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Many Local Governments
Have Operating Deficits
By Loleta A. Didrickson, Comptroller, State of Illinois
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The demands on local governments in Illinois are
similar and so are the problems. For fiscal year 1994,
31% of the counties in Illinois had operating deficits.
Those totals were bested by 39% of Illinois' municipalities, 43% of Illinois' townships and 46% of Illinois
road districts that operated with deficits.
With continuing demands for services and limited
revenue growth, local governments are struggling to
balance their budgets. Problems with a continued operating deficit were revealed through recent research
of the Annual Financial Reports that were submitted
to the Illinois Office of the Comptroller.
An operating deficit happens whenever current
expenditures exceed revenues. An operating deficit
doesn't necessarily mean that the government has a
budget deficit. That's because reserves or fund balances from previous years can be used to make up the
difference.
It's important to know how the deficit is financed,
whether the unit relied on reserves, borrowed money
from the bank, or simply did not pay its bills. Also, an
examination of the year-end balance alone may not reveal financial problems in a local government, though
trends in year to year ending balances will.
An operating deficit in any one year may not necessarily be reason for concern. Such a deficit may be in
response to an emergency situation that requires a
large, immediate expenditure. It could also result from
a planned policy of the government to reduce accumulated surplus funds. However, repeated or increasing operating deficits mean current revenues are not
sustaining current expenditures and could indicate future financial problems.
The consistently high percentage of governments
with operating deficits indicates that many are under
fiscal stress, and the situation affects large and small
communities. This fact calls for further analysis to see
the depths of the problem. Officials must identify
whether state government has a role to play to assist local units of government.
Illinois is not the only state to address this issue. In
New York, the State Comptroller has proposed a uniform process to assess local finances instead of reviewing them in a case-by-case basis. The process
would allow officials to identify financial problems at
an early stage before they become full-blown fiscal
crises.
The Illinois Comptroller's Office is working with
the State's Department of Commerce and Community
Affairs (DCCA) to create fiscal stress indicators as an
early warning system for local governments. This system runs on a computer spreadsheet and uses data
from the past five annual reports.
Any solutions to continuing operating deficits
would be remiss without comprehensive policy
changes to prevent the re-occurrence of this situation. •
June 1996 / Illinois Municipal Review / Page 15
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