Governor, pass budget reforms before shifting funds or transferring local fund reserves

Chuck Sweeny writes in the Rockford Register Star, “With Illinois on the verge of running out of money to pay day care centers, court reporters and prison guards, Gov. Bruce Rauner said Thursday a solution can be found easily, by shifting money from the state’s hundreds of special funds into the General Fund.” Governor, isn’t skimming off special fund monies to support day care, court reporters, prison guards and other “essential” General Fund services the same excuse your predecessors, Rod Blagojevich and Pat Quinn used? Wasn’t this practice roundly criticized by Republicans? Also, it was this kind of inter-fund borrowing mentality that resulted in a severely underfunded pension program that has placed the state in such a precarious financial situation in the first place. If these special funds are so non-essential, as Illinois governors seem to believe, were these special funds set aside for such General Fund emergencies, and if so, why did the state begin the special funds in the first place? Besides, this technique of robbing Peter to pay Paul is at best a temporary solution. Without substantial cuts in the state’s General Fund or increasing state revenues, what will the strategy be for next year’s expenditures in these essential state areas when the special funds run out of money? Another strategy being considered by the governor is to increase the state’s revenue side of the equation by sharing only half the income tax previously shared with the cities and counties. Is this a new unfunded state mandate on the cities and counties; unfunded mandates, which the governor promised were to be reduced or eliminated? According to the article, our new governor’s view is that the local governments “have among them $18 billion in reserve … $18 billion is a lot of money” – a new source of state revenue apparently. The reason the locals have those reserves, governor, which you now view as a revenue source to be transferred to the state, is that many local government bodies have remained frugal, cutting expenditures to stay within their budgets, while your predecessors and the General Assembly were unwilling to do the same to balance their budget. The state kicked the can down the road by borrowing billions of dollars each year to cover their deficits. Local governments were forced to take on more and more of the state’s liabilities, yet still managed to balance their budgets and even managed to save some money for a rainy day. Also, you met with the Rockford mayor and discussed your reforms, which are intended to reduce local costs and may increase the chances of balancing local budgets with the state reforms you are considering. First, pass the reforms governor. Demonstrate that the General Assembly is willing to vote for your reforms, intended to make our local elected jobs easier and less costly, before transferring our local budget reserves to the state in the form of reduced state income tax...

read more

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...

read more

Municipal alliances not always advantageous for taxpayers

According to a recent article  in the Rockford Register Star, Rockford is joining with fellow industrial cities, Peoria, Aurora and Danville to form an alliance to lobby state legislators for solutions to common urban problems in the areas of education, poverty, and crime. Peoria Mayor Jim Ardis believes there is power in numbers and more could be accomplished with a group of municipalities lobbying Springfield legislators. The coalition could eventually include 10 to 12 cities representing over a million people. However, these cities are also members of the Illinois Municipal League, which successively lobbied against a bill in Springfield last year that would have prevented property taxes from increasing, while property values are declining. The bill would have benefited taxpayers but would have reduced municipal revenue. Municipal officials usually represent their self-interests, not those of their constituent taxpayers, when it comes to increasing their revenue and other legislative issues, such as home rule or appointed school boards, one of the first issues mentioned by the Peoria mayor. Excerpt: “(Mayor) Ardis said Peoria, which has five school districts throughout the city, has had problems attracting quality school board members (usually community members who don’t want to face public scrutiny in an election).”   “He’s hoping to pursue legislation that would allow for mayoral appointments of school board members with City Council approval. A similar idea was pitched in Rockford in 2008, but never gained traction.” Mayor Larry Morrissey stated at the time that truancy, high drop-out rates and low graduation rates stunt economic growth and drive crime rates. If the mayor was going to be held accountable by city voters, then he wanted some control of the process through school board appointments. The “quality” of school board members might then become the degree to which they vote for the municipal leaders’ positions to whom they would now owe allegiance, versus the positions held by the taxpayers, who would be effectively excluded from the elective process! As Chuck Sweeny once opined in his column, public officials could do what the teacher’s associations have done for years, and that’s recruit the candidates they want on the board with prerequisite business or educational experience and back their campaigns with cash and volunteers. The City of Rockford collects at least 23% of the local property taxes and the Rockford School District in excess of 52% – a combination that would control three out of every four of our property tax dollars – a lot of power for a small group of municipal officials responsible for school board appointments. Do you think a school board, appointed by the mayor and other local officials would have ever appealed the People Who Care lawsuit to the United States Appellate Court, Seventh Circuit to obtain Unitary Status, thus saving Rockford taxpayers $20M annually? Another goal of the municipal league has been to support increases in state revenue, hoping to share in the higher taxes. One Republican state representative even told me his constituents were the municipalities, not the taxpayers, not the people who elected him! The General Assembly has a constitutional amendment legislators are currently debating – HJRCA33 – the “Fair Tax Amendment,” a graduated income tax, which increases taxes for every Illinois wage earner making over $18,000 after deductions. The state just increased their take $6 – $7B by increasing the state income tax rate...

