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Revenue Sharing andthe Future of our
Massachusetts Economy
Presentation to the
Massachusetts Municipal AssociationStatewide Economic Forum
Federal Reserve Bank of BostonOctober 18, 2005
Barry BluestoneAlan Clayton-Matthews
David SouleMassachusettsMunicipalAssociation
Key Findings: A new fiscal partnership between state and
local government is essential to the future ofour economy
Firms choose to locate in cities & towns, notstates
In order to keep people and jobs here we needto Offset high private sector costs with high quality
public services Limit high property taxes
Local fiscal capacity is essential to attractingand retaining people and firms
Economic Update
August 2005 unemployment rate stood at 4.2%, down from 5.0% ayear earlier … but, due in part to 26,000 workers having left thestate’s labor force over the past year, and 65,500 in the past threeyears.
But by August 2005, employment in Massachusetts was still downby more than 163,000 from its pre-recession peak.
Personal income in the second quarter of 2005 was up 5.3% overthe prior year. In the depths of the last recession, personal incomedeclined by 0.7% in the year ending in the first quarter of 2002.
A Deeper and Longer RecessionHere Than in the U.S.
Employment Growth
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
% C
han
ge
Sin
ce Y
ear
Ear
lier
U.S. Massachusetts
Source: Bureau of Labor Statistics, Payroll Employment
Losing Young Workers…Demographic Update
While foreign immigration in Massachusetts remained at roughly31,000 per year between 2000 to 2004, out-migration to otherstates increased from 14,000 in 2000-2001 to 59,000 in 2003-2004… making Massachusetts the only state to lose population in 2004.
The young prime working age cohorts experienced the slowestgrowth or largest net losses relative to the U.S. --
Between 2001 and 2004, the 20-24 year old cohort grew byonly 5.7% while the number of 25-34 year olds fell by 4.8%.
Nationally, the 20-24 year old cohort grew by 9.7% while the25-34 cohort grew by 0.5%.
Massachusetts Net Migration 2000-2004
32,268 32,244 31,555 31,535
-14,244
-28,074
-47,776
-58,910-70,000
-50,000
-30,000
-10,000
10,000
30,000
50,000
Foreign
Domestic
Source: U.S. Census
2000-01 2001-02 2002-03 2003-04
Population Change by Age, 2001-2004
Source: U.S. Census
-0.2
-3.1
5.7
-4.8
1.1
-0.8
0.9
4.6
0.2
9.7
0.5
3.14.1
18.5
3.5
19.1
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Under 5Years
5-19 20-24 25-34 35-54 55-64 65Years+
All Ages
Massachusetts
U.S.
Net Migration Between Massachusetts andCompetitor States 1990-2002
Source: Mass Inc, IRS
28,670New York
14,997Connecticut
9,672New Jersey
2,895Rhode Island
2,433Pennsylvania
809Michigan
-4,516Washington
-8,983North Carolina
-11,033Arizona
-23,978California
-78,201New Hampshire
-99,082Florida
-213,000Massachusetts
Net Migration From/to MassachusettsState
Where did they go?
Cost of Living Update
According to a new measure of living costs, Greater Boston hasthe highest cost of living of any Metro Area in the United States
A family of four needs $64,656 to pay for the costs of housing,transportation, day care, health care, and other basic necessities
This is more than $3,000 higher than in Washington, D.C;$6,000 higher than in New York City; and $7,000 more than inSan Francisco
Monthly housing costs are 40% higher than in Austin, Chicago,and Miami and 63% higher than in Raleigh-Durham-Chapel Hill
Massachusetts’ other Metro Areas are among the highest cost inthe country as well … Lowell, Lawrence, Brockton
Total Annual Budget for Family of Four
Source: Economic Policy Institute
$64,656
$58,656$57,624
$49,716 $49,152 $48,684 $48,576$47,532
$45,516$43,452
$42,372$41,220
$39,120
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Boston
New York
San Francisco
Philadelphia
Manchester
Hartford
Trenton
Providence
SeattleMiami
Charlotte
Detroit
Phoenix
Comparison Cities
Fam
ily o
f Fou
r
If you thought it was just Boston, you’re wrong!
