November 01, 2006

Municipal Financial Data: 36th Edition

The overall municipal financial picture stabilized in 2006. Nevertheless, most communities continue to face a fiscal squeeze as underlying costs grow faster than revenues, according to the Foundation's 36th annual analysis of local revenues and spending. Total local revenues rose 4.7 percent in 2005 and 5.3 percent in 2006 - double the rate of 2003-2004 during the state's fiscal crisis but well below the 6.3 percent average annual growth in the 1997-2002 period. The growth in property taxes slowed slightly to a state average of 5.3 percent in 2006, compared to an average annual increase of 6.1 percent in the 2001-2004 period. Inflation adjusted growth was flat. While this slowdown offered some relief, many cities and towns approved overrides which resulted in much larger increases. As a fraction of all local revenues, the contribution from property taxes rose to 53 percent in 2006; this is the highest level yet and a continuation of a sustained upward trend since 1982. At the same time, growth in revenue from fees and charges continued to outpace the growth from all other sources, up a staggering 7.9 percent in 2006. Local expenditures tracked revenues, growing 5.4 percent in 2006, approximately double the rate in 2004 but barely keeping pace with inflation. Given the large annual increases in health care costs facing cities and towns, holding the growth in spending to the rate of inflation requires most communities to reduce programs or services, with little opportunity to restore those cuts that took place during the state's fiscal crisis. The state needs to take two steps to place local finances on sounder financial footing over the long-term: - giving local officials greater authority to manage health care costs; - steadily increasing the share of tax revenues going for local aid.