SPECIAL SERVICE AREA FINANCING
Special service areas were authorized by Statute in
1973. In 1988, there were over 180 special service areas
in the State. Their popularity is likely to grow, since
municipalities have in recent years recognized, and are
making use of, a provision in the Statutes that allows the
local government to choose the base of taxation. That is,
the municipality can decide to base the special service
area tax on something other than assessed valuation. A
continually growing number of municipalities are making use of the authority to create special service areas.
These areas are formed to finance the provision of
additional or enhanced service, improvement, or a facility in a specific area in the community.
Until 1984, special service areas were legally restricted by Statute in the base of the tax to the assessed
value of property. This limitation on the type of tax
base would be a significant disadvantage to using this
financing technique when property owners would not
benefit equally from the new or improved service or
infrastructure. The benefits from public improvement
projects to property owners are typically not of equal
value for reasons such as the size, use, and location of
the lots. Since property values do not necessarily reflect
the size, use, and location of lots, a tax based on assessed
property value will in many instances not reflect the
benefit received from improvements to public streets
and right-of-ways. For example, corner lots would
benefit more from such improvements than side lots,
but would not necessarily be expected to have higher
assessed value. A better example of an inequitable sharing of project costs is when the area for improvement
includes vacant land. The property owner of a vacant
lot would pay a much smaller portion of the total cost
then other property owners although he would benefit
just as much. Before 1984 when such inequity was an issue of concern, special assessments had to be the
preferred financing technique.
The disadvantage of special service area financing
was removed when the applicable section of the Act
was amended. The amendment states in part: "In lieu of
or in addition to such property tax, a special tax may be
levied and extended within the special service area on
such other basis as provides a rational relationship between the amount of such tax levied against each lot,
block, tract and parcel of land in the special service area
and the special service benefit rendered . . ." (Illinois
Revised Statutes, chapter 120, par. 1310). The county
clerk is to include in the tax bills the special tax so long as
the ordinance creating the special service area the municipality files with the county clerk contains a special
tax roll. The special tax roll is to: (1) explain the method
of spreading the special tax; (2) list the lots, blocks,
tracts and parcels of land in the special service area, and
(3) the amount assessed against each.
Municipalities are making use of this provision in the
special service area section of the Statutes to finance
infrastructure improvements based on the number of
feet of property fronting the planned improvement.
The City of Geneva has formed special service areas
twice in this manner for street improvements in the last
four years. The Village of Hinsdale formed an area for
the same purpose and on the same basis of taxation last
year. The Village of Rockdale created a special service
area last year with the tax based on front footage for the
installation of sewer lines.
February 1991 / Illinois Municipal Review / Page 13
Municipalities may determine that there is another
means of imposing the tax that meets the test of rational
relationship between the tax levied and the benefit
received. For example, the Village of Bannockburn
created a special service area for the installation of
water mains wherein each resident is paying an equal
share of the cost for the project. The municipality can
help minimize problems the clerk will have in modifying the tax administration system by giving the clerk
advance notice of the intent to impose a different form
of property tax.
Since the base of taxation no longer distinguishes
special service area financing from special assessment
financing, special service area financing should be the
preferred form of financing in most all instances where
only a portion of the community will benefit from a
new or improved service or improvement project. The
only situation for which the special assessment method
would be necessary to use is if the proposed project met
with objections from a majority of those citizens to be
served, but the municipal officials wanted the project
to proceed. Special assessments can be made even if
100 percent of the property owners involved are opposed. However, the municipality can expect the special assessment court proceedings to be quite lengthy
and expensive.
Advantages of Special Service Areas
Over Special Assessments
1. The legal procedures are quicker and easier. As a
result the project can be completed in less time. Special service areas require an ordinance proposing the project; a newspaper notice, notices mailed
to property owners and a public hearing. Whereas,
special assessments require court hearings to determine if the assessment on each property will not
exceed the benefit to that property.
2. Special service area bonds sell at a lower interest
rate than special assessment bonds.
3. Administration costs are less. The legal procedures
are quicker and easier and the legal fees are less.
Since the special service area tax appears on the real
estate tax bill, there are no collection costs.
4. Construction costs are less because the costs of special assessments are paid for with vouchers that are
sold at a discount. The discount is added to the bid
of the contractor.
5. Special assessments need an interest reserve to
cover the lag between collection and payment of
bonds.
6. Taxes paid by property owners are fully deductible
on their federal income tax returns.
Both forms of financing services and improvements
have advantages over general obligation bonds. There
is no limitation on the amount of debt incurred and the
amount assessed or taxed. Also, neither financing
method is subject to a referendum.
Special service areas have proven to be quite useful
in municipalities efforts to make improvements in services and facilities that enhance the community's environment for businesses and residents alike.
For more information on special service areas, contact DCCA's Office of Local Government Management
Services through the toll-free number, 1-800-562-4688,
or in Chicago at 312/814-6696. •
Page 14 / Illinois Municipal Review / February 1991