Source: Economic Policy Institute
$64,656
$61,236 $60,912$59,280
$58,236 $57,624$56,388
$55,704 $55,380 $55,320$53,112 $52,632
$45,516
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
BostonLowell
Brockton
Lawrence
Barnstable
San Francisco
Attleboro
Worcester
Fitchburg
Springfie
ld
New Bedford
Pittsfie
ldSeattle
Massachusetts MSAs and Select Cities
Fam
ily o
f Fou
r
Gross State Product
Key findings
Massachusetts is slightly above the nationalaverage in growth in Gross State Product (U.S.5.34% vs MA 5.57%), but only average amongthe states in the study.
If Massachusetts had average population growth,it would have ranked near the top, because itsworkers are highly productive.
Average Annual Percent Changein Gross State Product 1994-2004
Source: Bureau of Economic Analysis
4.24Michigan
4.62Pennsylvania
4.68New York
5.03New Jersey
5.34Connecticut
5.54Massachusetts
5.57Rhode Island
5.87New Hampshire
5.88Washington
5.99California
6.32Florida
6.45North Carolina
7.68Arizona
5.43US
PercentageState
Personal Income Growth
Key findings – Some Good News
Currently, on a per capita basis, welead all of the other states in personalincome growth and are significantlyabove the national average.
Our personal income is high and it hasgrown quickly. Now is the time to investin our future.
Average Annual Percent Changein Per Capita Personal Income 1994-2004
Source: Bureau of Economic Analysis
3.48Michigan
3.67North Carolina
3.80Florida
4.00Arizona
4.02New York
4.05Pennsylvania
4.14New Jersey
4.20California
4.32Rhode Island
4.34Connecticut
4.40Washington
4.61New Hampshire
4.74Massachusetts
4.04US
PercentageState
Employment Growth
Key findings – Some Bad News Unfortunately, our employment growth
for the last decade (1994-2004) is adismal 65% of the national average andis lower than 8 of our competitor states,in some cases (AZ) less than a third oftheir growth.
Average Annual Percent Changein Employment 1994-2004
Source: Bureau of Labor Statistics
0.58Michigan
0.68Connecticut
0.76New York
0.83Pennsylvania
0.92Massachusetts
1.18Rhode Island
1.20New Jersey
1.32North Carolina
1.59Washington
1.80California
1.83New Hampshire
2.61Florida
3.45Arizona
1.41US
PercentageState
What we know
Firms choose to locate in cities and towns,not states Investment and job creation occur at the local
level Local municipalities in Massachusetts attract
businesses Recent research with leading industrial and
office developers and real estate specialists(NAIOP and CoreNet) confirms the importance ofthe local community environment to economicdevelopment
What we know
Key factors for businesses in makinglocation decisions are: Availability of appropriate local labor pool Local crime rate Quality and capacity of local infrastructure Quality of local schools Physical attractiveness of the local area Timeliness of approvals at the municipal level Reputation of the community as a good place to
live, work and invest
In summary…
Key challenges: High cost of living Loss of jobs and people To stay competitive in attracting and
retaining jobs and people, we need highquality public services in municipalities
Per capita personal income is growing …making it possible to invest now in theseservices
The State-Aid RecessionRollercoaster
Real State Aid Per Capita to Municipalities, by Type
0
100
200
300
400
500
600
700
800
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Do
llars
(R
eal,
2000
)
Additional Assistance Chapter 70 Lottery Other
Non-Education State Aid is LowerThan It Has Been for Decades
Non-Chapter 70 Real State Aid Per Capita to Municipalities, by Type
0
50
100
150
200
250
300
350
400
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
Do
llars
(R
eal,
2000
)
Additional Assistance Lottery Other
Additional Assistance is Far Below1998 Levels
Additional Assistance, in Real and Nominal 2000 Dollars
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Mill
ions
of D
olla
rs
Real Nominal
