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Series:New England Public Policy Center Working Paper  Bank:Federal Reserve Bank of Boston 

Working Paper
Does Springfield receive its fair share of municipal aid? : implications for aid formula reform in Massachusetts
This paper examines the distribution of unrestricted municipal aid in Massachusetts, which has been a major concern to civic leaders and elected officials of many communities, including Springfield. The paper develops a measure of the municipal fiscal gap indicating the relative need of municipalities for state aid. The analysis shows that in recent years, unrestricted municipal aid has not been distributed in proportion to the gap measure among the 10 largest cities in Massachusetts. For example, despite having the largest municipal gap, Springfield received almost the lowest per capita amount of Additional Assistance -- a key component of municipal aid. This pattern is the result of deep and uneven aid cuts in the past that distorted the distribution of municipal aid. This paper therefore suggests that state government consider adopting a formula that provides more aid to communities facing larger municipal gaps. To avoid disrupting local budgets, the state could consider holding existing aid harmless, and using the gap-based formula to distribute new aid. The simulations show that if the state commits to reasonably large increases in municipal aid, this new approach can be both equalizing and beneficial to a majority of municipalities in the Commonwealth within a relatively short time period. The paper provides various formula evaluations and policy recommendations that could support efforts to reform state aid in Massachusetts.
AUTHORS: Browne, Lynn E.; Chakrabarti, Prabal; Green, DeAnna; Kodrzycki, Yolanda; Munoz, Ana Patricia; Walker, Richard; Bo Zhao with Marques Benton
DATE: 2010

Working Paper
The fiscal impact of potential local option taxes in Massachusetts
This paper examines the potential impact of local-option taxes on meals, general sales, income, and payroll on revenue-raising capacity in Massachusetts municipalities. It finds that, while new local-option taxes would generate considerable additional revenues from untapped sources, revenue capacity is not evenly distributed across municipalities. Indeed, local-option taxes are likely to exacerbate fiscal disparities, because municipalities with low existing revenue-raising capacity often lack the tax bases for new local-option taxes. Policymakers could consider increasing equalizing state aid to offset these fiscal disparities. If more aid is not forthcoming, this paper proposes that the state change aid formulas to reflect differences across municipalities in local-option tax capacity, and to better target fiscally distressed communities. These strategies - explored in the Massachusetts context - could also be useful in other states.
AUTHORS: Zhao, Bo
DATE: 2010

Working Paper
House prices and risk sharing
We show that homeowners are able to maintain a high level of consumption following job loss or disability in periods of rising house values. However, the consumption drop for consumers who simultaneously lose their job and equity in their houses is substantial. Using data from the Panel Study of Income Dynamics, we verify that homeowners smooth consumption more than renters, and that consumption smoothing improves when houses appreciate in the area of residence. We calibrate and simulate a model of endogenous homeownership and home-equity loans, and show that the model is able to reproduce the patterns in the data quite well.
AUTHORS: Hryshko, Dmytro; Luengo-Prado, Maria Jose; Bent E. Sørensen
DATE: 2009

Working Paper
The role of the housing market in the migration response to employment shocks
The United States is known for the ability of its residents to move to where the jobs are, and this has helped the nation maintain its position as the world?s top economy. Households? decisions to move depend not only on job prospects but also on the relative cost of housing. I investigate how the housing market affects the flow of workers across cities. This occurs through at least two channels: the relative mobility of homeowners versus renters, and the relative cost of housing across markets. I use homeownership rates to measure the former, and use an index that measures house prices across metropolitan statistical areas (MSAs); the price elasticity of housing supply; and the growth rate of house prices to capture the latter. ; To show how variation in these factors affects cross-city migration, I estimate a VAR model of migration, employment, wages, house prices, and new housing supply using data from 277 U.S. MSAs for 1990?2006. The impulse response functions based on employment supply and demand shocks show substantial variation when evaluated at different values of the homeownership rate, the price elasticity of housing supply, relative housing prices, and their growth rates. I also allow for spillover effects in the model that reflect the impact of a labor demand shock in the nearest city.
AUTHORS: Zabel, Jeffrey
DATE: 2009

Working Paper
Unaffordable housing and local employment growth
High housing prices have caused concerns among policy makers as well as the public in many U.S. regions. There is a general belief that unaffordable housing could drive businesses away and thus impede job growth. However, there has been little empirical evidence that supports this view. In this paper, we clarify how housing affordability is linked to employment growth and why unaffordable housing could negatively affect employment growth. We empirically measure this effect using data on California municipalities and U.S. metropolitan areas and counties. It is argued that for various reasons a simple correlation between unaffordable housing and employment growth should not be interpreted as causal. We therefore develop some empirical strategies and employ statistical techniques to estimate the causal effect of unaffordable housing on employment growth. Our results provide consistent evidence that indeed unaffordable housing slows growth in local employment. We discuss policy implications of these findings.
AUTHORS: Chakrabarti, Ritashree; Zhang, Junfu
DATE: 2010

