When Gov. Bruce Rauner suggested withholding half of the municipal share of income tax revenues to shore up state finances, he assumed towns could absorb the loss by dipping into their reserves.
That's easier said than done in some places, according to a Daily Herald analysis of reserves in 90 suburbs.
Island Lake is one example. Already in the red by nearly $200,000, the town would lose $400,000 more next year if Rauner's income tax cuts are implemented by the legislature.
"In 2014, the village reduced the deficit but still did not eliminate it. The village still remains insolvent," said Ed McGinty, the village's treasurer. "Any reductions in revenues will result in more cuts to local people and services."
If the income tax share paid to towns is cut in half, reserves in eight of the 90 suburbs analyzed would fall below the recommended minimum in the first year, the analysis shows.
Supporters of Rauner's plan say the current system of distributing income taxes to municipalities based on population -- an estimated $99 per person next year -- shortchanges downstate towns and the cuts will force suburbs to be more fiscally responsible.
"If one part of our state is getting an advantage, what we need is a system that really solves the problem. This is really politically courageous," said Ty Fahner, president of the Civic Committee of The Commercial Club of Chicago, a nonpartisan organization of business executives. "It's kind of tough rocks because it's his responsibility to all in the state."
Others criticize the governor's proposal, saying the cuts would hurt taxpayers unless they're paired with relief from mandated state expenses.
"It will be very difficult for some local governments to absorb a magnitude of a 50 percent reduction," said Laurence Msall, president of the Civic Federation, a government finance research organization. "While we applaud Gov. Rauner for introducing a budget that identifies the magnitude, we urge the General Assembly and governor to work together to ensure the effort to balance the state budget doesn't wind up creating a greater fiscal crisis for local governments."
Even in towns with bigger reserves, officials argue the cuts would force municipalities to cut services, raise taxes or both. Last year, Huntley's reserves amounted to almost half of the $8.9 million in village expenses. The village stands to lose more than $1.2 million of income tax revenue next year if Rauner's cuts are approved, which would take about 29 percent of the village's reserves, according to village financial records.
"If it's one year certainly it would come from our reserves, but that's not sustainable," said Huntley Finance Director Jennifer Chernak.
On average, the 90 suburbs would use up a quarter of the reserves to cover the loss of income tax revenue in the first year, according to the analysis.
While the governor's office refused to say whether Rauner intends the cuts to the municipal share of income taxes to be permanent, most expect that to be the case. It's estimated the cuts would shift more than $550 million from municipalities to the state.
"It would be hard to imagine that this is just a one-time thing," Fahner said.
The Government Finance Officers Association recommends reserves be kept at a minimum of two months of spending, or roughly 17 percent of annual spending. The state does not mandate any levels.
The reserves of the 90 suburbs analyzed averaged 60 percent of annual expenses. Besides Island Lake with its deficit, only West Dundee, Aurora and Hampshire reported reserves below the minimum suggested threshold. Hampshire reported reserves of just 1.1 percent of the village's annual expenses last year. Four more towns -- Antioch, Barrington Hills, Carpentersville and Prospect Heights -- could drop below two months of reserves after an initial year of income tax cuts.
"The Great Recession took a heavy toll," said Hampshire Finance Director Lori Lyons. "Reserves were tapped into to maintain core village services such as police protection and public works. It goes without saying, but Gov. Rauner's plan to withhold half of the municipal share of income tax revenues, if enacted, will have significant impact."
Nine towns reported reserves totaling more than 100 percent of annual costs. Volo's reserves amounted to more than 240 percent of the village's annual expenses, according to village financial documents. Village Administrator Mike May said $2 million to $3 million of the village's $4.2 million reserves is earmarked for a water project, but that would still leave enough to cover about a year's worth of village expenses in its reserves.
Thirty-six other suburbs reported reserves totaling more than half a year's worth of expenses. While some argue reserve levels prove Rauner's point about towns being able to absorb income tax cuts, others believe reducing reserves will ultimately cost taxpayers in those towns more.
That's because credit rating agencies use reserve levels to determine a government's worthiness to borrow. Critics argue that if reserves dip too low, banks will charge local governments higher interest rates on loans, which costs more money to pay off.
"These (reserves) are insurance policies that if the economy goes south we can still deliver services or even save money on a project," said Kurt Thurmaier, director of the School of Public and Global Affairs at Northern Illinois University. "To say that the governor is going to take away this income tax and that local governments should not make this up is wacky and breaks the fundamental reason for revenue sharing."
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