Financing Local Government

The balancing of municipal programs and activities against available fiscal resources is the key element in financing local government. The task is performed in an environment essentially different from that of a business enterprise in the private sector since laws, constitutions, and public accountability, as well as considerations of public policy, all impose constraints.

Broadly speaking, financing local government is a twofold proposition. It involves a determination, on the expenditure side, of the quantity and quality of activities, services and improvements that will be undertaken by the community; and an allocation of resources from revenues and borrowing within the capacity of the community. Political, economic and social considerations are involved in the process. All enter into the formulation of financial plans, which are most visible in the budget of a municipality, where commitments and resources are brought into balance on an annual basis.

Compared to the private sector, local governmental financial decisions seem largely removed from the classical marketplace. They are constrained within a framework of State Constitution, state statutes, and legal restrictions found in charters, local laws and ordinances. The legal setting of local finances is one of the first things to impress public officials upon taking office. It permeates many aspects of municipal finance administration.

Local governments may spend money only for what are deemed public purposes, a basic condition which springs from the State Constitution and appears in statutes and official opinions of state agencies. Strict conditions are attached to the delegation of the state’s taxing power. Many local governments are restricted as to the amounts they may raise by levies upon real property, and they may levy taxes other than property taxes only as authorized by the Legislature. New York State law also closely constrains local governments with respect to incurring indebtedness, including limitations on its purposes, the types of municipal obligations, maximum terms of debt for different purposes and basic conditions of bond sale and guarantees. Financing local government takes place in an arena of competing demands and conflicting interests. The individual local government faces internal and external pressures; the state and federal governments are very much in the picture. Local officials are responsible for striking a balance among these interests and pressures.

Local Expenditures in New York

Local government expenditures may be divided into current operations, equipment and capital outlays, and debt service costs. Equipment and Capital outlays cover expenditures for equipment purchases and the construction, improvement and acquisition of fixed assets. Debt service costs include the payments of principal and interest on debt. All other local costs fall into the current expense category, which accounts for the largest share of expenditures — 86 percent of local government costs in New York State in 2012.

Expenditure Patterns

Local Government Current Expenditures by Function, 2012 (Excluding New York City) Amounts in Millions of Dollars.[1] and Local Government Current Expenditures by Function, 2012 (Excluding New York City) Percent Distribution.[2] summarize 2012 current expenditures by general purpose local governments, excluding the City of New York. It presents a generalized profile, in dollar terms, of the service responsibilities of these local governments.

  • Counties are heavily involved in social services programs. The expenditure profile, however, confirms the diversification of county services;

  • City and village expenditures show a similarity in the application of resources to public safety;

  • Traditional town responsibilities for general government and highway functions are reflected in the table. Towns are also heavily involved in water and sewer services, refuse management and public safety.

Expenditure Factors

Expenditures for social services and health programs mandated and partly financed by the state and federal governments have greatly increased. Population and economic changes pose challenges for local governments throughout the State of New York.

Central cities focus on a wide variety of municipal services including police and fire services, roads, health, transportation, economic assistance, culture and recreation, sanitation, sewer and water service, and upgrading deteriorating infrastructure and facilities. City officials are often looking for ways to conserve their cities’ existing residential, commercial and industrial assets, and to attract and hold new enterprises. Towns, on the other hand, are more generally concerned with community development, the extension of necessary municipal services, the installation of public improvements and other typical demands of growth due to out-migration from cities.

Table 1. Local Government Current Expenditures by Function, 2012 (Excluding New York City) Amounts in Millions of Dollars.[1]
Function Counties Cities Towns Villages Total







General Government












Public Safety


















Social Services






Economic Development






Culture and Recreation






Community Services


















Employee Benefits






Debt Service






Table 2. Local Government Current Expenditures by Function, 2012 (Excluding New York City) Percent Distribution.[2]
Function Counties Cities Towns Villages Total







General Government












Public Safety


















Social Services






Economic Development






Culture and Recreation






Community Services


















Employee Benefits






Debt Service






Local Government Current Expenditures, 2007 and 2012 (Amounts in Millions of Dollars) reflects growth in current expenditures from 2007 through 2012 for each respective unit of general and special purpose local government, excluding New York City. During the five-year period 2007 through 2012, local governments experienced a 10 percent increase in current expenditures. Growth of expenditures in school districts outpaced that experienced by other local governments during this period.

