Effective Revenue Utilization

By JAY R. HEDGES
Director, Department of Commerce & Community Affairs

Municipalities in the state continue to look for new sources of revenue. There are a number of reasons.

—Despite recent reductions in the rates of inflation, the cost of government over an extended length of time is expected to increase.

—Relatively flat or declining real estate values have eliminated traditional increases in assessed valuations and impacted real estate taxes.

—Taxes, while a revenue raising alternative, have their politically acceptable limits.

—The loss of federal revenue sharing and increases in the cost of liability insurance continue to loom — putting increased pressures on the real estate taxes.

—Statutory rate limitations make it hard for many non-home rule municipalities to raise sufficient taxes.

Municipalities increasingly are looking for ways to deal with this revenue challenge. Many are looking for alternatives to the tough choice of raising taxes or reducing services.

In this regard, sound fiscal management procedures are essential. A detailed operating budget, for example, permits the local government to follow actual revenues and expenditures compared to estimates established at the beginning of the fiscal year. Any unusual fluctuations can then be analyzed to determine if corrective measures are needed. Municipalities which do not adopt a budget, as provided in Ch. 24/8-2-9.1 et. seq. of the Illinois Revised Statutes, but who adopt an annual appropriation ordinance are encouraged to prepare an operating budget.

Another good management tool is a procedure recommended by the International City Management Association several years ago to determine a community's financial health. A community's financial data is organized into a number of indicators to give insights into its strengths and weaknesses. Our department has developed its own version of this procedure in a booklet entitled. Financial Analysis Handbook for Illinois Municipalities. This procedure is also available to run on an IBM compatible personal computer and the Lotus 1-2-3 electronic spreadsheet.

A water rate review is suggested to make sure that water user charges are keeping pace with expenditures. On several occasions, when our staff helped municipalities conduct water rate studies, it was discovered that the user charges were inadequate and that the utility was subsidized by revenue from other sources. Water rates should be sufficient to produce adequate revenue for the payment of debt service on the facility, for operating and maintenance expense, and for the funding of reserves necessary for replacement. More importantly, operating self-sufficiency can allow the use of the revenues for other functions which cannot support themselves.

Local government cash flow can be complex to address yet significant to a local government's revenue picture. The cash flow to municipalities varies considerably during any fiscal year and particularly during property tax collection time. An analysis of a schedule of anticipated revenues and expenditures can provide an investment plan for any available cash not immediately needed. Since the deregulation of the banking and savings and loan industry, there are many investment options available. Good investment practices can provide substantial revenue through greater interest income.

The above examples are only a few of the good management practices that local governments are using to produce revenue and make the most of existing revenue. There are also many other sources of revenue that are often not utilized by municipalities.

It is not uncommon to hear that a non-home rule municipality has levied to its maximum when, in fact, there are additional levies beyond the general corporate levy which have not been utilized. Our department, each year, prepares The Illinois Tax Rate and Levy Manual, which identifies all of the various prop-

May 1986 / Illinois Municipal Review / Page 9

erty tax levies available to non-home rule municipalities. This is also free and available upon request from our department.

The Illinois Revised Statutes provides the power to municipalities to franchise utilities operating within it.

A municipality may impose a utility tax not to exceed five percent upon the gross billings of a telephone, electric, gas, or water company.

A municipality may impose fees for services and code enforcement purposes. For example, fees may be set for the submission of petitions for rezoning or variances or for plumbing, electrical, or building inspection.

A municipality may license many kinds of businesses as provided for in Ch. 24/11-42-1 et. seq. While the courts have held that licensing cannot be for revenue, they have upheld reasonable license fees to offset the costs incurred for regulation. It makes sense that license fees should be sufficient to cover the cost of regulation and that such costs should not be absorbed at the expense of other revenues.

Sometimes a community may acquire buildings or land for the purpose of redevelopment or the construction of some facility at some future time. In the interim, there may be opportunities to lease or rent the property for use until such time as it may be needed for its designated purpose.

While municipalities are working to meet day-today financial obligations, it may appear ridiculous to suggest the accumulation of cash for future capital expenditures. However, mathematics clearly substantiate that available cash for capital projects can reduce the long term cost to the taxpayer.

A direct reduction loan, at eight percent per annum with equal annual payments for 20 years, will cost over two times the original cost of the loan.

The value of a dollar, invested at seven percent accumulated annually for a period of ten years, will be nearly two dollars.

One dollar, invested each year for a period of ten years at seven percent accumulated annually, will have a future value in excess of $14.

Ch. 24/8-2-9.5 and Ch. 24/8-3-1 permits municipalities to accumulate money, not to exceed three percent of its equalized assessed valuation, in a special fund for capital improvements, repair, or replacement.

As our population continues to grow, so does the need for economic development. Commerce and industry must grow to maintain and improve our standard of living. It behooves each municipality to develop a strategy for economic development and to undertake steps to implement it. At the same time, the municipality should, regardless of its size, undertake the development of a capital improvement plan in order to meet its future infrastructure needs.

We realize that each municipality is unique in that it has its own separate characteristics and personality. Notwithstanding, the application of sound management practices, the utilization of available tax and non tax revenues, and the development of economic and community development strategies may help to alleviate the revenue crunch.

For further information or assistance on any of the ideas suggested above, please call our local government hotline number 1-800-562-4688 ("LOC-GOVT"). •

Page 10 / Illinois Municipal Review / May 1986