Sharing City Sales Tax Revenues with Local School Districts by rcv90633


                                                       Sharing City Sales Tax Revenues
                                                       with Local School Districts
                                                       By Beverly S. Bunch

                                                                ood schools are an important         erty tax relief. The non-home-rule sales

                                   Facing financial     G        component of a strong commu-
                                                                nity. Therefore, it is in the best
                                                       interest of both city government offi-
                                                                                                     tax statute did not originally include
                                                                                                     public schools as public infrastructure;
                                                                                                     however, the statute has been revised to
                         challenges, three cities      cials and school district officials           include public schools for at least two
                                                       for the local school district to perform      communities that requested this
                                  in Illinois turned   well, both financially and academically.       change. The local sales tax is imposed
                                                       But does that mean that a city should         on top of the state sales tax, which is
                            to city officials, who      be willing to share its tax revenues if       currently 6.25 percent on most items.
                                                       school district officials request financial
                     raised the local sales tax        assistance from the city government?          THE REQUEST,
                                                         When called upon to answer that             AND THE RESPONSE
                        rate to generate funds
                                                       question, three small to mid-sized cities        After two failed voter referendums for
                            in order to help the       in Illinois decided to increase their         the construction of a new high school,
                                                       sales tax rates and share the revenues        school district officials in Carbondale
                           local school districts.     with their local school districts. Their      approached the city government in the
                                                       experiences provide useful lessons for        late 1990s requesting financial assis-
                                                       other jurisdictions under similar cir-        tance for the proposed new facility.
                                                       cumstances.                                   After a number of options were
                                                                                                     explored, the city proposed the idea of
                                                       THE THREE CITIES                              raising its home-rule sales tax to help
                                                                                                     finance a new school. At that time, the
                                                         The cities of Carbondale, Mt.Vernon,
                                                                                                     school district also was eligible for a
                                                       and East Peoria,Illinois,were among the
                                                                                                     construction grant from the state gov-
                                                       first in the state to share city sales tax
                                                       revenue with one or more local school
                                                       districts. Carbondale (population               The school district held another voter
                                                       26,000) and Mt. Vernon (population            referendum for the construction of a
                                                       16,000) are home-rule cities located in       new high school, and this time the ref-
                                                       southern Illinois, and East Peoria (pop-      erendum passed. Although the city
                                                       ulation 23,000) is a non-home-rule city       sales tax increase was not mentioned in
                                                       located in central Illinois.                  the referendum, local officials noted
                                                                                                     that the city’s role was well publicized
                                                         In Illinois, home-rule cities can raise
                                                                                                     prior to the referendum.
                                                       the local sales tax in quarter percent-
                                                       age-point increments without obtaining           In 1999, the City of Carbondale raised
                                                       voter approval. Non-home-rule cities          its home-rule sales tax rate by a quarter
                                                       must obtain voter approval to raise the       of a percentage point, to 1 percent,
                                                       sales tax, are constrained to a maxi-         bringing the total sales tax rate in
                                                       mum rate of 1 percent,and must use the        Carbondale to 7.25 percent. The city
                                                       funds for public infrastructure or prop-      agreed to give the school district

60 Government Finance Review | February 2009
  Exhibit 1: Summary of Initial Tax-Sharing Agreements
  City             Year               Tax              Maximum Annual             Length of            Number                  Use of
                                    Increase           Shared Amount             Agreement            of Districts             Funds
  Carbondale       1999            quarter                $800,000                20 years                 1               New Facility
                               percentage point
  Mt.Vernon        2003            quarter                $450,000                 2 years                 1               Operations
                               percentage point
  East Peoria      2005            quarter                $800,000                2.5 years                4               Operations
                               percentage point