Table 3. Local Government Current Expenditures, 2007 and 2012 (Amounts in Millions of Dollars)
Government Unit 2007 2012 Percent Increase





Counties (excluding New York City counties)




Cities (excluding New York City)












School Districts (excluding New York City)




Fire Districts




Local Government Revenues

Total local government revenues in New York State increased by about 10 percent during the period 2007 to 2012, from $66.2 billion to $72.6 billion. A significant development in local revenue sources during the sixties and seventies was the growing importance of intergovernmental aid. The federal government, through its array of categorical grant programs, transferred substantial sums to state and local governments.

New York State also increased its aid to local governments, providing more general assistance as well as funds for specific programs.

The introduction of federal general revenue sharing in 1972 signaled the shift from categorical to block grants. Local government was thus provided with more control over the disposition of its federal monies, but with a reduced amount available, beginning in the second half of the seventies. The federal revenue sharing program expired in 1986. The early 1980’s witnessed increased efforts to consolidate numerous categorical grant programs in such areas as education, social services and health into a greatly reduced number of block grants and has not changed dramatically since. The federal contribution to local revenues in New York State in 2012 was $5.1 billion, 29 percent more than the 2007 level of $4.0 billion. State aid of $ 16.1 billion in 2012 was 4 percent more than the 2007 amount of $15.6 billion, with increases in school aid a significant factor in state aid growth over the period.

Local government property tax in New York State rose from 59.5 percent of all local revenue in 2007 to 62.1 percent in 2012. Property taxes in 2012 totaled close to $32.1 billion, about 15 percent more than 5 years earlier.

Local Taxes in New York State, 2007 and 2012 (Amounts in Billions of Dollars).[3] shows total tax revenue for New York State and its local governments by type of tax. The real property tax raises significantly more revenue in the state than any other single tax.

Property Taxation

The property tax in New York State is a tax based on the value of real property (land and improvements). It occupies a special place in the financing of local government not only because of its yield in relation to total local revenue, but also because of its key position in the municipal budget process.

Property Tax and Local Budgets

Municipal budgeting follows a procedure which first estimates expenditures or appropriations and then deducts estimated revenues from sources other than the property tax to arrive at a remainder, which is the tax levy. Thus the property tax levy becomes the balancing item on the revenue side of the municipal budget. This process is constrained by the existence of legal limitations upon the amounts which may be raised by certain jurisdictions from the real property tax.

Table 4. Local Taxes in New York State, 2007 and 2012 (Amounts in Billions of Dollars).[3]
Local Taxes 2007 Amount 2012 Amount




Real Property






Other Taxes and Fees[1]



The final step is fixing the local tax rate. The tax levy is divided by the total dollar amount of the taxable assessed valuation of real estate within the local government. The result is a percentage figure, which is expressed as a tax rate, normally so many dollars and cents per $1,000 of assessed valuation.

Where the tax levy for a county, school district or improvement district is spread between or among two or more municipalities, assessed valuations are equalized for each municipality through the use of equalization rates. Equalization is intended to ensure equity where a property tax is levied over several local government units that assess properties at different percentages of value.

For school apportionment and for county apportionment in most counties, the equalization rates are determined by the State Office of Real Property Tax Services (ORPTS). In other counties — except Nassau County and the counties in New York City — equalization rates are established by the county legislative body, subject to review by ORPTS.

Property Tax and Local Revenues

2012 Local Government Revenue Sources Percent Distribution illustrates the position which real property taxes occupied in the general revenue structure of local governments and school and fire districts in 2012. Property taxes continue to play a prominent role in financing school district, town and village expenditures. Fire districts also depend heavily upon this revenue source.

Table 5. 2012 Local Government Revenue Sources Percent Distribution
Government Unit Real Property Taxes and Assessments Non-property Taxes State Aid Federal Aid All Others Total

Total — All Units







Counties (excluding New York City counties)







Cities (excluding New York City)





















School Districts (excluding New York City)







Fire Districts







Local Government Real Property Tax Revenue by Type of Government, 2007 and 2012 (Amounts in Millions of Dollars).[4] shows the increase in real property tax income between 2007 and 2012 for all levels of local government. Overall, real property taxes in 2005 were about 34 percent higher than in 2000.

