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Designing formulas for distributing reductions in state aid

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  • Bo Zhao
  • David Coyne

Abstract

Local governments depend on state aid to provide residents and businesses with vital public services, such as education, police and fire protection, and safe public roads. However, in response to the recent fiscal crisis, many states are quickly and deeply cutting local aid. The Congressional Budget Office reported that 22 states reduced aid to local governments in FY 2010, and 20 states have proposed additional cuts in FY 2011. ; States tend to cut aid either on an ad hoc basis or across the board, with every community receiving the same percent aid cut. This paper proposes a new, more equitable approach to distributing reductions in state aid. It develops a framework that distributes reductions in state aid based on underlying local fiscal health whereby communities that are in worse underlying fiscal health and receive less existing aid experience smaller aid cuts. The framework can also apply to aid increases, giving policymakers a single tool to accommodate any change in state aid. ; The paper uses Massachusetts data on unrestricted municipal aid to simulate the impact of the proposed framework. The framework can be used to distribute cuts or increases in school aid or non-school aid, and is potentially applicable to all states.

Suggested Citation

  • Bo Zhao & David Coyne, 2011. "Designing formulas for distributing reductions in state aid," New England Public Policy Center Working Paper 11-2, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbcw:11-2
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    References listed on IDEAS

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    1. Skidmore, Mark & Scorsone, Eric, 2011. "Causes and consequences of fiscal stress in Michigan cities," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 360-371, July.
    2. Clemens, Jeffrey, 2013. "State Fiscal Adjustment During Times of Stress: Possible Causes of the Severity and Composition of Budget Cuts," MPRA Paper 55921, University Library of Munich, Germany.
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    Keywords

    Municipal finance - Massachusetts ; Municipal finance;

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