Boston -- A new study by the Boston Fed's New England Public Policy Center suggests ways to reform state non-school aid to Massachusetts cities and towns.

The study develops a measure of local fiscal health indicating the relative need of municipalities for state non-school aid. It does so by measuring the gap between each community's costs of providing municipal services and its capacity to raise revenue locally. The study confirms that most of the 10 largest cities in the state have large gaps and have great needs for non-school municipal aid from the state. However, the current system of municipal aid is not closely related to municipal gaps among these large cities.

The study examines options for aid formula reform in Massachusetts. It suggests that the state consider holding existing aid harmless to avoid disrupting local budgets, and then use a new formula to distribute incremental aid, with more incremental aid allocated to communities with larger gaps (in other words, with worse fiscal health and a greater need for state assistance). This new approach can potentially be both equalizing and beneficial to a majority of municipalities in the Commonwealth within a relatively short time period.

"We hope the analysis provided in this study gives Massachusetts municipal and state leaders new insights in their efforts to reform state aid in Massachusetts," says Yolanda Kodrzycki, Director of the New England Public Policy Center at the Federal Reserve Bank of Boston and a Vice President at the Bank. "We know this is a difficult and contentious issue, and we want to be helpful in this important reform effort."

The study was authored by Bo Zhao, senior economist in the Bank's New England Public Policy Center. It builds on previous research into state-aid formulas conducted by Zhao and economist Katharine Bradbury of the Bank's Research Department. The study provides additional research for the Bank's ongoing involvement in a project to help reinvigorate the City of Springfield, Massachusetts and share the related insights gained on revitalization and resurgence with policymakers around the region.

The study is available on the Boston Fed's web site.