Report says fiscal squeeze on local aid expected to continue for towns

Rocked by the economic downturn of the last few years, Massachusetts cities and towns have seen their budgets gored by cuts to local aid and may be forced to cope with revenue shortages for “the foreseeable future,” according to a report issued Wednesday by the Massachusetts Taxpayers Foundation.

Over the last two years, municipalities saw their toughest fiscal stretch since 1992, according to the report, the foundation’s 41st annual assessment of municipal financial data. Revenue grew by 1.2 percent over the two years, with cuts in state aid and local receipts forcing cities and towns to depend more heavily than ever on property taxes, which supported 56.5 percent of local budgets, the report said.

The report could carry ramifications as the Patrick administration prepares to unveil a fiscal 2013 budget in January. After rising by nearly $2 billion in fiscal 2011, state government tax collections have continued to grow this fiscal year, leading to speculation about increases in local aid and services, even though administration officials have sought to tamp down clamoring for additional spending. But municipal officials have ripped a succession of cuts to local services over the past few years.

Asked Tuesday about whether positive economic signs warrant a local aid increase, Boston Mayor Thomas Menino swiped at lawmakers.

“Do I expect the state to give me local aid?” Menino wondered “Are they going to make up for the $100 million I lost over the last six years? Alright, next question.”

Property taxes grew 3.8 percent in 2011, the report concluded, the smallest annual increase since the implementation of Proposition 2 ½; — a voter-approved policy that limits property tax hikes to 2.5 percent per year, unless residents vote to override the cap.

The report also found that local aid from Beacon Hill — the second largest source of revenue for cities and towns — has slid $534 million since fiscal 2009, with the bulk of cuts to unrestricted aid.

Local receipts, the third largest source of municipal revenue, fell for the second straight year, with declines in motor vehicle excise tax collections and investment income, which plummeted to $33.4 million in fiscal 2011 after reaching $118.9 million in 2009.

Local receipts, according to the report, would have fared worse were it not for local option meals and sales taxes backed by the Legislature in 2009. As a result of that legislation, according to the MTF report, more than 140 cities and towns have approved the local meals tax increase, generating $61 million, and 89 cities and towns have adopted the local hotel tax increase, generating $126 million.

In addition, municipal employee pensions and benefits are poised to consume a greater share of local budgets in the coming years.

“The constraints on municipal revenues heighten the urgency of addressing the escalating costs of employee and retiree benefits,” said Michael Widmer, president of the business-backed foundation, in a statement accompanying the report.

The report also concluded that a new law curbing certain collective bargaining powers of municipal unions is poised to generate budget savings “well in excess” of a $100 million estimate in its first full budget cycle.

But a $13 billion pension liability collectively facing cities and towns and a $25 billion liability for retiree health care could crush local budgets in the upcoming years, according to the report.

“Only a handful of communities have a plan to begin funding these liabilities, making it a near certainty that broad reforms and painful budget decisions will be necessary in the future,” according to the report.