Many Local Governments Have Operating Deficits By Loleta A. Didrickson, Comptroller, State of Illinois

The demands on local governments in Illinois are similar and so are the problems. For fiscal year 1994, 31% of the counties in Illinois had operating deficits. Those totals were bested by 39% of Illinois' municipalities, 43% of Illinois' townships and 46% of Illinois road districts that operated with deficits.

With continuing demands for services and limited revenue growth, local governments are struggling to balance their budgets. Problems with a continued operating deficit were revealed through recent research of the Annual Financial Reports that were submitted to the Illinois Office of the Comptroller.

An operating deficit happens whenever current expenditures exceed revenues. An operating deficit doesn't necessarily mean that the government has a budget deficit. That's because reserves or fund balances from previous years can be used to make up the difference.

It's important to know how the deficit is financed, whether the unit relied on reserves, borrowed money from the bank, or simply did not pay its bills. Also, an examination of the year-end balance alone may not reveal financial problems in a local government, though trends in year to year ending balances will.

An operating deficit in any one year may not necessarily be reason for concern. Such a deficit may be in response to an emergency situation that requires a large, immediate expenditure. It could also result from a planned policy of the government to reduce accumulated surplus funds. However, repeated or increasing operating deficits mean current revenues are not sustaining current expenditures and could indicate future financial problems.

The consistently high percentage of governments with operating deficits indicates that many are under fiscal stress, and the situation affects large and small communities. This fact calls for further analysis to see the depths of the problem. Officials must identify whether state government has a role to play to assist local units of government.

Illinois is not the only state to address this issue. In New York, the State Comptroller has proposed a uniform process to assess local finances instead of reviewing them in a case-by-case basis. The process would allow officials to identify financial problems at an early stage before they become full-blown fiscal crises.

The Illinois Comptroller's Office is working with the State's Department of Commerce and Community Affairs (DCCA) to create fiscal stress indicators as an early warning system for local governments. This system runs on a computer spreadsheet and uses data from the past five annual reports.

Any solutions to continuing operating deficits would be remiss without comprehensive policy changes to prevent the re-occurrence of this situation. •

June 1996 / Illinois Municipal Review / Page 15