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Report: Unfunded costs choking budgets in Mass.

January 7, 2014

BOSTON (AP) — The state’s cities and towns have shed more than 15,000 jobs in the past six years, and pension obligations, health care and borrowing costs will continue to squeeze budgets for the foreseeable future, according to a report issued on Tuesday.

Municipalities face a total of nearly $45 billion in unfunded liabilities, according to The Massachusetts Taxpayers Foundation, an independent, business-backed organization. Meeting those responsibilities could divert resources from schools, public safety and other services, the group warned.

In its annual report on municipal finances, the foundation also noted what appeared to be a declining appetite among voters for property tax overrides. Cities and towns raised $11 million from overrides in the 2013 fiscal year, down from $15 million the previous year and the lowest total since 2000. By contrast, voters approved a total of $49 million in overrides in 2006.

The state law known as Proposition 2 1/2 limits municipalities from raising the annual property tax levy more than 2.5 percent without approval from voters.

The $13.4 billion raised in property taxes in the last fiscal year, up from $13 billion the previous year, marked the slowest rate of property tax growth since 1985, the report said. But cities and towns did benefit from a 3 percent increase in direct aid from state government — following three years of declines — and modest gains in other local receipts such as those from building permits and motor vehicle excise taxes.

In all, the foundation said municipal revenues rose 3.7 percent in fiscal 2013, an improvement over levels seen during and immediately after the Great Recession, yet below the average 5.2 percent growth level between 1982 and 2009.

Despite the recovering economy, the report warned that costs associated with pensions, health care for current and retired municipal employees, and debt service would continue to eat away at local budgets in years to come. Financial pressures associated with those costs had already contributed to the elimination of about 15,500 jobs since 2007.

“Spending on employee and retiree benefits will consume an ever larger share of municipal budgets for the foreseeable future as municipalities face nearly $45 billion in unfunded liabilities,” said Michael Widmer, president of the foundation, in a statement accompanying the report.

Borrowing costs rose 23 percent and pension obligations 30 percent between 2007 and 2012 while total municipal spending grew 13 percent over that same period, the report said.

A state law offering cities and towns more flexibility in the design of health care plans for employees led to a one-year decline of $30 million in those costs, but the foundation noted that health care expenses account for nearly 10 percent of all municipal budgets and that spending on health care for retired workers was expected to nearly double in the next decade.

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