Table 6. Local Government Real Property Tax Revenue by Type of Government, 2007 and 2012 (Amounts in Millions of Dollars).[4]
Government Unit 2007 2012 Percent Increase





















School Districts (excluding New York City)




Fire Districts




Property Tax Exemptions

The exemption of federal property from local taxation springs from the American constitutional doctrine of intergovernmental immunity. The exemption of state property from local taxation rests on the principle that the sovereign entity cannot be taxed by subordinate political units and still be sovereign. When so determined by the Legislature, however, the state does permit taxation of its property.

The exemption of certain privately-owned property from local taxation is grounded in theory, history and practice. The underlying principle is that real property used exclusively for religious, educational or charitable purposes serves a public purpose by contributing to moral improvement, public welfare and the protection of public health. Although such property is wholly exempt from general municipal and school district taxes, it does pay a share of the costs of certain capital improvements made by improvement districts (such as water supply and sewer systems).

Exemptions from property taxation may be granted in the State of New York only by general law. References to the subject comprise some of the most extensive and complex provisions of the Real Property Tax Law. State law in some instances mandates exemption and in other instances allows exemption upon enactment of local legislation.

Non-fiscal Purposes

The use of the property tax for what may be described as non-fiscal purposes — to accomplish goals other than raising municipal revenue — is a controversial topic, particularly as such uses extend beyond the traditional confines of religious, educational, or charitable purposes and are directed toward economic, environmental and social ends. The following are examples of types of property which may be partially or fully tax-exempt: public housing, privately owned multiple dwellings, industrial development agency facilities, commercial and industrial facilities, railroads, air pollution control facilities, industrial waste treatment facilities, agricultural and forest lands, and the residences of veterans and low-income senior citizens.

Property tax exemptions may cause financial stresses on local governments. Exemptions do not reduce tax levies, but instead shift a greater portion of the levy to remaining taxpayers, who consequently must pay higher taxes. An exception is the School Tax Relief (STAR) exemption, a partial school tax exemption applicable to most residential property, which is State-funded. Many challenge the use of property tax exemptions for non-fiscal purposes, arguing that subsidies for such purposes might better come from broader revenue sources than the limited base of the local property tax.

The standard source at the state level for technical assistance on the law and practice of property tax exemption is the State Board of Real Property Tax Services. The Board has published a number of reports on the impact of various exemptions on local tax bases. In addition, it annually publishes a statistical report detailing the value and location of exempt property in the state.

The value of exempt property is often obscure. Many assessors conclude that they have no reason to place realistic values on property which will not be taxed. Furthermore, many assessors do not revise exempt property lists, even periodically, since the figures are not utilized for any apparent purpose. However, where a tax levy is spread between or among two or more municipalities, the equalized value of tax exempt properties is used when calculating the tax rates, so unrealistic values on tax exempt properties can affect a tax levy. Consequently, the reported valuations of exempt properties in New York State in all likelihood do not reflect their full impact on municipal tax bases or the revenue they would return if they were made taxable. With that caveat in mind, it is worth noting that the ratio of exempt valuation to the total of taxable and exempt valuation in New York State rose from 11 percent at the turn of the twentieth century to about 32 percent in 2005.

Exemptions in Cities and Towns

In 2005 there were 4.5 million property tax exemptions on assessment rolls in New York. The value of exempt property in cities and towns totaled $678 billion in 2005, almost 32 percent of the state’s real property assessed value. In nine of New York’s cities, more than half of the value of the real property contained therein was exempt from taxation. Twenty-three of the 933 towns in New York had in excess of 50 percent of their total real property value exempt from taxation on their 2005 assessment rolls.

Property owned by government and quasi-government entities, such as public authorities, accounts for 47 percent of the total value of exempt property. As for private owners, the largest proportion of exempt property is owned by community service organizations, social organizations and professional societies (13 percent of all exempt property). As for exempt residential property other than multiple dwellings, the leading categories of exemption based on value are the School Tax Relief (STAR) Program (23 percent of total exempt value), property owned by veterans (almost 5 percent) and property owned by senior citizens (about 2.5 percent).

The percentage of exempt value attributable to state-mandated exemptions statewide was 94 percent. In absolute terms, the total value of state-mandated exemptions on 2005 assessment rolls was $637 billion.

