Governor Deval Patrick's Budget Recommendation - House 1 Fiscal Year 2010

Governor's Budget Recommendation FY 2010

Local Aid Overview

Aid to cities and towns, or local aid, represents an important component of the Commonwealth’s annual budget.  In fiscal year 2010, local aid programs consume $5.3 billion, and is 19%, of the total state budget. The Administration’s approach to the local aid budget reflects Governor’s Patrick’s and Lieutenant Governor Murray’s commitment to a strong partnership between the state and its cities and towns. 

In the current fiscal downturn, protecting local aid has been a priority for the Patrick-Murray Administration.  When revenues were revised sharply downward in October 2008, the Governor proposed a $1.4 billion budget solution without requesting authority to reduce local aid.  State programs were cut more deeply to preserve local budgets.  Only when a second significant revenue reduction of almost one billion dollars was required in January 2009 did the Governor seek to be able to share the cuts between state and local spending, and the cut in local aid for fiscal year 2009 was limited to $128 million or 2.3%.  In formulating the fiscal year 2010 budget, minimizing cuts to local aid amidst unprecedented fiscal challenges demonstrates the Administration’s continued commitment to cities and towns. 

To offset these unavoidable reductions, and also to enhance local governments’ short and long-term financial capacity, the Administration is filing with this budget two companion bills.  The first, the Emergency Recovery Bill, contains proposals for local option taxes which the Administration has sought for two years; the Administration’s second Municipal Partnership Act (MPA II), provides for a number of tools enhancing self-governance by communities.  This list of legislative initiatives has been developed over two years of consultation and listening to the needs of many municipal officials across the state.  The Patrick-Murray Administration’s local aid proposal for fiscal year 2010 consists of all three documents:  the budget itself, several revenue-raising proposals included in the Emergency Recovery Bill, and MPA II.  The interrelation of these elements and their significance for communities is described below.

Budgeted Local Aid

The fiscal year 2010 budget supports a total of $5,331,376,377in local school and general aid, a decrease of $234,758,255 or 4.22% below the original fiscal year 2009 budget.  The changes in local aid accounts are as follows:

Local Aid Account Changes
PROGRAM FY09 GAA FY2009 9C Reductions FY2010 H.1 FY2010 H.1 - FY2009 GAA % Change
Section 3  
Chapter 70 3,948,824,061 - 3,948,824,061 - 0.00%
Lottery* 935,028,283 (91,114,887) 944,836,706 (368,709,565) -28.07%
Additional Assistance* 379,767,936 (36,885,113)
Restaurant Excise - - 125,000,000 125,000,000 100.00%
Room Occupancy (Hotel) Excise - - 24,247,706 24,247,706 100.00%
Operating Accounts  
Veterans Benefits 20,904,223 - 27,864,017 6,959,794 33.29%
Vet, Surv, Blind Exempt** 17,241,130 - 25,181,475 (1,950,000) -7.19%
Elderly Exempt** 9,890,345 -
State Owned Land 30,300,000 - 30,300,000 - 0.00%
Charter School Reimbursements 79,751,579 - 79,751,579 - 0.00%
School Lunch 5,426,986 - 5,426,986 - 0.00%
Reg. School Transportation 61,300,000 - 53,300,000 (8,000,000) -13.05%
Reg. Public Library 17,166,071 - 14,705,068 (2,461,003) -14.34%
Public Libraries 9,989,844 - 8,557,657 (1,432,187) -14.34%
Police Career Incentive 50,202,122 - 42,202,122 (8,000,000) -15.94%
Local Share Racing Tax 1,592,000 - 1,179,000 (413,000) -25.94%
TOTAL 5,567,384,580 (128,000,000) 5,331,376,377 (234,758,255) -4.22%
* Consolidated into new account FY2010:  Unrestricted General Government Local Aid
** Consolidated into new account FY2010:  Tax Abatements for Veterans, Widows, Blind Persons, and the Elderly.


