With each passing day it seems the headlines in the papers highlight a worsening fiscal situation for the state. This begs the question: What does it mean for our towns?

This is the first in a series that will examine the fiscal situation of municipalities. There have been several statewide initiatives to examine fiscal challenges facing both the state and towns. Our goal is to highlight the major findings from these initiatives and reports; expand on the research that was done; present it through a new medium; and inform a broader audience on the work being done in the state.

This first story highlights the findings from a report to the General Assembly’s Program Review and Investigations Committee prepared by the Federal Reserve Bank of Boston’s New England Public Policy Center (NEPPC), “Measuring Municipal Fiscal Disparities in Connecticut.”

The report analyzed the fiscal situation for towns in Connecticut and measured non-school fiscal disparities and the key drivers.

The NEPPC report highlights seven key findings:

  • The capacity to raise revenue from property taxes is the main driver of fiscal disparities in Connecticut.
  • 78 of 169 towns have a deficit, with revenue capacity below the cost of providing services. These 78 towns represent almost 60% of state’s population.
  • 91 of 169 towns have sufficient capacity to raise revenue capacity to cover the cost of services.
  • Municipal cost differences exist but are not as dramatic as the differences in the ability to raise revenue
  • Current state nonschool grants made to towns have a limited effect in reducing nonschool fiscal disparities in Connecticut.
  • Five cost factors were identified as driving non-school municipal costs: unemployment, population density, private sector wages, town road maintenance, and jobs per capita.
  • Statistical analysis shows that the following factors do not impact costs: poverty, population, the share of foreign-born population, and the share of older rental housing units

What this story covers:

  • What is meant by fiscal disparity?
  • What is the methodology of analyzing fiscal disparities?
  • How is a municipality’s capacity to raise revenue measured?
  • How are a municipalities costs measured?
  • Which towns are in fiscal distress – a gap exists between revenues and cost?
  • What does it look like for towns since the report was released?

A municipal fiscal disparity exists when either

  1. a town faces high costs for providing a given level of public service OR
  2. fewer taxable resources exist to finance the services

What is the methodology for analyzing fiscal disparities?

The framework for the study examines the difference (gap) between costs of providing non-school public services and the ability of a town to pay for those services (capacity)

What the framework is and is not:

  • NOT a measure of actual spending – actual spending is subject to the administrative efficiency of local officials and is not necessarily related to actual costs. Similarly, towns with identical capacity to raise revenue may have different tax rates
  • IT examines structural deficiencies and NOT the current situation
  • Based on factors outside the direct control of local officials
  • IT USES a uniform tax rate to determine how much revenue each municipality could raise

How is a municipality’s capacity to raise revenue measured?

In Connecticut, real and personal property taxes are virtually the only source of revenue for municipalities. To determine each town’s capacity to raise revenue the following formula was used:

  • Capacity = standard tax rate x Equalized Net Grand list

A standard tax rate was used to equalize the ability to raise revenue across all towns. Actual tax rates were not used since they are subject to local officials – towns with identical total property values might have different tax rates based on local choices. The equalized net grand list is a town’s total grand list minus any tax-exempt properties and then equalized to account for differences in when towns assess their properties.

The map below shows wide variation in per capita revenue capacity. The CT Data Collaborative grouped the data by Regional Council of Governments. We chose to display the data this way since these are the government entities that are looking at regional revenue and cost sharing opportunities. Exploring fiscal disparities by these entities can inform future policy decisions.

Map 1: Wide Variation in per capita Capacity

How are a municipality’s costs measured?

Municipal cost=amount a municipality must spend to provide a core set of non-school public services.

How were the costs of the public services determined?

A statistical analysis identified five cost factors strongly related to non-school per-capita spending levels:

  1. unemployment rate
  2. population density
  3. private-sector wage index
  4. town maintenance road mileage
  5. jobs per capita

All of the costs identified as factors are not within the direct control of local officials. Interestingly, statistical analysis shows that the following factors do not impact costs: poverty rate, population size, percentage of the population that is foreign born, and percentage of housing units that are older rental units.

As shown on the map, the highest costs tend to be in southwestern Connecticut and in and around Hartford. The urban areas in Connecticut have the highest per capita costs with the highest unemployment rates, population densities, and number of jobs per capita driving up those costs.

Map 2: Range of Costs Narrower than Range of Revenue-Raising Capacity

Which towns are in fiscal distress– a gap exists between revenues and cost?

A municipal gap exists when the costs are higher than the revenue raising capacity.

When a town’s capacity to raise revenue is greater than its costs of services, it has a surplus When a town’s capacity to raise revenue is lower than its costs, it has a deficit

78 towns in the state have a deficit - the capacity is below the cost of providing services. These towns cover almost 60% of state’s population.

91 towns have sufficient capacity to raise revenue greater than the cost of services. These towns cover 40% of the state’s population, primarily in Fairfield County, Litchfield and the shoreline.

The map displays a wide range of municipal gaps indicating significant fiscal disparities across the state largely driven by the uneven distribution of revenue raising ability.

Map 3: Wide range of municipal gaps

Table 1: Municipal Gaps

What does it look like for towns since the report was released?

Since property taxes are the primary way that municipalities raise revenue, we examined the trends in the Equalized Net Grand List since 2011.

Overall, property tax revenue has been on the decline. The table shows - by town- the average annual growth rate (or decline) in the grand list from 2011 to 2014, and also shows the Municipal Gap calculated by the report. In total, ENGL has declined for 145 of the 169 towns since 2011. Thus the revenue raising capacity for towns has only become more difficult.

Table 2: Equalized Net Grand List Trends"

The study raises the question, “How can towns address the disparities?”

As noted in the report, the greatest disparities exist on the revenue side. What does this mean for the reliability, equity, and efficiency of the property tax in raising revenue for our towns? The challenges require a new policy paradigm particularly since the cost factors are outside the control of municipal officials.

In our next story, we’ll look at state grants to towns - the primary mechanism for equalizing differences across municipalities. We’ll also explore the following questions:

  • What percentage of the municipal gap is filled by the state for each municipality?
  • What are the disparities in absolute terms, not by per capita? What does it mean for revenue or cost sharing across municipalities?
  • Are state grants to towns increasing or decreasing?