Municipal Aid: A Gap-Based Approach

An intriguing article I read recently came from the Boston Federal Reserve Bank. Released back in December, it is titled “Reforming Municipal Aid in Massachusetts: The Case for a Gap-Based Formula”. You can read the full article here –

http://www.bostonfed.org/econo…

Basically, the article discusses the municipal aid “gaps” (or “deficits”) which many cities and towns throughout the state deal with. On many occasions, these gaps stem from a low per capita income, or a low average property value, or simply a very low number of citizens and/or properties from which to raise tax revenues. In some wealthier towns, the inverse may be true. A high per capita income or average property value drives up the per capita tax revenue, giving cities and towns surpluses in their funds for municipal services, or “negative gaps”. The problem lies in the allocation of free resources towards municipal aid. Cities and towns with excess resources may receive as much aid as cities and towns with gaps. Additionally, cities with similar gaps may receive widely different resources (to be clear, all of these values are per capita).

The authors of this article argue for a formula to correct for this misallocation of resources. First, lawmakers establish a minimum municipal aid, which is the minimum increase in municipal aid which towns and cities will see every year. Legislators would then set a “baseline gap”. Any cities or towns with a gap below this baseline would receive only the minimum increase in municipal aid. After each city and town has received its share of the minimum per capita aid, those cities running the greatest per capita gaps, in comparison to other cities and towns running gaps, will receive what the authors call “equalizing aid”. At a real growth rate of 5% per year in the municipal aid fund, the authors argue, the state can create an almost perfectly linear relationship for all cities and towns above the baseline by the year 2021.

Naturally, as with any economic prediction, this forecast has its flaws. Perhaps the most glaring problem is its assumption of a 5% growth rate. This doesn’t adequately take into account the peaks and troughs of the business cycle, and we can’t entirely rule out the possibility of another strong recessionary period.

We all know that the government is immeasurably inefficient, especially when it comes to giving the towns the aid that they need. The adoption of a system similar to the one proposed by the authors would increase allocative efficiency in the government, and while it’s a small step, it’s a step in the right direction. This kind of solution makes economic sense, and, while I hate to say it for fear of cursing it, I think that this change could be legislated quickly and in a bipartisan fashion. Properly allocating municipal aid helps reduce costs to local governments who have to try to fill the gap with other funds that could be used elsewhere, and certainly no one would argue against making government spending more effective. Additionally, because it is, in nature, a method of redistribution, it should appeal to Democrats. It is a fiscally responsible idea that could actually get passed by the government.  

About DeanCavaretta