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.

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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