Revenue Sharing and the Future of our Massachusetts Economy

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


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


2.4

2.4

1.1

1.7

0.0 0.5 1.0 1.5 2.0 2.5 3.0

Fixed





Debt Service Increased, Mainly forSchool Construction


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





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





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





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





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





Other Public Safety

Other Public Safety: Emergency Medical Services, Inspection and Other


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





Public Works Spending Lags Far Behind


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





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




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



Perc

ent


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


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



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



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



Including Police,Average Per Household Spending on Police, by Income of

Community, FY 2000

$397

$481

$-

$100

$200

$300

$400

$500

$600



And FireAverage Per Household Spending on Fire, by Income of

Community, FY 2000

$494

$273

$-

$100

$200

$300

$400

$500

$600



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!

Documents

Revenue Sharing and the Future of our Massachusetts Economy