Property Tax Administration

The administration of the real property tax involves four tasks:

  1. the discovery and identification of land and buildings;

  2. their valuation by a defensible method or suitable combination of methods;

  3. the preparation of the final assessment roll against which property taxes are levied; and

  4. the review of assessed valuations for the correction of inequalities.

Organization for Assessment

The first three of the above tasks are the duty of local assessors. In New York State the assessing units include the 62 cities and 933 towns. Other local governments use the assessment rolls as they require them. County and school tax levies, it was noted earlier, are distributed among constituent municipalities in relation to their equalized values. Although the 550 villages are empowered to assess property for purposes of village taxation, many accept the town rolls and a majority have terminated their status as assessing units and transferred that function to the towns.

There are two county assessing units in the state: Tompkins County and Nassau County. Under the Tompkins County Charter, an appointed county director of assessment assesses all real property in the county subject to taxation for county, town, village, school district or improvement district purposes. The Nassau County Government Law establishes a county board of assessors, consisting of four appointed members and a chairman and executive officer who is elected from the county at large. The board assesses real property on a countywide basis for purposes of county, town, school district and improvement district taxation.

Local assessors are either elected or appointed to their positions. All but two cities have a single appointed assessor or appointed boards of assessors. Since 1927 village assessors have been appointed, and villages have either one or three assessors. In some villages, the village trustees act as assessors.

Title 2 of Article 3 of the Real Property Tax Law provides that, except in Tompkins and Nassau Counties, cities under 100,000 population and all towns shall have a single assessor, appointed to a six-year term of office. In any city or town where one or more of the offices of assessors was elective, the governing body was empowered to retain elective assessors by enactment of a local law, providing such action was taken prior to April 30, 1971. About 50 percent of towns retained elected assessors under this option.

Property Valuation

There are three basic methods for arriving at the value of real estate for tax assessment purposes - sales analysis and comparison, income capitalization, and the replacement cost of improvements. The separate valuation of land entails a further set of value factors and a judgment as to their combined effect upon a give parcel of land. Among the various considerations are prevailing land use or classification, sales and income data, and the establishment of separate units of value (such as front foot), subject to modification for reasons of lot size, depth or irregularities.

The basic issues in property valuation are treating the owners of taxable property fairly and administering the property tax efficiently in the interest of both the municipality and the taxpayers. Until December, 1981, Section 306 of the Real Property Tax Law required all assessments to be set at full value. Historically, however, real property in this state was usually assessed at a percentage of full value. Inequities had long existed among and within different classes of property, e.g., residential, industrial, commercial. These inequities stimulated a series of court challenges to the property tax assessment system in New York State. The most notable cases are Hellerstein v. Assessor of the Town of Islip 37 NY2d 1,371 NYS2d 388 (1975) modified by 39 NY2d 920,386 NYS2d 406 (1976) and Guth v. Gingold (34 NY2d 440,358 NYS2d 367 (1974)).

In its June 1975 decision in Hellerstein, the Court of Appeals found that assessment of real property must be at its full value since the Real Property Tax Law did not, at that time, authorize fractional assessments. In Guth, the Court of Appeals determined that a property owner could use the equalization rate established by the State Board of Equalization and Assessment (now the State Board of Real Property Tax Services) as a sole means of proving inequality with respect to the assessment of a property.

In December 1981, the State Legislature repealed Section 306 of the Real Property Tax Law thereby removing the full value assessment requirement. Section 305 of the Real Property Tax Law authorizes the continuation of existing methods of assessment in each assessing unit. However, it specifically requires assessment at a uniform percentage of value (fractional assessment) within each assessing unit.

Special provisions applicable to New York City and Nassau County prescribe a classification system. In all other areas of the state, assessing units are authorized to preserve homestead class tax shares on taxing jurisdictions completely within the assessing unit - predominantly cities, towns or villages. This means they may reduce the tax burden on residential real property (dwellings for three or fewer families) and farmhouses relative to other types of property.

Assessment Improvement

Efforts at the local level to improve assessment administration take various forms such as assessor training, improved record-keeping, tax maps and computerization of assessment data. Many municipalities have conducted comprehensive reappraisals. State financial assistance on a per parcel basis is available to assessing units which conduct reappraisals. Statewide, however, wide disparities still exist among classes of property and within classes of property regarding a uniform and equitable relationship of property assessments to full value.

