Budget-setting season kicks off on Beacon Hill

From the Beacon, March 2023

In contrast to the state, cities and towns are facing major fiscal challenges and very tight budgets. That’s because communities must live under Proposition 2½, which caps municipal revenues, and spiraling inflation, which has driven up expenses at double the allowable municipal revenue growth rate.

State tax revenues increased by 34% from fiscal 2020 to 2023, an average growth rate of 11.3% per year. During this time, 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. Inflation was 15.6% during this time, with an average rate over 5%.

This shows that the state’s fiscal capacity has grown much faster than inflation, and local fiscal capacity has been crushed by inflation, with communities in a weaker financial position through no fault of their own.

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.

We all know that 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 Healey-Driscoll administration kicked off the annual budget-setting season on Beacon Hill this week when they filed their first state budget proposal, known as House 1. The process now moves to the Legislature, where lawmakers will start their months-long process of listening to constituents and stakeholders, diving into the details, making decisions based on their collective priorities, and delivering a final product to the governor by July.

Because of the stark fiscal realities facing cities and towns, we are asking our legislators to view the governor’s budget as a first step, not the final step, on local aid.

Many aspects of the administration’s budget proposal match up with challenges facing cities and towns, providing a better starting place than gubernatorial budgets filed in past years. Those previous budgets have typically offered increases for Chapter 70 school aid and Unrestricted General Government Aid, but have level-funded most other accounts, leaving it to the Legislature to increase funding for a wide range of state commitments.

In a welcome break from that pattern, Gov. Healey and Lt. Gov. Driscoll have proposed increases for regional school transportation, vocational school transportation, special education reimbursements, payments-in-lieu-of-taxes (PILOT), transportation of students in temporary housing, library aid, and rural school aid.

This is a solid start. While further increases are still needed to get school transportation reimbursements, PILOT, and rural school aid up to full funding levels, and special attention must be given to addressing an unaffordable spike in special education costs, the gap between House 1 and full funding is smaller than in past years. Local officials look forward to diving into the details with members of the House and Senate, and building on this progress, with the goal of reaching full funding.

At the outset, there are two headline issues that require special attention, in addition to the special education, school transportation, PILOT and rural aid programs noted above. These are Unrestricted General Government Aid and Chapter 70 school aid.

A 2% UGGA increase is too low
For the past eight years, funding for discretionary local aid (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, while the state has benefitted from record tax revenue collections, the method of calculating state revenue growth undercounted the increases the state has enjoyed, creating a challenging process for cities and towns because UGGA increases were lower than the actual revenue growth rate. This was a major reason why the Legislature doubled the UGGA increase from 2.7% to 5.4% in its fiscal 2023 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 strongly requests that the $1.23 billion UGGA account 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, would even out large swings, and would avoid 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 in House 1, which would provide only $24.6 million more for fiscal 2024, UGGA funding should be based on a more accurate calculation of the recent growth in state revenues. This would generate a 6% increase, or $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.

Chapter 70 funding must provide all districts with enough funding
Regarding Chapter 70 school aid, the MMA strongly supports full funding of the Student Opportunity Act, which is included in House 1. At the same time, communities and districts should all receive an adequate level of minimum aid to ensure that all schools receive a meaningful Chapter 70 increase in fiscal 2024, which should be at least $100 per student.

Under the school funding distribution in House 1, 119 communities and school districts, serving 257,000 students, would be relegated to increases of just $30 per student. Their education aid would increase by 0.7%, forcing these districts to impose painful cuts. Increasing minimum aid to $100 per student, would allocate an additional $18.8 million to provide some assistance to partially cover inflation.

Again, we know that lawmakers understand this issue, and we applaud the Legislature’s initiative to double minimum aid in this year’s budget. Local officials look forward to engaging with their representatives and senators to address this critical issue impacting so many communities and schools. Going forward, $100 per student would result in an average increase much closer to historical inflation.

Another aspect of Chapter 70 that calls for attention is the very high increase in mandated local contributions to the foundation budget formula. House 1 is based on a calculation that calls for a $400 million increase in required municipal spending on the school budget, a 5.6% increase. This is far above the growth in municipal revenues. Without addressing this aspect of the Student Opportunity Act funding challenge, districts with required increases in local contributions that exceed the percentage growth in their own local property tax revenues would be forced to cut funding for essential municipal services, a harmful zero-sum process that would weaken their capacity to deliver critical non-school services to students and families outside the classroom.

Budget-setting season is shifting into high gear at the State House and in every town and city. The key priorities outlined here will establish fiscal stability and sustainability at the local level and ensure that the residents of Massachusetts receive the essential municipal and school services they expect and deserve.