Working Paper
Spatial competition and cross-border shopping
This paper investigates competition between jurisdictions in the context of cross-border shopping for state lottery tickets. We first develop a simple theoretical model in which consumers choose between state lotteries and face a trade-off between travel costs and the price of a fair gamble, which is declining in the size of the jackpot and the odds of winning. Given this trade-off, the model predicts that per-resident sales should be more responsive to prices in small states with densely populated borders, relative to large states with sparsely populated borders. Our empirical analysis focuses on the multi-state games of Powerball and Mega Millions, and the identification strategy is based upon high-frequency variation in prices due to the rollover feature of lottery jackpots. The empirical results support the predictions of the model. The magnitude of these effects is large, suggesting that states do face competitive pressures from neighboring lotteries, but the effects vary significantly across states.
AUTHORS: Schiff, Nathan; Knight, Brian
DATE: 2010

Working Paper
Voting with their feet?: local economic conditions and migration patterns in New England
Over the past several years, policymakers and business leaders throughout New England have expressed concern regarding the region's ability to attract and retain skilled workers, given the economic climate of the region compared with other parts of the nation. Indeed, net domestic migration for New England became increasingly negative after the 2001 recession, as the number of people leaving the region exceeded those entering. Examining the factors underlying these migration trends is important for determining what role, if any, public policy might play in addressing their potential impact on the region's labor supply. Using a logistic migration model, this paper examines the relative role of economic factors - namely labor market conditions, per capita incomes, and housing affordability - in determining domestic state-to-state migration flows. Using such flows from the Internal Revenue Service for each of the 48 states in the continental United States from 1977 through 2006, the model controls for demographic characteristics of origin states as well as state-specific fixed amenities, such as climate, culture, and natural features. The model's estimates show that while all three measures of relative economic conditions are significant determinants of migration, the magnitude of their impact varies. The estimates also show that the impact of these economic factors on state-to-state migration flows has changed considerably over time. For example, the importance of per capita income as a determining factor has fallen considerably since the late 1970s, while that of housing affordability has risen. Forecasts of net domestic migration based on the model show that while New England will continue to lose individuals to other states during 2009, the pace of out-migration will likely slow, particularly in Massachusetts. This is likely due to the fact that both the region and the Bay State are performing slightly better than the nation as a whole during the current recession. However, this trend may reverse itself if economic conditions deteriorate in the New England states relative to other parts of the country.
AUTHORS: Sasser, Alicia
DATE: 2009

Working Paper
Public-private partnerships, cooperative agreements, and the production of public services in small and rural municipalities
Using data from approximately 1,000 small and mostly rural municipalities from Illinois, New Hampshire, and Wisconsin, the authors study choices in production arrangements over a wide range of services, and examine a variety of contracting options available to local governments. The data reveal that municipalities often rely on contracts to provide an extensive list of services. ; The use of for-profit contractors and cooperative agreements with other governments correlates negatively with population. Nonetheless, small municipalities are less likely to use competitive bidding processes, compare costs between production options, and report that privatization produces savings. Other factors, such as median income, rural geography, and ideology, show statistically significant associations with contracting choices. ; Respondents generally consider themselves "satisfied" with services provided by contract, although satisfaction levels are lower than those associated with self-provision. Satisfaction with services provided by other governments is lower than satisfaction with services provided by private contractors. This suggests that small municipalities encounter no tradeoff in service quality directly attributable to for-profit contractors.
AUTHORS: Mohr, Robert D.; Halstead, John; Deller, Steven
DATE: 2008

Working Paper
Municipal aid evaluation and reform
The distribution of unrestricted municipal aid has been a major policy concern in many states. Using Massachusetts as a case study, this paper examines the extent to which unrestricted municipal aid is responsive to the variation in the underlying fiscal health of municipalities. The paper uses a measure of ?municipal gap??based on local economic and social characteristics outside the direct control of local officials?to indicate the underlying fiscal health of cities and towns. The analysis finds large disparities in municipal gaps among Massachusetts cities and towns, and that those disparities have increased in recent years. However, unrestricted municipal aid has not been highly correlated with municipal gaps. This pattern is partly due to large ad hoc cuts in state aid over the past 20 years. This paper suggests that the state consider adopting a gap-based formula that provides more aid to communities facing larger municipal gaps. Policymakers should carefully readjust policy parameters in the formula over time to maintain the political feasibility of the approach. The gap-based framework and policy suggestions are potentially applicable to other states.
AUTHORS: Zhao, Bo
DATE: 2011

Working Paper
The dynamic between municipal revenue sources and the state-local relationship in New England
This working paper was written for the New England Public Policy Center?s third annual conference: ?The Dynamic between Municipal Revenue Sources and the State-Local Relationship in New England?. It relies on data from the U.S. Census to examine the dynamic between municipal revenues and the state-local relationship in New England. The analysis shows that?compared with the nation as a whole?municipal governments in New England rely very heavily on the property tax. They also have limited or no access to local-option revenues such as sales taxes, and they rely less on fees and other nontax sources. ; Although some research has shown that the local property tax can help counter fluctuations in state aid, Massachusetts, Rhode Island, and Maine all limit the percent by which local governments may increase their property tax collections from one year to the next. Municipalities in these states are more vulnerable to changes in state aid, and more bound by constraints on other revenue sources. ; New England states and municipal governments will face enormous fiscal pressures as their populations age dramatically and they face higher pension and health care costs. This analysis suggests the need for policymakers to consider new local revenue sources and state aid formulas.
AUTHORS: Dye, Richard F.
DATE: 2008

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