Although this 4.22% decrease is necessary to achieve budgetary balance, between the major categories of local aid listed in Section 3 of this budget and the other local receipts on the cherry sheet, the Administration has worked hard to maintain investments at levels provided in fiscal year 2009 wherever possible. 

Protecting Education ReformOne of the Governor’s most important priorities is investing in education.  In a budget characterized by many deep cuts in important programs, this commitment to education is demonstrated by the decision to hold harmless Chapter 70 funding for city, town and regional schools at the fiscal year 2009 General Appropriation Act level of $3,948,824,061.  The fiscal year 2009 level was an unprecedented high-water mark for Chapter 70, representing a 6% increase over the prior year and second only to the Medicaid program in both dollar and percentage growth in the entire state budget.  That investment provided more aid to all 328 school districts and ensured that the growth in each district’s foundation budget was supported by the state. 

This bar graph illustrates the Chapter 70 Aid funding through budgets from FY01 through the H.1 recommendations

The decision to hold Chapter 70 education aid harmless at fiscal year 2009 levels for every city, town and regional school district in a budget characterized by many deep cuts in other important programs, demonstrates the Governor’s commitment to education and maintaining a level course in difficult times. 

Other approaches to Chapter 70 funding were considered: 

Running the formula consistent with the method used since 2007 (which is the basis for the fiscal year 2009 figures used for the “hold harmless” funding amount in this budget) would result in cost increases of between $150 million and $400 million in fiscal year 2010 (depending on the parameters used in the calculation). That level of spending is unaffordable in the current economic and fiscal climate and would have required unsustainably deep cuts in municipal aid or other important programs in the budget. 

An alternative approach of running the formula to ensure that all communities received enough aid to maintain foundation budgets – but no more – with state aid was considered but dismissed because it would have resulted in funding losses for the majority of school districts.  A similar approach was used during the fiscal year 2004 economic downturn, when Chapter 70 aid was reduced by $150 million below fiscal year 2003 levels.  If this Administration applied a similar budgetary reduction methodology to Chapter 70 in fiscal year 2010, the results would be as follows:

  • Over 200 Districts would lose an estimated $200M compared to FY2009
  • Nearly 100 Districts would gain an estimated $100+M more aid than in FY2009
  • The Commonwealth would realize estimated savings of $100M (from FY09 spending)

This approach, although consistent with the Chapter 70 formula and helpful to the Commonwealth’s balance sheet, would create fiscal challenges for districts and communities that would be impossible to absorb at this difficult time.  The Patrick-Murray Administration remains committed to the principles of Education Reform, particularly to the goal of ensuring an adequate level of school spending for all districts.  Consistent with this commitment is the belief that the recommendation to freeze funding at fiscal year 2009 levels – which, it should be remembered, meet or exceed the foundation criteria for every district in the current fiscal year -- is vastly better than creating “winners and losers” during the current economic climate.  In the map below, the shaded communities would have received less state Chapter 70 aid in fiscal year 2010 if reductions, similar to prior recessions, were implemented:

This table illustrates the H.1 level of funding for Section 3 Local Aid for Chapter 70, General Government Aid, Local Assistance of $155,538,141 from a 1% Meal Tax, a 1% Hotel/Motel Tax and Mitigation Aid for Communities; 10% reductions.  This shows the total Section 3 Local Aid for H.1 $5,042,908,473

The Administration also supports enhancing flexibility for municipalities while current Chapter 70 aid is maintained.  We propose to recalculate the required municipal contribution for cities and towns based on updated fiscal year 2010 municipal revenue growth factors. These growth factors calculate a municipality’s ability to provide funds toward education.  In this current fiscal downturn, it is not reasonable to have cities and towns with declining growth factors contribute funds at levels in previous years.  The Administration recognizes that revenues have declined and budgets are tighter which is why it promotes the changes to municipal contribution as provided for by the Executive Office of Education and the Department of Elementary and Secondary Education. 

