MTF report: Municipalities mired in worst 2-year stretch in 3 decades

In fiscal 2010 and 2011, Massachusetts cities and towns endured the most difficult two-year period in 30 years, with property taxes rising to their highest share of local spending since Proposition 2½ took effect in 1981, according to a report released today by the Massachusetts Taxpayers Foundation.

The foundation’s 41st annual Municipal Financial Data report finds that municipal budgets expanded in fiscal 2010 and 2011 by just 0.1 percent and 1.1 percent, respectively. The combined two-year growth rate was less than half of the state’s previous two-year low, between fiscal 1990 and 1992.

Local property tax receipts grew by just 3.8 percent in fiscal 2011, the smallest one-year increase of the Proposition 2½ era. Due to reductions in state aid and other local receipts, property taxes accounted for 56.5 percent of total local revenues last year – the highest level in three decades. This proportion has been growing steadily since 2001, when it was 49 percent.

“We are entering a new period in which there will be a permanent squeeze on municipal finances,” the report states. “For the foreseeable future, year-to-year revenue growth will be constrained, outpaced by the growth in personnel costs and liabilities.”

The report warns that unfunded municipal liabilities for retiree health care and pensions loom as a further constraint on local budgets.

State funding for municipalities in the form of Cherry Sheet aid was cut for the third consecutive year in fiscal 2011, falling by $39 million. Since the original fiscal 2009 budget, total Cherry Sheet aid has been cut by $534 million. Unrestricted local aid has suffered the brunt of the cuts, decreasing by 32 percent, or $415 million, to $899 million in fiscal 2011, compared to $1.314 billion in the original 2009 budget.

Local receipts, the third-largest revenue source behind property taxes and state aid, recorded a two-year decline for the first time in at least 30 years, according to the report. Local receipts include economically sensitive revenues such as investment income, which totaled $33.4 million in fiscal 2011, a 72 percent drop since fiscal 2009.

Additional property tax revenue from new construction totaled just $8 million statewide in fiscal 2011, after a $42 million decline the prior year. Since fiscal 2009, new construction-related revenue is down 15.4 percent, the worst stretch since an 18.3 percent contraction between fiscal 1991 and fiscal 1993.

The Taxpayers Foundation also found that a large majority of the state’s 351 cities and towns are operating at or near their property tax levy limits. Nearly 75 percent of local municipalities have less than 1 percent in “excess capacity,” or the amount by which property tax levies can increase without a Proposition 2½ override. Fewer than 20 communities passed overrides in fiscal 2011, the lowest level in more than a decade.

Dozens of communities have taken advantage of new local-option meals and hotel taxes approved by the Legislature in 2009. The 0.75 percent meals tax has been adopted by 140 communities and produced $61 million in fiscal 2011. A total of 89 communities increased hotel tax rates, producing $126 million in fiscal 2011, compared to $87.5 million in fiscal 2009.

“Passage of municipal health reform was a huge accomplishment, which will provide major savings for cities and towns,” said Taxpayers Foundation President Michael Widmer, “but much more remains to be done as benefit costs continue to consume ever larger shares of tight budgets.”

The municipal health insurance reform legislation approved in July promises to generate total first-year savings well in excess of the initial estimate of $100 million, according to the foundation. Some two dozen communities already have taken advantage of the new law, and scores of other communities are expected to follow suit as part of the fiscal 2013 budget process.

The state’s 100 local pension systems, however, are just 59 percent funded in the aggregate and have an unfunded liability of nearly $13 billion. While recently approved pension reform legislation will provide municipalities with more than $1 billion in pension savings over the next 30 years, the short-term relief will be marginal, the report concludes.

Unfunded municipal liabilities for retiree health care are even larger — estimated at between $25 billion and $30 billion statewide. Only a handful of communities have a plan to begin funding these liabilities, making it a near certainty that broad reforms and painful budget decisions will be necessary in the future, according to the report.

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 the state’s 351 cities and towns.

The full report is available at www.masstaxpayers.org.