Alternative Ways to Finance Capital Improvements By JAY HEDGES, Director Illinois Department of Commerce and Community Affairs

The Growing Revenue Gap
The revenue problems facing local governments have been widely publicized. Due to a decreasing or stagnant revenue flow, some municipalities have had to dip into cash reserves to help make ends meet. Borrowing in anticipation of future revenue to help meet potential deficits is one alternative. But debt service costs may present additional problems and reduce money available to pay for municipal services.

Faced with problems such as these, a municipality will often take drastic steps to maintain fiscal solvency without raising real estate taxes. Steps generally taken include the postponement of capital outlays and repairs, reductions in the level of services, and a cut-back in personnel.

In some cases, a locality may be able to raise needed revenues to support government costs through the use of, or increase in, user fees. Some cities have imposed a fee on automobiles for the use of streets. Other cities may consider raising fees imposed on those who use public golf courses or other public recreational facilities. While such revenues are helpful, they are often inadequate to fill the gap left by the demise of such programs as federal revenue sharing and the decline in entitlement funds under HUD's Community Development Block Grant Program.

There are steps, however, that a municipality can take to raise revenue for capital improvements that do not require an excessive increase in property taxes or drastic cuts in basic government services. Illinois law recognizes that certain kinds of capital improvement projects provide a benefit to the general public or a direct benefit to certain property owners, and authorizes two different procedures that can be used to finance such projects. One is the method authorized under Local Improvements (Ill. Rev. Stat., Ch. 24, Art. 9) and the other is Special Service Areas (Ch. 120/1301 et seq.)

Local Improvement Projects
The State Local Improvements legislation provides for the financing of needed public improvement projects through a special assessment against those property owners directly benefitted. Such an assessment is generally calculated on the basis of the cost per front foot of the property benefitted by the project. The municipality may also assess itself to pay a portion of the cost of the project, if the general public would benefit from the project as well as specific property owners. The municipal share of the cost may be paid from surplus funds, motor fuel tax funds (for certain projects when approved by the Illinois Department of Transportation), public benefit tax funds (which are permitted to be levied at five cents per $100 of assessed valuation of all taxable property), or a combination of all three.

Most special assessment projects are structured on a ten-year payment schedule; however, a twenty-year payment schedule may be utilized for sewer projects.

The law provides strict guidelines for procedures to be followed when utilizing this financing technique, and your municipal attorney should be consulted so that all requirements of the act properly met, including a court hearing and approval.

The law covers the duties of the board of local improvements, assessor, engineer and project attorney. Legal guidelines address public notices and public

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hearings, preparation and adjustment of the assessment roll, and the requirement for a court hearing and approval of the project.

One of the key advantages of the special assessment technique is that the validity of a project is solely dependent upon the actions of the municipality and the approval of the court. The court must find that the assessed properties will benefit directly from the project in proportion to assessment costs. The use of public benefit tax funds may substantially strengthen the validity of the project in the eyes of the court, and hasten court approval.

Special Service Area Financing
The Special Service Area technique is another way to finance capital improvement projects. It differs from the special assessment method in that a special tax is levied upon the real estate being benefited within a designated improvement area.

The special service area must be a contiguous one within a municipality; however, certain portions entirely within the service area can be left out. A special service area may be initiated by the corporate authorities upon the adoption of an ordinance proposing its establishment. Prior to, or within 60 days after the adoption of such an ordinance, the municipality must set the time for a public hearing.

Persons owning taxable property within the proposed service area may file, with the municipal clerk, written objections and may be heard with respect to any matters covered in the notice. The statutes provide that at the hearing or at the first regular meeting thereafter, the municipality may delete an area from the proposed special service area as long as the entire area remains contiguous.

In order to generate money immediately, the municipality is permitted to issue general obligation bonds, which will be retired from the special tax levied. Such bonds do not affect the locality's legal debt limit.

The creation of a special service area may be stopped if a petition containing the signatures of at least 51 percent of the electors in the proposed service area and 51 percent of the owners of record of real property within the area is filed with the municipal clerk within

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60 days following the adjournment of the hearing. If this occurs, such a special service area may not be proposed again for at least two years.

Basic Differences Between the
Two Financing Techniques
There are two basic differences between the special assessment and special service area procedures. First, the amount to be collected from the property owner for a special assessment project is based upon an assessment, usually upon a cost per front foot of the property benefiting. The amount collected for a special service area project is based upon the levy of a tax against the equalized assessed valuation of the property served. It should be noted that the levied tax is deductible from income taxes, but a special assessment is not.

Second, the right to proceed with a special assessment project is dependent solely upon the action of the corporate authorities and court approval, whereas the right to undertake a special service area project is dependent upon the action of the corporate authorities and the acceptance by those property owners and residents affected.

These two techniques are sound alternatives that many communities have used to help finance needed capital improvements. However; before undertaking such a project, municipal officials should call upon their attorneys to fully explain the details of the procedures required so that the best method for a particular situation can be selected.

For further information, call the Office of Local Government Management Services, toll free, at 1-800-562-4688 (LOC-GOVT). •

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