As this budget document goes to print, Congress is preparing to assist states with a significant Federal stimulus package.  While the details of the package are far from final, it seems clear that a portion of the Federal Aid will be allocated to education spending.  At the levels of federal aid being considered, we believe that foundation spending levels will be reached by many districts in fiscal year 2010 with the help of new Title I funds.  If the Commonwealth receives flexible education funds, the Administration will prioritize helping other districts likewise achieve foundation in fiscal year 2010 to the extent possible.  The Patrick-Murray Administration will fully engage education stakeholders as we seek to maximize the impact of any Federal education assistance.

Minimizing Reductions in General Government Aid:

As described above, the Patrick-Murray Administration has prioritized education aid by holding Chapter 70 harmless at current levels for all districts.  At the same time, we recognize that cities and towns rely heavily on other categories of local aid for critical public safety and other non-school spending as well as to manage the property tax burden locally.  Therefore, while some state budget reductions in general government aid are unavoidable in this unprecedented fiscal climate, we have sought to significantly mitigate the impact of these reductions with both our methodological approach and the inclusion of proposed new revenues. 

Our approach was as follows. 

  • Fiscal year 2009 levels of Chapter 70 were maintained and FY 2009 levels of Lottery and Additional Assistance Aid were combined into a new category, called Unrestricted General Government Aid. 
  • This category of aid was first cut by $375 million, or 7.1% below fiscal year 2009 section 3 totals, with each city and town receiving a proportionate share of the cut. 
  • This impact was subsequently mitigated by allocation of two new revenues, which we propose to be enacted at the statewide level and exclusively dedicated to local aid:  a 1% increase to the existing meals tax (estimated to yield $125 million) and a 1% increase to the existing statewide hotel and motel room occupancy tax (estimated to yield $24.25 million).  These new revenues (“Local Aid Assistance”) were allocated among communities in proportion to their Unrestricted General Government Aid. 
  • Finally, the net reduction proposed for each community was compared to 10% of the sum of its fiscal year 2009 Chapter 70, Lottery and Additional Assistance aid (if any).  For any community whose cut exceeded 10% of the prior year aid, Mitigation Aid was applied to reduce the reduction to 10% and added to the Unrestricted General Government Aid total. 

Thus, through our methodology, no community will experience a reduction greater than 10% in its Section 3 aid.  As a result of the use of the new tax revenues (“Local Aid Assistance”) and Mitigation Aid, the net cut is reduced by 40 percent from $375 million to $220 million, or 4.2% (below fiscal year 2009).

This table illustrates the FY10 Section 3 funding amounts for Chapter 70 and Unrestricted General Government Aid.  This amount represents a total of $4,887,370,332.  This amount is before additional revenues were added through Statewide Meals and Room Occupancy Taxes to mitigate a reduction to this level.  Charts below show the additional revenues and the totals for Local Aid distribution 

Section 3 of the budget presents four columns:  Chapter 70, Unrestricted General Government Aid, the share of the meals tax and the share of the room occupancy tax for each community.  This presentation makes it clear how much each community will benefit from a statewide allocation of the meals tax and room occupancy tax increases we have proposed.  With the inclusion of these revenues, the Local Aid cut is reduced to $220 million.  The reduction in local aid will rise to $375 million if these revenues, which are being filed in the accompanying Emergency Recovery Bill, are not enacted and applied to cities and towns in this manner.

Additional Revenue for Individual Communities at Local Option

The Administration has consistently advocated for greater flexibility for cities and towns to identify additional revenue sources to fund essential services such as education and public safety and relieve pressure on property taxes.  Upon taking office, Governor Patrick filed the Municipal Partnership Act allowing municipalities to establish a two percent local option meals tax and increase the existing local option hotel tax by one percent.  The Act also eliminated outdated property tax exemptions for telecommunications companies that increase pressure on residential property taxpayers and lack any meaningful policy justification.  Though the Governor proposed these changes over two years ago, they have yet to be enacted by the Legislature.