The State Board of Real Property Tax Services maintains a comprehensive system of software programs called the Real Property System (RPS) which is available, for free, to all assessing units. It is capable of maintaining assessment, physical property inventory, and valuation information for any type of real property. In addition, RPS has the ability to conduct a mass appraisal of an entire municipality and is capable of producing assessment rolls, tax rolls and tax bills. In addition, it includes a Geographic Information System (GIS) and ten layers of State-provided geographic coverage data (roads, municipal boundaries, wetlands, school district boundaries, etc.). A document image management system (DIM) allows any document, such as a photograph, a sketch, a deed or a map, to be electronically attached to a parcel of property. A custom report writer (CRW) provides the assessor with the ability to create reports regarding assessment, sale or inventory data. Other municipal systems or off-the-shelf software can be easily integrated with the RPS system. The Office of Real Property Tax Services (ORPTS) periodically develops updates to the RPS system.

Legislation passed in 1970 provided for the appointment of property tax directors at the county level to coordinate and assist local assessment functions; gave towns the option of converting from elected to appointed assessors; created boards of assessment review in each municipality; required all counties with the exception of Westchester and those in New York City to provide assessors with modern, accurate tax maps; established minimum qualifications for appointed assessors; and required many town and most city assessors to achieve certification from the State Board of Real Property Tax Services. The legislation also provided for advisory appraisals of taxable utility property by the State Board upon local request.

In 1977, the State Legislature enacted Article 15-B of the Real Property Tax Law. This article provides for state financial assistance to local governments which implement improved systems for real property tax administration. This program has been revised several times, including to encourage cyclical reassessments. The “Aid for Cyclical Reassessments” replaces the previous Aid programs. Assessing units that commit to conducting reappraisals of all property at least once every four years may receive up to $5 per parcel in the year of a full reappraisal with additional payments of up to $2 per parcel in interim years.

Effective in 1982, the legislature amended the Real Property Tax Law to make training mandatory for all assessors, whether elected or appointed, as well as for directors of county real property tax services. In addition, the State Board of Real Property Tax Services was given authority to review the qualifications of appointed assessors and county directors to determine if they meet the minimum qualification standards.

Local Non-Property Taxes

The power of taxation is an inherent attribute of state sovereignty, not possessed by its political subdivisions. Article XVI of the State Constitution declares:

“The power of taxation shall never be surrendered, suspended or contracted away, except as to securities issued for public purposes pursuant to law. Any laws which delegate the taxing power shall specify the types of taxes which may be imposed thereunder and provide for their review.”

Using this authority, the State Legislature has authorized the imposition of what have come to be known as local non-property taxes.

New York City Taxes

New York State began to utilize local non-property taxes because of the difficulties the City of New York experienced during the Great Depression in the 1930s. Delegation of local taxing power on a significant scale started with New York City. At the emergency session of 1933, the Legislature granted the City power to impose, for a six-month period, any type of tax which the State itself could impose. This initial grant of power was to expire six months after its effective date. Amid much controversy the initial grant was renewed and modified, but the broad outlines of state policy with regard to special local taxes did not emerge until 1939. After the 1938 Constitutional Convention, the State altered its home-rule stance toward New York City’s authority to tax. From this point forward the Legislature narrowed the range of special taxes available to New York City and began to limit maximum rates. By the postwar period, New York City possessed the power to impose a variety of special taxes, which, under economic conditions in some degree peculiar to the City, became an important source of revenue. These included taxes on hotel room occupancy, sales, utilities, gross income, business gross receipts and pari-mutuel wagering.

Local Utility Taxes

In 1937, the Legislature extended optional, local taxing power to the upstate cities when it authorized upstate cities to levy a local one percent tax on the gross income of public utilities. Initially, the proceeds could only go to pay for relief. In 1942, the Legislature removed the welfare restriction upon the use of utility tax proceeds and receipts could thereafter be applied to general municipal purposes. The utilities gross income tax proved attractive, and cities throughout the state adopted it.

Housing Subsidy Taxes

Following a 1938 housing amendment to the State Constitution, the Legislature authorized a series of special non-property taxes, which could be levied by cities and by villages with a population of 5,000 or more. The proceeds were to cover periodic housing subsidies or to meet service charges for local housing debt incurred outside the normal constitutional debt limit. Although the only two municipalities that took advantage of this legislation — the Cities of Buffalo and New York — have since repealed their local statutes, the enabling legislation marked another phase in the development of local taxing power.