Even Education Aid is NotRecession Proof
Chapter 70 Aid to Municipalities, in Real and Nominal 2000 Dollars
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
3,000.0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Mill
ions
of D
olla
rs
Real Nominal
Lottery Aid Has Been Capped orCut – or Both – in Recessions
Lottery Aid, in Real and Nominal 2000 Dollars
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Mill
ions
of D
olla
rs
Real Nominal
Real Total State Aid is Below thePeak of the 1980’s
Total State Aid to Municipalities, in Real and Nominal 2000 Dollars
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
4,500.0
5,000.0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Mill
ion
s o
f D
olla
rs
Real Nominal
Real Non-School State Aid is as Low as theEarly 1980’s
Non-School State Aid, in Real and Nominal 2000 Dollars
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Mill
ion
s o
f D
olla
rs
Real Nominal
Local Property Taxes are HigherThan Ever – Even Before Prop 2.5
Property Tax Levy, in Real and Nominal 2000 Dollars
0.0
1,000.0
2,000.0
3,000.0
4,000.0
5,000.0
6,000.0
7,000.0
8,000.0
9,000.0
10,000.0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Mill
ion
s o
f D
olla
rs
Real Nominal
Municipal Revenues Have Declined, in RealTerms, in Each of the Last 3 Years
Total Municipal Revenues, Including State Aid, in Real and Nominal 2000 Dollars
0.0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
14,000.0
16,000.0
18,000.0
20,000.0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Mill
ion
s o
f D
olla
rs
Real Nominal
Except for Education, Local ServiceDelivery Has Fallen Behind Income
Real Income and Municipal General Fund Expenditures
80.0
100.0
120.0
140.0
160.0
180.0
200.0
87 89 91 93 95 97 99 01 03
Fiscal Year
1987
=100
Debt ServiceEducationFireFixedGeneral GovernmentPolicePublic WorksPersonal IncomeTotal
Source: Division of Local Services, Mass. Department of Revenue; and the U.S. Bureau of Economic Analysis
Locally-Provided Goods and Services arethe Poor Stepchild of the State’s Economy
Real Growth in Spending or Income, 1987-2004
2.4
2.9
3.3
1.1
1.7
2.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
Non-Education Municipal Expenditures
All Municipal Expenditures
State Spending (Net of Local Aid)*
Massachusetts Personal Income
U.S. Personal Income
U.S. Personal Consumption Expenditures
Annual Average Percent Change* 1988-2004
Despite Ed Reform, EducationSpending Has Only Kept Pace withIncome
Real Growth in Spending or Income, 1987-2004
2.4
2.5
1.1
1.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Education
Non-Education MunicipalExpenditures
All MunicipalExpenditures
Massachusetts PersonalIncome
Annual Average Percent Change
Rising Fixed Costs, such as HealthInsurance, Force Reductions in Other LocalServices
Fixed costs: Workers’ Comp., Unemployment, Health Insurance, other employee benefits and retirement
Real Growth in Spending or Income, 1987-2004
2.4
2.4
1.1
1.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Fixed
Non-Education MunicipalExpenditures
All MunicipalExpenditures
Massachusetts PersonalIncome
Annual Average Percent Change
Debt Service Increased, Mainly forSchool Construction
Real Growth in Spending or Income, 1987-2004
2.4
3.4
1.1
1.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Debt Service
Non-Education MunicipalExpenditures
All MunicipalExpenditures
Massachusetts PersonalIncome
Annual Average Percent Change
Police ProtectionReal Growth in Spending or Income, 1987-2004
2.4
1.9
1.1
1.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Police
Non-Education MunicipalExpenditures
All MunicipalExpenditures
Massachusetts PersonalIncome
Annual Average Percent Change
Fire ProtectionReal Growth in Spending or Income, 1987-2004
2.4
1.1
1.1
1.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Fire
Non-Education MunicipalExpenditures
All MunicipalExpenditures
Massachusetts PersonalIncome