The Patrick-Murray Administration believes that the current fiscal crisis makes it imperative to reconsider making these revenue sources available to communities.  Our budget blueprints refine these proposals to shield cities and towns from even larger Local Aid cuts in the budget and limit harmful impacts on core services for our citizens. 

As indicated above, raising the existing statewide meals and room occupancy taxes by one penny on the dollar and dedicating the proceeds (approximately $149 million) to municipal aid will reduce Local Aid cuts for all communities in fiscal year 2010.  Furthermore, this proposal creates a recurring revenue source to help provide predictable and adequate Local Aid in the future.

Additionally, to give municipalities greater tools to cushion immediate Local Aid cuts that could not be spared and manage their finances moving forward, we are proposing to allow cities and towns to establish a one percent local option meals tax and increase the existing local option hotel tax by one percent - and are again pressing to close property tax loopholes for telecommunications companies.  These local option revenues are proposed in the accompanying Emergency Recovery Bill and would provide up approximately $200 million in recurring new funds for eligible communities.

The graph below illustrates how the local aid reduction of $375 million is reduced significantly by the new statewide revenues, and could be mitigated still further if communities adopt the local option portion proposed in the accompanying Emergency Recovery Bill.

In FY10, the Additional Assistance and Lottery accounts are combined.  Without Local Aid Assistance, the Local Aid budget is reduced by $375 million or 7.1% below FY09

Other Cherry Sheet Programs

In addition to protecting $3.948 billion in Chapter 70 aid, this budget also protects Payment in Lieu of Taxes on state owned land (PILOT), the School Lunch Program (which generates substantial federal dollars), and Charter School Reimbursements.  The fiscal year 2010 budget recommendations also change the budgeting structure for charter school reimbursements to remove the challenge districts face with budgeting based on enrollment projections.  Also, due to caseload growth, the Administration is providing an additional $7 million for Veterans’ Benefits. 

Some local aid programs will receive a decrease in funds as compared to the fiscal year 2009 budget; however, not all of the decreases are a result of efforts to balance the state budget.  Tax exemptions for veterans, survivors, the elderly and blind persons are expected to decrease based on Department of Revenue data on utilization of these programs, and the local share of racing taxes is being impacted by lower anticipated revenues at horse and dog racing tracks within the Commonwealth.  The library programs throughout the state and the Police Career Incentive programs will receive a decrease in fiscal year 2010 to help achieve budgetary balance.  To reduce the impact of the reduction on libraries, the Administration proposes to remove the cap on the number of waivers that can be granted in fiscal year 2010 to libraries not meeting certain funding requirements.

This table illustrates the H.1 level of funding for Section 3 Local Aid for Chapter 70, General Government Aid, Local Assistance of $155,538,141 from a 1% Meal Tax, a 1% Hotel/Motel Tax and Mitigation Aid for Communities; 10% reductions.  This shows the total Section 3 Local Aid for H.1 $5,042,908,473

Municipal Cost-Savings: Municipal Acts I and II

Apart from state and local revenue solutions, cost containment initiatives are likely essential to relieving current and future pressure on municipal budgets.  From the Governor’s original Municipal Partnership Act, the Legislature enacted proposals allowing communities to join the Commonwealth’s lower cost, high-quality Group Insurance Commission (GIC) for their municipal employees and the requiring that low-performing local pension systems invest their assets in the state’s PRIT fund.  The Governor’s fiscal year 2010 budget plans for fifteen additional communities to join the GIC during the fiscal year.

As a component of the Administration’s fiscal year 2010 local aid package, we are now filing a Municipal Partnership Act II bill (MPA II). This bill consists of additional tools to help municipalities manage their bottom lines.  MPA II responds to key management needs identified by local government officials.  It includes provisions promoting more cost-efficient and effective service delivery through collaboration among communities and modernizes outdated and overly restrictive regulations that unnecessarily add to the cost and administrative burden of doing business.  The elements of this bill have been developed over a year of discussions with city, town and regional government officials in meetings and listening sessions throughout the state.

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