Extension of Permissive Taxing Power

The further extension of permissive local taxing power occurred in New York State at the same time it was expanding elsewhere. After the Second World War, municipal costs soared. Many people felt that the full weight of these additional expenditures should not fall upon the property tax base. Local government officials and finance officers throughout the country expressed interest in gaining authority to adopt non-property taxes at local option. One conspicuous result was the well-known “home rule” tax law adopted by the Commonwealth of Pennsylvania in 1947. In 1947 and 1948 the New York State Legislature also enacted permissive local tax laws, applicable to cities and counties. A principal factor stimulating their enactment had been the adoption of a permanent teachers’ salary law. These permissive tax laws reflected state policy that optional local taxes had to be defined and that they would neither supplant nor supplement the principal existing sources of state revenue.

The most productive local tax contained in the law was the sales tax. Other items included a business gross receipts tax (later denied upstate), a tax on consumers’ utility bills, and an array of miscellaneous taxes or excises. The permissive tax law has been frequently amended and additional local taxes or options have been made available under other provisions of law.

Adoption of Permissive Taxes

Among the important developments with respect to optional local taxing powers are the following:

  • All 57 counties (outside of New York City) have adopted a sales and use tax. As of September 2005, 49 of these counties plus New York City have local sales tax rates that exceed the 3 percent statutory limit, including eight counties with local rates exceeding 4 percent.

  • Extension of limited optional local taxing power to city school districts, with the result that by 2005, 21 city school districts had adopted a consumers utility tax.

  • 60 cities, other than New York City, and 348 villages, have accepted at least a one percent tax on the gross income of utility companies.

  • Ten of the 61 eligible cities, other than New York City, have adopted the miscellaneous taxes and excises allowed by law, including taxes on coin-operated amusement devices, hotel room occupancy, real estate transfers, restaurant meals, amusement admissions and the consumer utility tax.

Special local taxes now occupy a prominent place in the financing of local government in the State of New York. 2012 Local Government Revenue Sources Percent Distribution shows the proportion of total revenue provided by local non-property taxes in 2012. Non-property taxes were approximately one-quarter of total revenues for counties and cities other than New York City. Special local taxes were a less significant income-producer proportionately for towns, villages, and school districts in New York State.

The local non-property tax revenues of cities, other than New York City, towns, and school districts outside New York City reflect, in varying degrees, the distribution of county sales tax receipts. More jurisdictions have adopted higher sales tax rates in recent years. The 2007 to 2012 comparison in Local Non-property Tax Revenue, 2007 and 2012 (Amounts in Millions of Dollars) SOURCE: Office of the State Comptroller shows that jurisdictions are gaining larger sales tax yields. The methods of distribution specified in the Tax Law are varied and complex, and further variations are permissible with the approval of the State Comptroller. Methods employed to distribute county sales tax revenues are the responsibility of county governing bodies.

Special Charges, Fees and Earnings

Local governments in the State of New York derive substantial revenues from special charges, fees and the earnings of municipal enterprises. In cities, for example, fees and charges may be made for licenses, permits, rentals, departmental fees and charges, sales, recoveries, fines, forfeits and other items. Earnings of municipal enterprises and special activities include user payments and miscellaneous revenues of such operations as water service, bus transportation, airports, hospitals, stadiums and public auditoriums, off-street parking, and municipally-owned public utilities. In the aggregate, local government revenues from special charges, fees and municipal enterprises rose from $5.1 billion in 2000 to $6.7 billion in 2005, an increase of 32 percent.

Table 7. Local Non-property Tax Revenue, 2007 and 2012 (Amounts in Millions of Dollars) SOURCE: Office of the State Comptroller
Government Unit 2007 2012 Percent Increase





Counties (excluding New York City counties)




Cities (excluding New York City)












School Districts (excluding New York City)




Fire Districts




Municipal Practices

Local governments have some latitude in establishing user charges and fixing rates, although fees collected by local officials are often controlled by state law, particularly in the administration of justice and offices of record. In general, the amount of a regulatory license or permit fee must be reasonably related to the cost to the municipality of the particular regulatory program, and the fees established for the use of a municipal service or facility must be reasonably related to the cost of providing the service or operating the facility. Municipalities have found it profitable to reexamine their charges periodically and bring them in line with current costs. Policy issues, local choice, and practical considerations are involved in the imposition of user fees. For example, many local governments will cover, or more than cover, the costs of a water supply and distribution system through water rates. In the case of certain enterprises such as airports, hospitals, public auditoriums, bus transportation and rapid transit, however, considerations other than the recovery of full annual costs may prevail.