Annual Average Percent Change
General Government FunctionsReal Growth in Spending or Income, 1987-2004
2.4
1.5
1.1
1.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0
General Government
Non-Education MunicipalExpenditures
All MunicipalExpenditures
Massachusetts PersonalIncome
Annual Average Percent Change
Culture and RecreationReal Growth in Spending or Income, 1987-2004
2.4
0.9
1.1
1.7
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Culture & Recreation
Non-Education MunicipalExpenditures
All MunicipalExpenditures
Massachusetts PersonalIncome
Annual Average Percent Change
Other Public Safety
Other Public Safety: Emergency Medical Services, Inspection and Other
Real Growth in Spending or Income, 1987-2004
2.4
-0.4
1.1
1.7
-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0
Other Public Safety
Non-Education MunicipalExpenditures
All MunicipalExpenditures
Massachusetts PersonalIncome
Annual Average Percent Change
Public Works Spending Lags Far Behind
Real Growth in Spending or Income, 1987-2004
2.4
-0.7
1.1
1.7
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0
Public Works
Non-Education MunicipalExpenditures
All MunicipalExpenditures
Massachusetts PersonalIncome
Annual Average Percent Change
Massachusetts Has About an Average Number of State andLocal Government Employees Per Capita, After Controllingfor School Enrollment and Population Density
Comparison states are in red
Number of State and Local Government Workers Fewer Than Expected (negative) or Greater Than Expected (positive), Per
1,000 Population
-30 -20 -10 0 10 20 30 40
Hawaii
New Jersey
Louisiana
South Carolina
Washington
Maryland
Minnesota
Wisconsin
Massachusetts
California
Indiana
Illinois
West Virginia
Tennessee
Idaho
Montana
Pennsylvania
Massachusetts (26th lowest)
PennsylvaniaArizonaFloridaNew HampshireRhode IslandMichiganCalifornia
WashingtonNorth CarolinaConnecticutNew YorkNew Jersey
After Controlling for Income as Well as Enrollment andPopulation Density, Massachusetts’ Rank Drops to 14th
Comparison states are in red
Number of State and Local Government Workers Fewer Than Expected (negative) or Greater Than Expected (positive), Per
1,000 Population
-40 -30 -20 -10 0 10 20 30 40
Hawaii
New Mexico
New York
Mississippi
Nebraska
Delaware
Oklahoma
Wisconsin
Kentucky
Alaska
Texas
California
Massachusetts
Arkansas
New Hampshire
Oregon
Pennsylvania
Massachusetts (14th Lowest)
CaliforniaRhode IslandMichigan
ConnecticutWashingtonNorth CarolinaNew YorkNew Jersey
PennsylvaniaArizonaFloridaNew Hampshire
The Ability to Pay for Services HasBecome More Unequal
Average Median Household Income, by Income Classification and Year
$71,362
$46,453
$65,765
$45,038
$77,765
$50,114
$62,890
$41,954
40000
45000
50000
55000
60000
65000
70000
75000
80000
Upper Half Lower Half Upper Half Lower Half
In Upper or Lower Half of Income Distribution, 1989
Dol
lars 1989
1999
Income Grew 1989-99 Income Declined 1989-99
Many Municipalities Have FallenBehind in the 1990’s
Number of Municipalies, by Income Classification
127
105
49
70
0
20
40
60
80
100
120
140
Upper Half Lower Half Upper Half Lower Half
In Upper or Lower Half of Income Distribution, 1989
Income Grew 1989-99 Income Declined 1989-99
Nearly 30% of Residents Live in PoorerCommunities That Lost Income in the 90’s
Percent of 2000 State Population, by Income Classification
30
32
10
29
0
5
10
15
20
25
30
35
Upper Half Lower Half Upper Half Lower Half
In Upper or Lower Half of Income Distribution, 1989
Perc
ent
Income Grew 1989-99 Income Declined 1989-99
Selected Communities In Upper or Lower Half of1989 Median Household Income, by IncomeGrowth, 1989-99
Upper Half Lower Half Upper Half Lower HalfWESTON BOSTON FRAMINGHAM WORCESTERDOVER CAMBRIDGE WEYMOUTH SPRINGFIELDCARLISLE SOMERVILLE WOBURN LOWELLSUDBURY WALTHAM CHELMSFORD BROCKTONWELLESLEY HAVERHILL RANDOLPH NEW BEDFORDNEWTON MEDFORD TEWKSBURY FALL RIVERNATICK PLYMOUTH DRACUT LYNNBILLERICA PEABODY SAUGUS QUINCYBROOKLINE BARNSTABLE DANVERS LAWRENCEARLINGTON ATTLEBORO STONEHAM MALDEN
