It's costing local governments more to borrow, and that costs you

So you were out of work for a while. You're behind on your car loan. And your credit card balances are higher than they should be.

Your credit score has dropped out of the 800s. What's that mean?

Next time you want to borrow money - for a car, a house, whatever, you'll pay more for the privilege.

You're not alone. Your town or school district probably faces the same challenges.

They haven't been out of work, but their sources of revenue are shrinking. Home construction is down. The values of existing homes are down. People are scrimping on big ticket items, meaning there is less sales tax revenue than there has been. It all paints a pretty bleak picture - for municipalities especially.

The housing crisis will force more credit-rating downgrades on local governments than during any recession in the past 40 years, one respected investor service claims.

In a December report, Moody's analysts predicted that the recession, likely to be deeper and longer lasting than others in previous decades, will result in a higher than average number of negative bond ratings doled out to municipalities seeking loans.

Communities most reliant on property taxes will be hit harder than their counterparts with broader, more diverse tax bases.

And that could mean that when taxing bodies want to get a project done and pay it off over time with property taxes, a ding in their bond rating means they're going to have to pay more to borrow. And that means you end up paying more in the long run.

How it works

When bonds are issued, the interest rate is set by two factors - market conditions and the strength of the municipality that's borrowing the money, or issuing the bonds.

Market conditions might not always be ideal, but crumbling roads, new school wings and police station roofs often can't wait.

The rate a municipality is going to get for its bond depends on its financial strength rating. If Moody's or Standard & Poor's downgraded the financial stability of a city, it will pay investors more to get the money. In this economic climate, some communities face a greater risk of being downgraded than others.

Falling home prices and foreclosures have already threatened many local governments' most significant revenue source: property taxes.

Compounding this is the more general economic slowdown.

As homes lose value, the report reminds us, homeowners are more likely to scrimp on luxuries - forgoing unnecessary shopping trips, redecorating expenses, meals out, pricey concerts and sporting events.

With residents more hesitant to spend, sales tax revenues, in addition to property tax revenues, are down.

Municipalities across the region feeling the pinch have tightened up spending plans as a result.

In Des Plaines, cuts have occurred across the board, from 12 position layoffs to festival trimming to the elimination of conferences for management personnel.

"It was a piece here, a piece there, let's go through the budget bit by bit," acting Finance Director Dorothy Wisniewski said. "Planning to make sure we can do this."

In Elgin, 54 positions will be eliminated, a move that will save the city $5 million. The city also discontinued its DARE program with Elgin Area School District U-46 fifth-graders, expected to save another $200,000.

On Feb. 14, U-46 announced $17 million in cutbacks for the 2009-10 school year. "Everything is on the table - including the table," Superintendent Jose Torres warned staff in a memo. Cuts could include freezing administrators' pay; reducing transportation costs; restricting costs on supplies and leaning out staffing.

With sales tax down, property tax down and building permits down, "we've trimmed every department," Sugar Grove Finance Director Justin VanVooren said.

Geneva Unit District 304 administrators concerned about cash flow announced recently that they're working on cutting the 2009-10 fiscal year operating budget by $1 million.

School principals and department heads have been asked to keep down spending for the second half of this fiscal year.

Exceptions

While most are in the same boat, some municipalities are armed with stronger paddles than their more residential property-tax dependent counterparts.

Less than 40 percent of Des Plaines' tax base is residential property.

In fiscal year 2008, Des Plaines made a move to raise several tax rates - including its telecommunication tax from 3 to 6 percent and its hotel tax from 5 to 7 percent.

In 2009, no taxes were raised, but the city cut its budget across the board, deferring plans to build an additional fire station, "until the economy picks up," Wisniewski said.

Despite 596 foreclosures in the city, "we have a pretty diverse tax base. As far as municipalities receiving downgrades from the housing crisis, we don't believe it will affect us," she said. The city's AA3 bond rating, Wisniewski said, has remained unchanged for the past several years. Not planning to have any bonds issued this year, Wisniewski said she does not expect a downgrade in 2009.

On the other end, Sugar Grove has a reason to be more concerned, despite its preparedness to weather the economic storm.

The good news: The Standard & Poor's bond rating for the village of 9,500 people was upgraded this fall from A to A plus.

"I was pleasantly surprised," Finance Director Justin VanVooren said. "I was hoping we wouldn't get a downgrade."

The investor service cited good financial practices, including having reserves on the books in all funds, as the reason for the upgrade.

"Our board has an informal policy to keep reserves at 25 percent of total expenditures," VanVooren said. "If we did not get another dime in (from state or property tax revenues) this year, we'd be OK for another four months," he said.

"Those that don't have those reserves are going to be in a much worse position," he said. "Still, don't get me wrong, things are not as rosy as they used to be for us."

The not-so-good news: Sales tax is down in the village, building permits in what had promised to be one of the fastest-growing towns in the area are down and state funding payments have been delayed. And according to a Kane County Board presentation in late October, the village has a 3.5 percent foreclosure rate. A whopping 88.4 percent of Sugar Grove's tax base comes from residential property taxes.

VanVooren admits that Sugar Grove's dependence on property taxes does make him nervous.

Because property taxes are based on an average of the three previous years, this year's assessment cycle, "we're not going to see the worst. In 2010-11, it's going to be really hard," he said. "You're going to see all the devaluation of housing really, really hit then," he said.

While VanVooren said the housing crisis wouldn't completely prevent the village from going out for bonds, he noted that more hesitation will likely be involved.

"You've got to have the resources to pay those bonds off, he said.

Sugar Grove, he said, is waiting to see what will happen with President Obama's economic stimulus package, which includes money for roads and other infrastructure projects.

Many cities and counties, as well as at least one state agency, have released detailed lists of projects they hope will eventually receive money through the Obama administration's $787 billion economic stimulus plan. Dozens of Illinois communities included projects on a 600-page wish list released by the U.S. Conference of Mayors. Addison, among other things, asked for $12.2 million for road reconstruction and street work. Arlington Heights wants a total of $50 million for street rehabilitation, resurfacing, a solar powered train station and water and sewer repairs.

"If we need to, we'd go out for bonds," VanVooren said. "But I don't foresee right now any needs we'd have to go out for. Depends what's happening with this stimulus package."

• Daily Herald news services contributed to this report.