8 percent, or $160 million, to $3.52 billion in 2013 from $3.36 billion in 2012. For the third consecutive year, unrestricted general government aid was funded at $899 million.

Local receipts, such as motor vehicle excise taxes, meals and hotel taxes, building permits, and charges for services, grew by 3.3 percent in fiscal 2013 to $4.2 billion.

Total municipal revenues and expenditures grew by 3.7 percent to $23.4 billion statewide in fiscal 2013, an improvement over the anemic growth during the recent recession but still well less than the average annual growth of 5.2 percent experienced between 1982 and 2009, according to the report.

Despite upticks in state aid and local receipts, overall revenue growth was constrained because property taxes, which account for half of all municipal revenues, grew at their slowest rate since 1985, increasing by 3.6 percent, from $13 billion in 2012 to $13.4 billion in 2013. By contrast, between 1985 and 2012, property taxes rose an average of 5.4 percent annually.

In addition to the analysis of overall trends in local finances, the Municipal Financial Data report provides a series of statistical tables that detail basic financial information for each of there state’s 351 cities and towns. The report also includes comparisons of average residential tax bills; percent of low-income students; and per capita expenditures, income, and equalized values.

For the full report, visit www.masstaxpayers.org.