Community Development, Reports and Publications

Fed Recommends Municipal Aid Reform


The Federal Reserve Bank of Boston recommends adopting a "gap-based" formula for distributing unrestricted municipal aid to cities and towns in a new working paper entitled "Municipal Aid Evaluation and Reform."

The paper defines the fiscal health of municipalities as a measure of "municipal gap," the difference between the underlying costs of local services and the ability to raise revenue locally to pay for those services. Differing from actual spending and actual revenue, measures of both costs and capacity are based on local economic and social characteristics that are outside the direct control of local officials. As such, they reflect a municipality’s underlying fiscal health, not the spending or taxing behavior of local officials. A community with a larger gap between costs and capacity is thus considered to be in worse underlying fiscal health, and to have a greater need for state aid.

The paper finds a large disparity from town to town in Massachusetts, and finds that those disparities have increased during the recent fiscal crisis due in large part to large cuts in state aid. The paper suggests that Massachusetts adopt a gap-based formula that provides more aid to communities facing larger municipal gaps. 

The Massachusetts system of aid to towns is similar to the system in Connecticut and the two states share some of the same problems, such as state aid going disproportionately to some municipalities, potential large cuts of aid from budget reductions in state budgets, and a similar system restricting how municipalities are able to raise funds through taxes.

To Learn More:
Read the Abstract of the Study
Download the Study


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