Financing Massachusetts Town Government Part 1

Financing Massachusetts Town Government - Part 1
Amy Handfield - Bureau of Accounts Field Representative
Kim Peloquin - Bureau of Accounts Field Representative
Tony Rassias - Deputy Director of Accounts

The following is the first in a three-part series covering the financing of annual town budgets in Massachusetts. If you are a new town official, especially a new town finance official, we hope you’ll find this series helpful.

Towns finance their annual budgets using different financing sources than do other levels of government. It’s important to understand what these sources are, where they come from and what limitations may be placed on them.  Let’s look at the other levels of government first.

Financing Other Levels of Government

The federal government’s budget primarily uses income and estate taxes paid by individuals, payroll taxes paid jointly by employees and employers, corporate income taxes paid by businesses, and other miscellaneous, including excises, tariffs, and interest. The federal government does not require a balanced budget. The Congressional Budget Office projects the FY2020 budget deficit at $3.7 trillion.

The Massachusetts state budget primarily uses income and estate taxes from individuals, corporate excises paid by businesses, federal government reimbursements, sales taxes, including regular sales taxes and others, such as occupancy, meals, motor vehicles, alcohol, etc., and other miscellaneous, including deed and licensing fees. G.L. c. 29, § 6E requires the Governor to recommend, the Legislature to enact, and the Governor to approve a balanced budget for the state.

County government budgets primarily use deeds excise, an annual assessment apportioned to each member community on the basis of its total taxable property values statistically determined at 100% of full and fair cash value every two years by the Commissioner of Revenue, and charges for services. County government budgets must be balanced annually prior to approval.

Financing Massachusetts Town Government

Every Massachusetts town must have a balanced budget before setting its annual tax rate and committing actual property tax bills for collection. A balanced budget applies sufficient financing sources equal in amount to appropriations and other required expenditures.

A town has six main categories of financing sources for this purpose: 1.) a tax levy on taxable real and personal property 2.) state aid3.) local receipts 4.) reserves 5.) debt 6.) other sources, which may include federal, state, and other grants.

1.) The Property Tax Levy

In FY2020, the total property tax levy budgeted for all towns was $9.5 billion. This represents 66.4% of all revenues budgeted by towns statewide. However, among individual communities, this portion of the budget can vary widely (between 45% to 89%), as do the other revenue sources discussed here.

The tax levy is collected by billing a town’s taxable real and personal property. However, the total town tax levy is limited by Proposition 2½, a law that has constrained town property tax levies since FY1982. (To learn more about Proposition 2½, please view this video.)

Each year, the local Board of Assessors holds a public classification hearing to assign values to all the classes of real and personal property in the community. At the same meeting, the Board of Selectmen makes policy decisions on the tax levy including consideration of the following options:

• vote to tax all real and personal property at the same tax rate
• vote to shift a portion of the tax burden (up to a legal maximum) from the residential and open space classes to the commercial, industrial and personal property classes
• vote a residential exemption for all eligible residential properties
• vote a discount for all eligible open space properties
• vote a small commercial exemption for all eligible commercial properties

Learn more about the classification hearing by watching this video.

2.) State Aid

In FY2020, the total state aid budgeted for all towns was $1.6 billion, 11.3% of all town budgeted revenues statewide. General fund state aid is made up mainly of “Cherry Sheet” aid at $1.56 billion (10.9%) and payments from the Massachusetts School Building Authority at $54 million (0.4%).

The Cherry Sheet The Commonwealth of Massachusetts distributes aid monthly to towns after amounts are approved in the annual State budget by the State Legislature. The Cherry Sheet is the official notification of estimated general fund state aid, as well as the state, and county assessments for programs the community participates in. Its name derives from the cherry-colored paper upon which it used to be printed.  (Chilmark receives less than $9,000 in State Aid annually. See the attached PDF here at the bottom.)

The top five FY2020 Cherry Sheet receipts for all towns were:

1. Chapter 70 ($1.1 billion)
2. Unrestricted General Government Aid ($328 million)
3. School Choice Receiving ($39 million)
4. State-owned Land ($25 million)
5. Veterans Benefits ($19 million)

To view Cherry Sheet aid details for your town, please see Category Four of the DLS Massachusetts Municipal Finance Trend Dashboard.

Massachusetts School Building Authority (MSBA)

The MSBA provides general fund payments to eligible school districts for projects approved prior to the creation of the MSBA. The MSBA also provides grant payments for school construction that are accounted for in a town’s capital projects fund.

Other State Aid

Other state departments, authorities, agencies, and trusts grant additional state aid to eligible towns, directed mostly toward special projects or purposes. Here are some examples of grantors:

•  Massachusetts School Building Authority
•  Massachusetts Department of Elementary and Secondary Education
• Massachusetts Water Resources Authority
• Massachusetts Clean Water Trust
• Massachusetts Department of Transportation  (Chilmark receives between $40,000 - 80,000 annually for paving projects that we build upover time since we can't use it for small repairs and must "reconstruct" at least 500 feet of road at a time.)

Review of Part 1
• Massachusetts town budgets are financed differently than the federal, state, or county government budgets.

• The six main components of town government finance are the tax levy, state aid, local receipts, reserves, debt, and other sources.

• The property tax and Cherry Sheet aid provide towns with most of their general fund revenues.

• Other state aid includes grants to eligible towns and targeted aid to specific towns for specific purposes.

The second article in this series will continue a review of the six com
ponents of Massachusetts town government finance.