Income Grew 1989-99 Income Declined 1989-99
All Municipalities Are Stressed –Some More Than Others
Change in Property Tax and Household Income, 1989-1999
59.1
-5.3
66.6
6.5
-10 0 10 20 30 40 50 60 70 80
Average Single FamilyTax Levy
Median HouseholdIncome
Average Single FamilyTax Levy
Median HouseholdIncome
Percent Change
Median Town in Top Half of Income Distribution and Growing Median Household Income, 1989-99
Median Town in Bottom Half of Income Distribution and Declining Median Household Income, 1989-99
Households in Higher Income CommunitiesTax Themselves More…
Average Per Household Property Tax, by Income of Community, FY 2000
$2,655
$5,590
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
90th %tile 10th %tile
Median Household Income Percentile
…So Their Towns Have More Own-Source Revenue
Average Per Household Own Source Revenue, by Income of Community, FY 2000
$7,090
$3,736
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
90th %tile 10th %tile
Median Household Income Percentile
State Aid Offsets Some of theInequality
Average Per Household State Aid, by Income of Community, FY 2000
$915
$1,360
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
90th %tile 10th %tile
Median Household Income Percentile
But Spending Disparities Remain
Average Per Household Municipal Spending, Including State Aid, By Income of Community, FY 2000
$7,193
$4,518
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
90th %tile 10th %tile
Median Household Income Percentile
Including Police,Average Per Household Spending on Police, by Income of
Community, FY 2000
$397
$481
$-
$100
$200
$300
$400
$500
$600
90th %tile 10th %tile
Median Household Income Percentile
And FireAverage Per Household Spending on Fire, by Income of
Community, FY 2000
$494
$273
$-
$100
$200
$300
$400
$500
$600
90th %tile 10th %tile
Median Household Income Percentile
Local Tax Capability
Massachusetts communities are heavilyreliant on the property tax.
Per Capita Revenue Property Tax 2002
991US
Source: Author’s Calculations of U.S. Census Bureau 2002 Census of Governments
674North Carolina
829Arizona
888Pennsylvania
893California
982Washington
985Michigan
986Florida
1,374Massachusetts
1,395Rhode Island
1,414New York
1,755New Hampshire
1,760Connecticut
1,907New Jersey
State
Local tax capability
Other states provide significant alternatetaxing powers for local governmentsincluding sales and income taxes
Revenue Sources Available to LocalGovernments
Source: Author’s Calculations of U.S. Census Bureau 2002 Census of Governments
XRhode Island
XNew Hampshire
XMassachusetts
XConnecticut
X XWashington
X XNorth Carolina
X XFlorida
X XCalifornia
X XArizona
XXXPennsylvania
XXXNew York
XXXNew Jersey
XXXMichigan
XXXUS
SalesIncomePropertyState
And so…
High cost of living and high personal incomesdemand high levels of public services.
And yet we are falling further and furtherbehind as we watch young talented workersleave for other competitor states.
Our fiscal partnership between state and localgovernment is at its lowest ebb in decades.
Furthermore…
Firms choose to locate in cities and towns,based on their ability to deliver importantservices and the reputation of the quality of lifein the community.
We need to invest in all aspects of municipalservices including education, public safety,culture and recreation, and infrastructure inorder to attract and retain jobs and people.
The current over-reliance on the property taxand limited local aid is not enough.
Summary…
All municipalities in the Commonwealth arestressed.
The growing disparities between communitiesis a big problem.
We have the ability to make the necessaryinvestments in cities and towns, and we needto do so to grow our economy.
Conclusion
It’s the economy!
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