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State replacement tax raid creates more uncertainty locally

Unexpected revenue hit makes budgeting even tougher

School districts were not the only taxing bodies shocked to discover they would be getting less revenue than expected from the state’s personal property replacement tax distribution.

The replacement taxes were instituted in 1979, to make up for money lost when local governments lost the power to impose property taxes on businesses.

While the school districts’ projected replacement tax reductions received more attention because the timing coincided with the chaos of the school funding bill stalemate in Springfield, cities, counties, villages, townships, libraries, park districts, and fire protection districts also received the bad news.

The Illinois Department of Revenue had given taxing bodies a heads-up earlier this year on an anticipated reduction in replacement tax revenue for fiscal year 2018. The agency said mistakes that occurred when the state launched a new tax collection system led to the overpayment of about $168 million in replacement tax distributions to local governments.

What taxing bodies didn’t expect was the state’s diversion of $297 million from the replacement tax fund to pay for an array of expenditures that had previously come from the general fund. The fund sweep was buried in Senate Bill 6, the state’s spending plan, and with that action, the local distributions are now reduced by 23.8 percent.

The action took local government officials by surprise, as most found out about it a couple of weeks ago when the budget was passed and the revenue department put new projections on its website.

The city of Sterling received nearly $597,000 from last year’s distribution, but now is projected to see that revenue reduced by about $142,000 in the next fiscal year.

“That’s a substantial loss when we’ve had budgets in place since spring and then we’re just now finding out about this,” City Manager Scott Shumard said.

Shumard said making matters more complicated is the fact that the money gets spread around to several places. The city had some of the money going everywhere from the police and fire pension funds and IMRF to the Coliseum and library funds.

“The vast majority, about $218,000, is hitting the general fund, and there’s no way we’re going to make up for it,” Shumard said. “I’ve issued the warning that it’s going to make for an extremely challenging year.”

Given the uncertainty surrounding the distributions, taxing bodies say they’ll have to reassess the role that revenue stream plays in the local budgeting process.

“This won’t affect any infrastructure projects we had planned, but these distributions have been such a roller coaster, we’ll have to try to determine what they will look like in the future,” Shumard said.

Rock Falls received only about $60,000 from the replacement tax in 2017, and is now projected to lose about $14,300 of that in 2018. That doesn’t seem like a lot of money within the context of a $26.6 million overall budget, but as pensions and crumbling infrastructure eat away at local funds, there isn’t much wiggle room in balancing the budget.

“Our estimated budget ended up in the black by only $33, so every little bit makes a significant difference,” Mayor Bill Wescott said.

The city’s general fund revenues topped $7 million for the first time, but two of the city’s utilities were forced to dip into reserves to balance their budgets. The electric department is looking at transferring nearly $625,000 from reserves, and sewer came up about $108,000 short.

In Dixon, the city received more than $760,000 from the replacement tax in 2017, but it looks as if that number will shrink by more than $181,000 in the next fiscal year.

Paula Meyer, the city’s finance director, said no budgetary changes will be made until the money comes in.

“You can never tell exactly how much is going to come in from the replacement tax anyway because the economy has something to do with it too,” Meyer said.

The city has a bigger reserves cushion than many taxing bodies, which makes the unexpected budget changes a little easier to deal with. Dixon has about a $3.2 million capital funds surplus, $4.8 million that can be spent in its Rita Crundwell recovery fund, and another $5 million in reserves for general purposes.

The city’s general fund revenue is expected to approach $10 million in fiscal year 2018, and if projections are on target, the city will be about $530,000 in the black. But like most cities, Dixon’s pension costs continue to skyrocket. The city expects police pension contributions to jump by $242,000, and fire contributions by $185,000, in 2018.

“The city is doing OK financially, so we’re going to wait and see what happens with distributions before we worry about it,” Meyer said. “If we have to make adjustments later, we’ll do it.”

County boards have an advantage in dealing with the situation because their new budget year doesn’t start until Dec. 1, and state payments don’t start rolling in until June.

“We’re fortunate in that we’re at the end of the budget year, and we’ll be able to plan for it a little bit,” Whiteside County Board Chairman Jim Duffy said. “We’re working on the budget right now, and we’ll see how it impacts revenue and go from there.”

Projections indicate Whiteside County’s share of the replacement tax will be reduced by about $154,636 in the next fiscal year. The county received nearly $649,000 last year.

Duffy said the county tries to keep at least $1 million in reserves, but department heads are trying to be frugal and the board would rather not use it.

The Sterling Park District stands to lose about $66,625 in replacement tax revenue. The park district’s budget was about $100,000 in the black last year, but the money will be missed.

Park District Executive Director Larry Schuldt said this is one of those unexpected situations that illustrates why it’s a good idea to create some room to maneuver when budgeting.

“We’re always ultraconservative on the revenue side, and equally aggressive on the expense side,” Schuldt said. “We’re about halfway through our budget year, and a good portion of our expenses come on the front part because of the weather.”

Schuldt said about $56,000 of the reduction will be factored into next year, and they’ll just hope they can make it up along the way.

The biggest chunk of the $297 million diverted from the corporate replacement tax fund will go to higher education. A total of $103.5 million is earmarked for the community college base operating grants, their largest allocation from the state.

State Rep. Tony McCombie, R-Savanna, said both parties agreed to that situation in the stopgap budget, but not in the full-year budget.

“We have to stop the practice of sweeping money from our pensions, other funds and away from the people of Illinois,” McCombie said. “This superficial budget is more proof of the need for fundamental spending reforms.”

The raiding of the replacement tax fund started in 2011, as a solution for solving the regional education offices funding crisis. The General Assembly passed a bill that shifted $13 million from the replacement tax fund to continue ROE operations.

The practice continued last year, when $100 million was diverted to the general fund, and the remaining $197 million was taken from the replacement tax fund in this year’s spending bill.

Given the state’s recent fund-raiding history, local officials are concerned that more local funds will wind up in the state’s hands.

“We’re not panicking at this point, but we expect the state could take more of the replacement tax money in the future,” Duffy said. “There is so much uncertainty at the state level, and this situation just adds to it.”

The cities, meanwhile, are getting ready to talk about tax levies, and the replacement tax reduction could make it even harder to put a lid on escalating property taxes. If cities don’t meet state-mandated pension obligations, they risk losing even more state funding.


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