At this time, there is no general authority for the imposition of service charges for established responsibilities of local governments such as police, fire, public works and libraries. There are exceptions as to particular aspects of these services, but, in general, these services are viewed as providing benefits to the public at large without relation to particular benefits provided to individuals.

State Aid

Intergovernmental payments by the state to local governments are a major aspect of local finances. State aid consists of grants-in-aid, which are payments to local governments for specified purposes, and general assistance. State assistance during 2012 accounted for slightly under one-quarter of all revenues received by municipalities and school districts. Overall state aid, in actual dollars, increased 4.2 percent from 2007 to 2012.

Background of State Aid

Early Origins

Origins of state aid in New York go back to the early days of statehood. References to state aid for common schools appear in 1795, and education aid began to assume real importance with the free public school movement of the 1840’s, although the principle of free schools was not fully realized until after the Civil War. A leading purpose of school aid in this era was to compensate for revenue losses which resulted from eliminating local tuition. At a later point, the state introduced incentive grants to stimulate local participation in particular aspects of public education. These purposes - providing assistance in meeting the costs of state-originated programs and providing an incentive for localities to participate in such programs - have continued to this day.

Growth and Expansion

State aid has grown from its small beginnings to its present dimensions because of various economic and social developments. These include free schools; the coming of the automobile; statewide initiatives in health and mental health, sanitation and public welfare; and, more recently, concern with the environment and natural resources, educational opportunity beyond twelfth grade, public safety and mass transportation.

Amount of State Aid

2012 Local Government Revenue Sources Percent Distribution illustrates the position which state aid occupies in the general revenue structure of local governments in the state in 2012. Overall, state aid supplied 22.2 percent of all local government revenues in 2012. State aid is a very important revenue source for school districts outside New York City, representing 33.9 percent of their revenues in 2012.

State Aid Payments to Local Governments by Type of Government, 2007 and 2012 (Amounts in Millions of Dollars).[5] illustrates the percentage increase in state aid between 2007 and 2012 for the different classes of government in the State.

Table 8. State Aid Payments to Local Governments by Type of Government, 2007 and 2012 (Amounts in Millions of Dollars).[5]
Government Unit 2007 2012 Percent Increase





Counties (excluding New York City counties)




Cities (excluding New York City)












School Districts (excluding New York City)




Fire Districts




State Aid to Local Governments

General Purpose Assistance

General purpose assistance can be defined as financial aid for the support of local government functions without limitation as to the use of such aid and without the substantive program and procedural conditions that are routinely attached to categorical grants-in-aid. In the late 1990’s, interest centered on the General Purpose Local Government Assistance program, which distributed over $770 million to cities, towns and villages during state fiscal year 1999-2000. The program, which had been titled “Revenue Sharing” in the early 1970’s, grew to include four distinct components: General Purpose Local Government Aid (GPLGA); Emergency Financial Aid to Certain Cities; Emergency Financial Aid to Eligible Municipalities, and Supplemental Municipal Aid. The 2005-06 budget established the Aid and Incentives for Municipalities (AIM) Program, which collapsed these four programs into one “base level grant” for all cities, towns and villages statewide.

New York State has provided financial aid to its municipalities since 1789. Early programs included categorical grants for activities encouraged by the state and the shared tax system whereby localities received portions of taxes they had participated in collecting. The per capita aid program instituted in 1946 allocated specific dollar amounts per capita to cities, towns and villages. In 1965, a statutory formula was established to calculate aid based on fiscal need, effort and capacity indicators.

The revenue sharing program created in 1970 was designed to eliminate the complexity and uncertainty of previous state aid programs and to provide municipalities with flexible, equitable and predictable aid. New York State Finance Law Article 4-A, section 54 outlines the framework of the Revenue Sharing Program, which is based on the previous Per Capita Aid Program. This program was designed to allocate specific amounts to counties, cities, towns and villages (with special emphasis on cities), based on population and full value data. The original legislation envisioned a distribution of aid equaling 21 percent of Personal Income Tax (PIT) revenues and that such aid would grow annually keeping pace with growth in the State’s major revenue source.

