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Report: Mass. communities still facing fiscal woes

By Steve Leblanc
Associated Press / December 7, 2011
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BOSTON—Massachusetts cities and towns are still facing fiscal woes after struggling through their worst two-year stretch since the adoption of a statewide ballot question known as Proposition 2 1/2 three decades ago, which limits property tax increases.

A new report by the business-backed Massachusetts Taxpayers Foundation found that during the 2010 and 2011 fiscal years, property taxes collected by cities and towns rose to their highest share of local spending in 30 years.

In 2011, property taxes accounted for 56.6 percent of total revenues collected by municipalities. A decade earlier, property taxes accounted for 49 percent of local revenues.

"We are entering a new period in which there will be a permanent squeeze on municipal finances," the report said.

One reason for the increased reliance on property taxes is reductions in the amount of state aid that communities have received compared to their expenses.

Other sources of money -- including revenues from new construction and investment income -- have done little to ease reliance on property taxes.

As a result, a large majority of the state's 351 cities and towns are operating at or near their property tax limits. The report found nearly 75 percent of local municipalities have less than 1 percent "excess capacity," or the amount by which property taxes can increase without voter approval under Proposition 2 1/2.

The ballot question was approved by voters in 1980 and radically changed the way cities and towns raise taxes to pay for municipal services. It limits communities from raising property taxes by more than 2.5 percent a year without approval from voters.

Fewer than 20 communities passed Proposition 2 1/2 overrides in the 2011 fiscal year, the lowest level in over a decade.

Two areas where cities and towns are feeling the most pressure are in pensions and health care.

The state's 100 local pension systems have an unfunded liability of nearly $13 billion, while the unfunded liability for retiree health care is estimated at between $25 billion and $30 billion statewide.

Only a handful of communities have a plan to pay for those benefits, the report found.

The state has begun to address the worries.

A recently approved pension overhaul is designed to help municipalities save $1 billion in pension costs over the next 30 years, although that won't help much in the short term, while a new municipal health reform law could help communities save up to $100 million in the first year.

The new law, signed by Gov. Deval Patrick in July, is designed to give cities and towns more flexibility to make changes to public employee health insurance outside of the collective bargaining process.

According to the report, about two dozen communities have already taken advantage of the law, and scores of other communities are expected to follow suit as part of the fiscal 2013 budget process.

"Passage of municipal health reform was a huge accomplishment ... but much more remains to be done," Michael Widmer, president of the Massachusetts Taxpayers Foundation, said in a statement.

Geoff Beckwith, director of the Massachusetts Municipal Association, said the report's conclusions are all too familiar for municipal officials who have struggled for years to balance their budgets.

"Cities and towns are facing dramatic fiscal challenges. They have laid off thousands of workers while the need for services has not gone down," Beckwith said.

He said one way to reduce pressure on local property taxes is to increase state aid, which he said will ultimately help the broader economy.

One area where communities have found extra revenues is increased taxes on hotel rooms and restaurant meals.

A state budget approved by lawmakers and signed by Patrick in 2009 allowed local communities to approve the tax hikes.

So far, 140 communities have approved the .75 percent meals tax, producing about $61 million in extra revenues in the 2011 fiscal year.

Eighty-nine cities and towns have increased hotel tax rates, generating $126 million in the 2011 fiscal year, up from the $87.5 million they took in two years earlier.

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