read more

Two state reps attempt to limit backdoor referendums that use Tax Caps

The tax caps people desired, and what the Illinois General Assembly originally intended, was supposed to limit what municipalities could collect to the amount they had collected the previous year, plus the rate of inflation or 5%, whichever was less. Taxpayers didn’t want the taxing bodies to get taxes based on unlimited property appreciation plus the rate of inflation, which was happening at the time. With the current depreciation of property, the taxes should go down unless the people approve an increase – that’s the way taxpayers wanted tax caps to work. A few legislators have tried to limit taxes in a decreasing market, but the municipalities screamed bloody murder! Using tax caps, no elected official or bureaucrat has to stand on the merits of their expenditures, when the law simply allows them to raise taxes on decreasing home values, without even voting on the increase. That’s what I posted in May 2013 and now Reboot Illinois, a statewide group reporting on the state of the state at least weekly, is writing about the same thing. That back in 1991, with the rapid increase in property taxes, the Tax Cap law capped property tax increases at a maximum of five percent a year, or the rate of inflation, which ever was less. Excerpt: No one anticipated the same law would work against home owners when values fell,” Franks (D-Marengo) said. But that’s what has happened recently once the housing bubble burst. Property values fell, but property taxes continued to rise for Illinois citizens. In fact, Illinois has some of the highest residential property taxes in the nation.   Franks says he believes that it should be fundamental that when property values decrease, property taxes should at least not increase.   Franks and State Rep. Ron Sandack (R-Downers Grove) are co-sponsoring House Bill 4273, legislation that would place an advisory referendum on the 2014 general election ballot asking voters to weigh in on Franks’ property tax reform measure.   Franks has introduced legislation aiming to “freeze the amount that local taxing bodies could raise annual levies if the value of property in the tax district decreased” in both the current and the previous legislative session, according to a press release from his office.   Essentially, his proposed legislation would make increases in property value and property taxes married to each other…the taxes could not increase without an increase in the property value. Franks has tried to pass this type of legislation in the past, but it failed both times he tried partly as a result of opposition from our local taxing bodies, who lobbied against his bills using taxpayer funded lobbyists, arguing the money was needed by the local entities or services would have to be cut – no voters need be consulted. Excerpt: They were lying to the people,” Franks said. “[The local governments] feel they’re entitled to the money. [The people] are not only scared, they’re mad.” By trying to get a referendum on the November ballot, Franks and Sandack are trying to circumvent the lobbyists and take the issue straight to the voters in Illinois.   Franks said he’s not concerned about voters living in downstate counties with lower property taxes not showing support for property tax reform. “I think everyone [in the state] can agree the taxes shouldn’t go up until property values...

read more

Illinois Public Pensions, Municipal Bankruptcy and Illinois taxes

The unfunded liabilities facing government pension plans have gained increased public scrutiny during the past year. Governing entities and taxpayers are beginning to recognize the potential consequences of public pension liabilities. Headlines have exposed municipal bankruptcies, such as Detroit and numerous cities in California. In some extreme cases, pension liabilities have been one of the key drivers for municipal bankruptcy filings and reduced pensions could wind up as the solution for the budget shortfall. Current data indicates that pension liabilities are expected to persist or even get worse. In late 2012, an actuarial firm found a $1.2 trillion gap for the largest 100 U.S. public pension plans. Morningstar has analyzed pension data managed by each of the 50 states. Overall, they found the fiscal health of state pension plans varies drastically, with some states having exceptionally strong plans, while others are facing severe funding shortfalls. The research found that the majority of state pension systems are having problems.  The funded ratio, which is calculated by dividing the pension plan’s assets by its liabilities, serves as a good measure of the plan’s ability to meet its obligations. The (unfunded liability per capita) represents the amount each person in the state would have to pay to fully fund the pension liability. Since many of these plans have multiple contributors, the state is not solely responsible for paying the full liability. However, as the other pension contributors are usually local government entities, the unfunded liability will still be funded by state taxpayers, either through payments to the state or the underlying entity that contributes to the pension fund – such as the Rockford School District and the Illinois Teacher’s Retirement System. The 2013 Morning Star report shows that state plans on average are 72.6% funded with an (unfunded liability per capita) of roughly $2,600 and has a wide variation between the individual states. Wisconsin remains the strongest system in the nation, with a 99.9% funded ratio with an unfunded liability of $18 per capita. A total of 12 states have funded ratios of at least 80%, which is considered to be strong by Morningstar. Illinois continues to have the worst funded system in the country with a 40.4% funded ratio and a $7,421 per capita unfunded liability.  A family of four, therefore, owes almost $30,000 for the (5) Illinois pension systems. The poor fiscal health of the Illinois pension system is due to a combination of reasons, including historical borrowing from the plans by the state, state law requiring annual funding of less than the annual required contribution (ARC), and below-expected investment returns. According to the Morning Star report, based on the Illinois’ current projections, the aggregate funded ratios for the state’s plans are expected to remain below 50% through 2020 unless further reforms are passed. Morningstar believes significant reforms will be necessary for the state pension system to be solvent over the long term. Research shows that pensions play an integral role in determining a state’s fiscal health and overall credit quality. As a result of our state’s pension systems, the credit rating has been downgraded, resulting in millions more being paid in interest on the money the state is forced to borrow to balance its budget in accordance with the state constitution. What do you think the odds are now that the General...

read more