Tax loophole allows property taxes to bypass statutory limits.

The Illinois tax cap law allows taxing districts to collect the same amount of property taxes as the previous year, plus inflation up to 5%, even as property values decline, by allowing the districts to raise their tax rates without referendum.

This year, the Rockford School District reached state statutory limits for their Education Fund at $4.00, the Special Education Fund at $0.80, the Operation and Maintenance Fund at $0.75 and an additional $0.15 for Working Cash and Fire & Safety Funds.

These statutory limits were reached despite the district eliminating the 58 cent tax levy and the Consumer Price Index as promised two years ago, saving district taxpayers over $33M dollars thus far.

However, the aggregate tax rate was allowed to increase despite the give back by the district, because property values in the district have decreased by 23% in the past five years and had RPS205 not abated the 58 cent levy and the CPI, the property tax rate for the district would have been approximately $8.17 instead of $7.23 this year.

A common misconception is that once the statutory limits have been reached, the tax levy should begin to decline as home values decrease, because the limited rates can no longer be raised, not even by referendum according the state statutes 105ILCS 5/17-2, 5/17-2.2 and 5/17-5.

Here is the loophole – Illinois school districts Transportation Funds have no statutory rate limit, unless constrained by the school board, and may be increased indefinitely to maintain the current levy plus inflation.

Taxes thus collected through an aggregate levy, may be spent on items other than school buses, fuel and drivers, including education funds and for operation and maintenance of schools or even retained as surplus.

The April 15, 2014 minutes of the district’s Budget & Finance Subcommittee reflect that a majority of the members recommended that the district raise the Transportation Fund rate to remain at the current property tax levy plus CPI in next year’s budget.

Despite a $4.7M projected deficit in the 2014/2015 budget, the district is in tremendous financial shape with a $3.2M surplus from this year’s budget and proposed changes to the state aid formula based on poverty could add an additional $18.7M for RPS205.

The district’s current surplus is more than $100M even after taking $40M to $50M from the surplus for the $250M school construction and maintenance plan.

The Durand School District has already begun using their Transportation Fund to bypass the statutory limits by increasing their tax rate 8% this year, primarily to cover the loss in tax levy due to a 5.8% decrease in assessed value, coupled with a 1.7% increase in CPI.

In 2012, the Durand school district was only 21.5 cents below the statutory limits of $5.70 and the Transportation Fund was 16.95 cents for a $157,760 tax levy. The following year the fund’s rate was raised to 25.84 cents increasing the levy to $216,522.

This year, Durand’s limited funds were only 2.5 cents below the statutory limit, yet the Transportation Fund rate grew to 52.54 cents, a $414,443 tax levy and more than 2.6 times the rate just two years ago – all taking place without voter approval.

Combining this year’s assessed value decrease of 5.87% for Rockford Township with the 1.5% CPI, the current tax rate of $14.00 for the Rockford area could increase to approximately $15.00 next year or over 5% of Fair Market Value without exemptions, if this loophole is used by taxing districts, the schools comprising 52% of the total tax levy.

The May 27, 2014 RealtorMag newsletter reported the highest property taxes in the nation by county as a percent of home value. Allegany County in N.Y. was the highest at 3.76%. Rockford is currently at 3.827% with Owner Occupied exemption – not countywide, but certainly among the highest property taxes in the U.S.

A property tax relief plan would require the state legislature to remove this loophole and mandate that the Transportation Fund be used only for transportation purposes, not a slush fund for other school district expenditures; also, limit rate increases when home values are in decline; and limit foreclosures and short sales effect on the assessment process to reduce the downward spiral in home values.