The revenue sharing program underwent numerous changes in the 1970s. Before the program was even implemented, allocations were cut in 1971 to 18 percent of PIT receipts. In 1977-78, the State capped distributions at the 1976-77 level. In 1978-79, revenue sharing aid was further restricted when statute was amended to change the basis of funding from 18 percent of PIT receipts to 8 percent of total State tax collections. In 1979-80, the State froze revenue sharing at the 1978-79 level, and until 1984-85, funding was capped at $800 million.

The program peaked in fiscal year 1988-89 at nearly $1.1 billion. During the early 1990’s, New York reduced numerous programs, including unrestricted local government aid by roughly 50 percent over four years. By 1992-93, revenue sharing had been decreased by more than $500 million to a low of $532 million.

AIM Program

The Aid and Incentives for Municipalities (AIM) program enacted in 2005 – 2006, increased unrestricted aid to cities, towns and villages by $57 million. The 2007-2008 enacted Budget restructured the AIM program to target additional State aid primarily to fiscally distressed municipalities. An AIM increase of $450 million was authorized in 2007-2008, and in each of the three following years, for a four-year total of $200 million. These increases were tied to enhanced accountability requirements that encouraged local fiscal improvement. The 2007-2008 AIM program included $15 million in grants for a range of local shared services activities. In addition, a new $10 million consolidation incentive aid is created under SMSI provides a recurring 25 percent AIM increase to municipalities that merged or consolidated in 2007-2008.

Federal Aid

The role of federal aid in local finances from 2007 through 2012 is indicated in Federal Aid Payments to Local Governments, 2007 and 2012 by Type of Unit (Amounts in Millions of Dollars).[6]. During this period federal assistance to local governments in the state increased from $4.0 billion in 2007 to over $5.1 billion in 2012.

Under pressure from state and local governments, which were overwhelmed by the multiplicity of federal programs and their individual requirements and administration, Congress enacted legislation during the 1970s that consolidated various categorical aid programs into block grants in the broad functional areas of education, manpower, law enforcement, and housing and community development. These programs have been broadly characterized as “special revenue sharing” programs. Among the objectives of this legislation were the simplification of grant administration, the provision of increased discretion in the use of funds allocated to state and local government grant recipients, and the elimination of conventional matching requirements. This system of categorical block grants to local governments is still presently utilized.

A major development in federal aid was the passage of federal general revenue sharing in 1972. For the first time, the national government distributed aid to local and state governments with very few restrictions on how the money could be spent and without requiring governments to apply for the grants. A local government’s allocation was based on a complex formula which, at the local level, took into account the adjusted taxes, per capita income, population and intergovernmental transfers of each governmental unit.

State and local governments received their first revenue sharing checks in December 1972 for the entitlement period January 1 through June 30, 1972. The federal general revenue sharing program was discontinued in the mid 1980’s.

Amount of Federal Aid

2012 Local Government Revenue Sources Percent Distribution illustrates the position which federal aid occupies in the general revenue structure of the local governments in the state in 2012. Overall, federal aid supplied 7.0 percent of all local government revenues in 2012.

Federal Aid Payments to Local Governments, 2007 and 2012 by Type of Unit (Amounts in Millions of Dollars).[6] reflects the growth of federal aid from 2007 through 2012 for each respective class of government, both in actual dollars and by percent increase.

Table 9. Federal Aid Payments to Local Governments, 2007 and 2012 by Type of Unit (Amounts in Millions of Dollars).[6]
Government Unit 2007 2012 Percent Increase





Counties (excluding New York City counties)




Cities (excluding New York City)












School Districts (excluding New York City)




Fire Districts




1. Office of the State Comptroller
2. Office of the State Comptroller
3. Office of the State Comptroller, Detail may not add due to rounding.
4. Office of the State Comptroller
5. Office of the State Comptroller
6. Office of the State Comptroller
1. Includes sales tax credits to towns used to reduce real property tax levy, utility gross receipts tax, consumer utility tax (if not included in sales tax), OTB surtax, hotel occupancy tax, harness and flat track admission tax, privilege tax on coin-operated devices, revenues from franchises, interest and penalties on non-property taxes, etc.

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