The time for real reform has come

From The Beacon, February 2009, Vol. XXXV, #2

Just last summer the national recession was on the front porch knocking on our door. But this past fall, it broke the door down, stormed inside, and decided to stay a long time.

Unemployment in Massachusetts has shot up from 4.5 percent to 6.9 percent, and it may reach 9 percent during this year. Housing prices have fallen by 12 percent. IRA accounts and investments have dropped by 30 percent or more. As a result, state tax revenues have plummeted, slashing more than $2 billion from what was expected for the current fiscal year and creating a $3.5 billion state budget deficit for fiscal 2010.

Cities and towns, already bracing for a terrible fiscal season due to declining excise tax revenues, loss of investment income, lower reserves, and reduced property tax growth, are now facing the harsh reality of local aid cuts.

The governor has been forced to cut $900 million from this year’s state budget, including nearly 10 percent from non-school municipal aid, the largest mid-year local aid cut in history. His fiscal 2010 budget would reduce non-school local aid by 28.6 percent, a $375 million cut compared to original fiscal 2009 Lottery and Additional Assistance aid.

These losses are deep and painful, and they will force widespread layoffs of teachers, police officers, firefighters, public works employees, librarians and other vital municipal workers. Communities will struggle with higher class sizes, smaller public safety forces, crumbling roads and bridges, and shorter hours for libraries and senior centers. Local governments will rely even more on the overburdened property tax and regressive fees.

This crisis requires bold, swift and decisive action by the state to enact real and meaningful reforms to provide cities and towns with the management powers, revenues, and relief necessary to navigate through this recession and protect the residents of Massachusetts from the harmful impact of the local aid cuts and the recession-triggered losses.

The MMA has been calling for these reforms for years. The time for waiting has ended. The time for reform is now.

Local-option taxes
It is essential that cities and towns be given additional taxing authority in order to continue to provide essential municipal services and avoid damaging increases in the property tax. Massachusetts ranks among the lowest of states in terms of local tax diversification. This has forced a higher-than-average reliance on the property tax as the primary means of paying for local services.

For several years, the MMA has been pushing a local-option meals tax. This would net cities and towns approximately $125 million per penny. The MMA also calls for an increase in the local-option room occupancy excise (the hotel-motel tax) that would raise approximately $24 million per penny, and we further ask that the Legislature reform the definition of occupancies subject to taxation to prevent tax avoidance by those who use vacation rentals in resort areas.

The governor has proposed a 1 percent local option meals and room occupancy tax. This must be enacted this spring in order to provide meaningful relief for fiscal 2010 budgets.

Telecommunications tax loopholes
Last year, the Appellate Tax Board ruled that telecommunications companies are subject to local taxation on poles and wires over public ways. Cities and towns are collecting these funds beginning this year, but they have been directed by the Department of Revenue to place at least half of the amount collected in the municipal overlay account pending an expected appeal and delay tactics by the companies.

The MMA asks the Legislature to act immediately to codify the ATB ruling, so that cities and towns can immediately access and use the full $26 million that rightfully belongs in local treasuries. Further, it is imperative that the Legislature act to eliminate the remaining obsolete and unwarranted exemption of telecommunications equipment from the personal property tax, which would provide up to $50 million in local revenues that the telecommunications companies are avoiding under the current scheme.

We appreciate that the governor has supported this reform from his first week in office, and now is the time to act. Failure to close these telecommunications tax loopholes would harm cities and towns and local taxpayers, and provide unwarranted benefits to the telephone industry.

Health insurance plan design
Cities and towns have worked hard to control health insurance costs as best they can, but they operate under a state law that reflects a double standard. Municipalities are required to negotiate and receive union approval to implement significant changes in their health insurance plans, while the state has exempted itself from this requirement and implements basic decisions on health insurance outside of collective bargaining. It is far past time that this double standard end, and we strongly urge the Legislature to give cities and towns the same authority as the state in designing health insurance plans for employees. This one reform is the most effective way to bring immediate fiscal relief to all cities and towns, and is urgently overdue.

A vast majority of municipalities participates in large regional or statewide insurance pools and buying groups, and they have been able to achieve the full amount of savings that comes from bulk purchasing. The real issue in terms of cost and savings opportunities comes in the area of “plan design.” This is because health insurance plans range in price based on the basic benefits that are offered. Plans that are designed with lower co-pays and deductibles for visits to the doctor, the emergency room, and for in-patient and out-patient procedures are more expensive than plans that have higher co-pays and deductibles.

Unfortunately, state law requires cities and towns to collectively bargain changes that would modernize their health insurance plan designs. On the other hand, the state has exempted itself from this, and plan design for state employees is determined by the Group Insurance Commission.

If cities and towns had the same authority as the state, they could quickly modernize their health plans to incorporate realistic co-pays, deductibles, and tiered networks (as the state has done) – and dramatically reduce the cost of municipal health insurance throughout the Commonwealth. Keeping the status quo means leaving this important cost containment measure to the agonizingly slow and ineffective collective bargaining process, which requires the agreement of all unions before affecting any change.

This change is far superior to the current option of having cities and towns consider joining the state plan, as there are many, many communities for whom the state plan would not work nearly as well, due to offsetting costs that depend on many complex factors, including the number of retirees, the percentage participation in indemnity plans, and other considerations. The MMA’s analysis shows that if cities and towns are able to update their health insurance plan designs to reflect the corresponding benefits that the state offers, many more municipalities would achieve immediate savings beginning in the last quarter of fiscal 2009, the savings would be greater, and there would be less of a cost shift onto employees.

Last month, the governor filed a disappointing measure that falls far short of reform. His plan would keep all plan design decisions subject to union approval and would punish cities and towns by taking away local aid when unions fail to agree to changes. This proposal would make it harder for communities at the bargaining table, and it is not a framework for success.

The one sure way to ensure appropriate health insurance savings for cities and towns is to grant municipalities the basic management authority that the state now enjoys. We need meaningful reform now, and this is the best way to achieve it.

Charter school funding
Charter schools are an increasing burden on municipal finances, and the current funding system drains resources from public school districts. For fiscal 2009, Chapter 70 school aid deductions from municipal and regional school districts to pay tuition to charter schools are expected to total $273 million. This is only partially offset by reimbursements that total $80 million, resulting in a net loss of $193 million. School aid losses due to charter schools affect 199 municipal and regional school districts.

According to the MMA’s initial analysis, the governor’s fiscal 2010 budget would increase the amount of money that cities and towns would lose to charter schools – at a time when overall local aid is dropping. The state and localities are struggling to spend an adequate amount on public education, and the charter school finance scheme is eroding the local capacity to deliver quality education.

The MMA is not opposed to charter schools in principle, yet we strongly object to this funding system. Until the system is fixed, we support a moratorium on new charter school openings next year and on any expansion of existing schools.

The MMA also supports the Massachusetts Association of School Superintendents plan to cap the local contribution at $5,000 (the school choice cap) with any additional payments to charter schools made from other sources.

In the short-term, the state should at least provide a circuit-breaker to ensure that future losses to charter schools will not consume a greater percentage of the Chapter 70 aid that a city or town now receives.

There are dozens of important reforms that should pass this year, covering a wide range of areas from procurement to borrowing to pension relief and everything in between.

But real, full and meaningful reform must include the four action items outlined above. There is no time to lose. These valuable priorities are needed now. Otherwise, the recession will stay in our house much longer than necessary, and the residents of Massachusetts will feel the difference.