Last modified: Tuesday, May 6, 2008 2:27 AM EDT Grip loosening on local aid lifeline By TRAVIS ANDERSEN AND MATT KAKLEY FOR THE SUN CHRONICLE Different analysts have different theories about the factors behind the state's municipal budget crisis: Weak growth in state tax revenues. Rising health care and energy costs. Cash-strapped voters reluctant to pass Proposition 2 1/2 overrides. But for many, the die was cast in 2003 when declining state revenues forced Gov. Mitt Romney and the Legislature to cut back on the municipal life line of local aid. "Cities and towns haven't fully recovered since," said Geoffrey Beckwith, executive director of the Massachusetts Municipal Association. Adjusted for inflation, state aid to municipalities remains $566 million below 2002 levels, Beckwith said. Michael Widmer, president of the Massachusetts Taxpayers Association, says lawmakers had to cut local aid when state revenues plummeted after a 2000 voter referendum trimmed the income tax rate from 5.85 percent to 5.3 percent. "After that, the state lost between $750 million and $1 billion in revenue between 2001 and 2002," Widmer said. As local aid dropped, health care spending by cities and towns was going up. In its study "Point of Reckoning: Two Decades of State Budget Trends," MassInc., a public policy group, found the state spent 16 percent of total revenue on health care costs in 1987, with 24 percent going to local aid that year. By 2006, when lawmakers passed the universal health insurance act, health care spending took up 30 percent of the operating budget. Local aid spending dropped to 20 percent, according to the study. The state's increasing health costs were nothing when compared to municipal budgets. A study by the Department of Revenue found that the municipal costs increased by 91.17 percent between 2001 and 2006. The commonwealth had a 48 percent increase. Local pension funds also are straining municipal budgets after years of poor investment, according to a 2006 study by the Pioneer Institute, a tax policy group. Institute researchers say just six of the 104 municipal pension funds have matched the two state funds in investment returns since 1996. Managers have lost more than $1.6 billion for cities and towns during that time with poor investments, researchers say, placing the burden on taxpayers to keep pension funds solvent. Energy costs have risen sharply. Milford saw its energy bill rise by 12 percent this year, Town Administrator Louis Celozzi said. Holyoke has experienced a similar trend. Even paving costs have been affected. "That's directly connected to the price of oil," said William Fuqua, Holyoke's public works superintendent. "Asphalt is made from oil, and you also pay for diesel fuel to get materials from the plant to the job." Meanwhile, taxpayers in cities and towns have become more resistant to Proposition 2 1/2 overrides, which allow municipalities to raise property taxes above the 2.5 percent ceiling. During the 2007 calendar year, voters rejected 51 overrides out of a possible 98, forgoing just over $40 million in revenue, according to state records. As cities and towns struggle to deal with soaring costs, the Massachusetts Lottery, whose profits are sent to the cities and towns, is struggling to meet the demands of lawmakers. When the Lottery does not meet the Legislature's projections, the state must kick in the difference. Dan Rosenthal, a spokesman for the Lottery, said the Legislature has routinely put more revenue in the budget than the Lottery projected they would take in. "In the 2008 (budget), for example, we predicted that we could do $902 million. They put in $1.027 billion," he said. "So, it's really just a question of projections." Projections indicate the Lottery's more modest estimate remains on target. Rosenthal said the Lottery is enjoying its best year ever in terms of sales and actually expects to exceed its original expectation of $919 million dollars in profits for fiscal year 2009. Both the governor and the House budget proposal call for $935 million in local aid from the Lottery. But rising health care and pension costs may exceed what the Lottery can provide. Beckwith warns that cities and towns should work on other revenue plans. "The future of local aid cannot depend on Lottery alone," he said. "The state will have to develop a revenue sharing plan to develop other sources of revenue to pay for municipal services."