State Aid to New York's Cities and Villages is Underfunded
Unrestricted state aid to local governments - formerly known as revenues sharing, now known as Aid and Incentive for Municipalities, or AIM - is state aid provided to all of New York's cities, towns and villages. For decades, the original revenue sharing formula - intended to redistribute state tax revenues to municipalities that do not have the tax base or the taxing authority to generate these revenues on their own - has been annually disregarded and various constraints have been imposed on the overall level of state aid to local governments.
In 1988-89, revenue sharing peaked at $1.1 billion. Faced with large deficits in the late 1980s and early 1990s, the state reduced revenue sharing by approximately 50% between 1988-89 and 1992-93 when it hit a low of $532 million. Revenue sharing to cities (excluding New York City) fell from $294 million in 1989 to $163 million in 1992. These sharp decreases forced local officials to turn to the property tax for additional revenue to support essential municipal services.
Unrestricted aid now totals approximately $1 billion, nearly the same level it reached at its peak in 1989. However, had the program kept pace with the rate of inflation, local governments in New York State would be receiving approximately $960 million more than they do currently. In fact, when adjusted for inflation since 1990, 80% of cities and 100% of villages are receiving less general purpose state aid than they did twenty years ago.
Despite the fact that AIM accounts for less than 1% of the total state budget, it is an essential funding source for city and village budgets. In fact, AIM funding, on average, currently accounts for approximately 50% of a city's property tax levy. Given this, any reduction in this funding source will have a significant negative effect on local property taxpayers. When you consider that school aid accounts for nearly 17% of the state budget, and the state share of Medicaid, almost 13%, it is easy to see the stark disparities that exist in the commitment to these programs compared to the state's commitment to AIM. Furthermore, while AIM funding today is at essentially the same level that it was in 1989, school aid has grown by approximately 164% ($13.3 billion) during the same period.
AIM is a Property Tax Program That Works
Despite the underfunding of state aid to cities and villages, AIM has proven to be a property tax program that works. Since 1995, when the state's financial picture began to turn around, there have been intermittent increases in unrestricted aid, both across-the-board, as well as through the creation of new aid categories, primarily Supplemental Municipal Aid. Most of the significant increases were targeted to large cities and were not allocated via any statutory formula. In addition, cities and villages have received consistent and measurable increases in aid since 2005 - increases which have undoubtedly helped to slow the growth in local property tax levies.
Between 1989-90 and 1992-93, when state aid to local governments was dramatically reduced and cities (outside NYC) experienced a 45% cut - city property tax levies increased by 22% in a mere three year period. However, as state aid began to increase beginning in 1995, city tax levies, while continuing to increase, grew at a much slower rate. In fact, in recent years, the positive impact AIM increases had on city tax levies is clear. Between 2004-05 and 2007-08, when city AIM funding increased by 53%, city tax levies actually declined by nearly 4%. This just goes to show that the increases in aid that cities received helped to reduce the reliance on the local property tax. This is in part due to the fact that, unlike other state aid programs, there are accountability measures associated with AIM funding that compel local officials to use this aid for property tax relief. AIM is clearly a worthwhile investment that pays important dividends for communities and their taxpayers.
Cities and Villages Are Doing All That They Can to Control Spending
Cities and villages are doing all that they can to control expenses. This is no easy task when you consider the limited revenue options they have available to them, the many state mandates that drive up their costs, and the personnel-dominated nature of government operations. Between 1996 and 2006, city expenditures grew at an average annual rate of 3.8%. The largest expenditure category is typically public safety, which is also, by far, one of the hardest to control since a substantial portion is driven by collective bargaining agreements, which are governed by state law. In addition, employee benefits - the fastest growing expenditure category for local governments over the past ten years - have greatly contributed to overall spending growth at the local level. According to the data collected by the State Comptroller, between 2001 and 2006, total local government expenditures increased by approximately 24%, or 4.4% annually, while employee benefits increased by 78%, or nearly 12% on an average annual basis, during the same period. Clearly, the unprecedented growth in employee benefit costs is having a significant effect on local budgets.
In particular, one cannot overlook the devastating impacts that local pension costs have had on municipal budgets. Contributions to the pension system by state and local governments have varied significantly over the past 20 years. When the stock market boomed in the 1990's, local governments were able to significantly reduce their pension contributions. These low rates lasted nearly a decade. The economic downturn at the beginning of this century, however, caused contributions to rise at an unprecedented rate. State and local tax-funded contributions to the pension system increased from $1 billion in 2000 to $6.6 billion in 2005. For villages and cities (outside NYC), pension costs increased more than tenfold in only three years - between 2003 and 2005.
Consequently, if you take pension costs out the equation, the spending picture changes dramatically. For example, city expenditures increased by nearly 5.4% between 2003 and 2005, but when you back out the dramatic and uncontrollable increase in city pension contributions, expenditures during that period actually decreased by .3%.
A strong and growing state-local fiscal partnership is essential to ensuring economic vitality at all levels of government. Predictable growth in state aid is a critical component of this partnership. Municipal governments remain under tremendous fiscal stress. The combined expense of pensions, health insurance and other employee benefits is largely out of local officials' control and is consuming a rapidly increasing percentage of municipal budgets. It is these expenses that are the driving force behind local property tax increases. And just like the state must be able to rely on the federal government in tough fiscal times, local communities must be able to rely on the state government to assist them as well. To invest in the AIM program now is a better and less expensive option for the state than to bail out municipalities in fiscal crisis later.