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    The Podium

    State needs to reform local aid program

    We commend Massachusetts’ elected officials for recommending the first increase in unrestricted local aid in five years. This increase would provide budget relief for every community in the Commonwealth, which would further strengthen the partnership between state and local communities.

    This may be a good opportunity for policymakers to consider a new formula to distribute new local aid funds in a more equitable manner than giving every community an equal-percentage increase, regardless of their fiscal conditions. The Federal Reserve Bank of Boston’s New England Public Policy Center’s 2010 working paper, “Does Springfield Receive Its Fair Share of Municipal Aid? Implications for Aid Formula Reform in Massachusetts” demonstrated how the state could reform its aid program to allocate more new aid to the most disadvantaged communities.

    The research considered a “municipal gap”: the difference between a community’s uncontrollable costs of providing public services and its ability to raise local revenues to pay for those services. The uncontrollable costs depend on each community’s socioeconomic characteristics that are outside the direct control of local officials, such as the poverty rate and the unemployment rate. Revenue-raising capacity of each community is largely determined by its property values and income. Communities with larger municipal gaps show a great need for municipal aid to provide local services to their residents, businesses, commuters, and visitors.


    The research suggested a new formula to allocate more new aid to communities with larger gaps while holding existing aid harmless. If distributed through this formula, even modest aid increases could significantly improve the distribution of municipal aid in a few years. The Governor’s FY2014 budget proposed allocating new local aid using a formula, a positive step toward reforming the Commonwealth’s unrestricted local aid.

    We encourage Massachusetts legislators to consider a funding formula for unrestricted local aid distribution that considers each community’s needs and revenue-raising capacity and targets higher shares of any increased aid to cities and towns with relatively large gaps.

    Yolanda K. Kodrzycki is vice president and director and Bo Zhao is senior economist of the New England Public Policy Center at the Federal Reserve Bank of Boston.