Local governments in New England rely on state aid to finance the provision of essential public services. Yet in response to the recent and ongoing fiscal crisis, state governments across the region have cut local aid deeply, often by the same percentage in each community. This across-the-board approach ignores differences in underlying local fiscal health and places a larger burden on many resource-poor communities. To address this concern, this policy brief provides a new, more equitable approach that allocates smaller aid cuts to communities that are in worse underlying fiscal health and received less existing aid. We use a “need-capacity gap” to represent underlying fiscal health, which is measured based on local economic and social characteristics outside the direct control of local officials. While we use Massachusetts data on non-school aid to conduct policy simulations, the approach is applicable to many states and aid categories. ; This summarizes the NEPPC working paper 11-2: Designing Formulas for Distributing Reductions in State Aid.