How And How Much Can A Municipality Borrow? By JAY HEDGES, Director, Department of Commerce & Community Affairs

There are few, if any, municipalities which can make improvements and construct facilities and pay for them with surplus cash. Even the most liquid of municipalities may suffer periods of an insufficient cash flow or find themselves in the immediate need of a substantial amount of funds to meet some obligation. In the normal process of capital improvement planning and budgeting, it is very rare to be able to undertake a proposed improvement schedule without borrowing money.

Every municipality can borrow money. However, there are some differences between the powers of home rule and non-home rule municipalities to do so.

Home rule municipalities have no debt limit and can borrow subject only to their credit and the marketability of their instruments of debt. They may issue general obligation bonds or revenue bonds, executive promissory notes, and enter lease or purchase agreements and other financial contracts without referendum.

The situation is different for non-home rule municipalities. Other than certain specific exceptions, the Municipal Code (Ill. Rev. Stat. Ch. 24/8-1-3) provides for the issuance of general obligation (G.O.) bonds only upon approval by referendum (Ch. 24/8-4-1) and constitutes statutorily limited debt. Accordingly, the debt limit of any non-home rule municipality is 8.625 percent of the equalized assessed valuation (EAV) of that municipality (Ch. 24/8-5-1). Therefore, a non-home rule municipality may not incur legal debt more than $86,250 for each one million dollars of equalized assessed valuation of that municipality.

An important thing to remember is that the balance of principal to be paid on the bonds outstanding is the figure that constitutes debt. Any interest to be paid during the period of amortization is not considered as debt.

G.O. bonds issued to abate pollution as required by a compliance order under the Environmental Protection Act, G.O. bonds issued to fund a judgment indebtedness, or G.O. bonds issued to provide an escrow fund for self-insurance against possible judgments may be issued without referendum and do not constitute debt under the statutory limitations.

If you lease or purchase real or personal property through a lease or purchase agreement (Ch. 24/11-76.1 et seq.), the entire amount of the contract due to be paid over the installment period must be included within the debt limitation.

The statutes also permit a municipality to borrow money from banks or savings and loan associations. This allows a municipality to meet an immediate need of cash through short-term borrowing with the capacity to pay back within a short period of time. Any such loan must be paid back within one year from the time that the money was borrowed (Ch. 24/8-1-3.1), and does constitute debt.

The factors that must be considered, in aggregate, to determine the existing legal debt of a municipality at any certain time are: the remaining principal balance of all outstanding general obligation bonds (exceptions excluded), the aggregate amount of remaining installments payable under a lease or purchase agreement, and the principal balances of any notes payable.

There are two special types of bonds that may be issued by a municipality that do not constitute debt and

June 1989 / Illinois Municipal Review / Page 7

do not require a referendum approval, namely those bonds issued for a special service area project or a local improvement (special assessment) project.

When a special service area is formed in accordance with Ch. 120/1301 et seq., and if bonds are to be issued to finance the project within the boundaries of the area, the notice of hearing must specify the amount and term of the bonds to be issued. Such bonds may then be paid through the levy of a special tax against the assessed valuation included only in the special service area. Since the full faith and credit of the entire municipality is not pledged, but only that within the boundaries of the special service area to the payment of this obligation, these bonds do not constitute debt under the limitations of the law.

Bonds issued for the payment of construction under the Local Improvement Act (Ch. 24/9) are not considered as debt because they are amortized by the payment of monies collected as assessments against the property benefited by the project.

Tax anticipation warrants are not considered as debt. Such documents are issued after the levy in anticipation of the next collection of taxes and are to be paid immediately upon receipt of that tax upon which the warrants were issued.

Tax anticipation notes (Ch. 85/823) pledge the full faith and credit of a municipality, are a direct general obligation of the municipality and are considered as legal debt. Tax anticipation notes can be issued for a period of two years and may be refunded.

Revenue bonds can be issued for a multitude of purposes, many of which do not require referendum approval. Ch. 24/8-4-1 lists, some by reference and some by Act, those purposes for which revenue bonds may be issued without referendum approval. Revenue bonds are defined as an obligation of a municipality, and are not considered in the statutory limitation. They may be issued in any amount as determined to be necessary by the corporate authorities. Since the bonds are to be paid with the revenue derived from the operation of the facility for which they were issued and not by the levy of taxes, it is vitally important that the revenue structure be sufficient to enhance the marketability of the issue.

For further information, use our toll-free hotline 1-800-562-4688 (LOC-GOVT). •

Page 8 / Illinois Municipal Review / June 1989