$800,000 a year over the 20-year life of       meetings to discuss the proposal and to        USE OF FUNDS
the bonds that were issued to finance           allow input from the public.                     In Carbondale,the school district’s use
the new school facility.This constituted                                                      of city funds was restricted to the debt
                                                  The East Peoria school districts ini-
more than half (57 percent) of the                                                            service on the bonds for the new school
                                               tially asked for a sales tax increase of
annual debt service on the $16 million                                                        facility. As of 2007, the quarter percent-
                                               half a percentage point,but the city offi-
bond issue.                                                                                   age-point city sales tax was generating
                                               cials decided on a quarter percentage-
   About five years later, a similar situa-     point increase, which was expected to          about $1.1 million, so the extra $300,000
tion occurred in East Peoria when offi-         generate $800,000 a year. This increase        was being used for city purposes.
cials from several school districts            brought the total sales tax rate in East         In Mt.Vernon, the home-rule sales tax
approached city officials requesting           Peoria to 8 percent, comparable to the         increase generated $1.6 million over
financial assistance. The grade school          rate in neighboring cities. The increase       the two-year period. The high school
district wanted help in financing a new         was imposed for 2.5 years, and the rev-        district received $900,000, and the city
school facility, and two other districts       enue was allocated among the four              retained the rest of the revenues. There
wanted assistance with operational             local school districts using a formula         was no written plan or intergovernmen-
costs. The local high school was faced         based on enrollment that was devel-            tal agreement regarding how the funds
with a budget deficit and was trying to         oped by the school districts.                  would be spent, but local officials said
avoid cuts in staffing and extracurricu-                                                       the school district used the money for
                                                 In the City of Mt.Vernon,officials from
lar activities.1 After considering alterna-                                                   operational purposes. One official said
                                               the local high school district asked the
tives, city officials agreed to increase                                                       he did not think many changes were
                                               city government for assistance to help
the non-home-rule sales tax and use the                                                       made during the tax-sharing period to
                                               address the district’s financial prob-
revenues to assist four local school dis-                                                     address the financial problems of the
                                               lems. The district had been experienc-
tricts (the fourth district was added                                                         high school district.
                                               ing an operating deficit in its education
prior to the final agreement).
                                               fund for several years. To obtain public         In East Peoria, the city initially includ-
   East Peoria is a non-home-rule com-         input, the city held an advisory referen-      ed a list of provisions that the school
munity; however, as a result of special        dum on a proposal to increase the city’s       districts would have to accept in order
state legislation that was previously          home-rule sales tax by a quarter of a          to receive the sales tax revenues. The
passed in relationship to a tax incre-         percentage point for a period of two           city wanted the school district to agree
ment financing (TIF) issue,East Peoria is       years to assist the school district. The       to the following conditions: conduct a
allowed to raise its non-home-rule sales       referendum passed, and the sales tax           study on the consolidation of two of the
tax rate without voter approval.A school       rate was increased in July 2003.The city       grade school districts; not increase the
referendum was not necessary since the         agreed to share the sales tax revenues         property tax rate except for limited pur-
local elementary school district put its       with the school district up to a maxi-         poses; continue to support the city’s
facility plans on hold when the state          mum of $450,000 per year and to use            economic development efforts, includ-
failed to appropriate funds for the state      the rest of the tax revenues for city pur-     ing possible expansion of the enter-
school construction grants program.The         poses. (See Exhibit 1 for a summary of         prise zone; furnish financial and statisti-
city and school districts held public          the three tax-sharing agreements.)             cal information to the city; implement

                                                                                                         February 2009 | Government Finance Review 61
   cost containment measures; provide an            The city and school district held pub-    ing the city sales tax to provide finan-
   accounting showing how the city rev-          lic meetings to discuss the proposal,fol-    cial assistance for this project.Although
   enue was used; and work with the city         lowed by a voter referendum for a new        some city officials questioned whether
   and a Mayor-appointed committee to            high school facility in 2007.The referen-    the city should assist a state institution
   address how the financial condition of         dum did not address the proposed             when the city had its own needs, in
   the school districts could be improved.       agreement with the city; however, local      2007 the city council voted 4 to 3 in
                                                 officials noted that the city’s role was      favor of raising the city sales tax by half
     The committee was formed with rep-
                                                 widely publicized. The referendum            a percentage point and using half of the
   resentatives of the school district and
                                                 failed. Local officials identified various     increase for city projects, and commit-
   community, with the superintendents
                                                 factors that may have contributed to         ting the other half to the debt service
   and the city manager serving ex-officio.
   This committee recommended consoli-           the defeat, including emotional attach-      for the university initiative. The city has
   dating the two grade school districts,        ments to the old high school facility,       pledged $1 million per year to SIUC
   decreasing costs through joint purchas-       uncertainty regarding where the city         over a 20-year period.
   es, and making the sharing of city tax        funds would come from, questions
   funds contingent on test score improve-       regarding the appropriateness of using       LESSONS LEARNED
   ments. The school districts objected to       city funds, and dissatisfaction among           When approached for help, a city may
   the conditions, with at least one school      some residents that there was not a sep-     be able to offer financially challenged
   board member questioning if the city          arate referendum on the city’s role in       school districts some type of assistance in
   council could legally control the             the financing.                                the short-run, or help with the financing
   school district’s spending decisions.2           The City of East Peoria also received a   of a particular project, such as the con-
                                                 request from the local elementary            struction of a new school facility. This is
      In the end, the conditions were not
                                                 school district and the high school dis-     especially true when the city has access
   enacted, and the school districts had
                                                 trict to extend the tax-sharing agree-       to a revenue source such as the local
   significant discretion in how the funds
                                                 ment to generate funds for constructing      sales tax that is not directly accessible to
   could be used. The districts used the
                                                 school facilities. After a series of meet-   school districts.If the public believes that
   money for energy efficiency projects,
                                                 ings and presentations,the city decided      the school district has legitimate needs,
   after-school programs, and counseling.
                                                 to extend the city sales tax increase and    then raising the sales tax rate to support
   Initially,the high school district used the
                                                 use the revenues to pay debt service on      those needs can be more politically feasi-
   money to replace student desks and
                                                 bonds issued by the two school districts     ble than having the school district raise
   textbooks, and to make repairs; howev-
                                                 for facility additions and improve-          the property tax.The sales tax is less visi-
   er, the focus then shifted to the funding
                                                 ments.As part of the intergovernmental       ble, is not paid in a lump sum, and part
   of a team-teaching approach that
                                                 agreements, the school districts agreed      of the burden typically is borne by non-
   included the hiring of classroom aids.
                                                 to support an extension and expansion        residents. In one of the jurisdictions
                                                 of TIF districts upon request by the city.   discussed in this article, the local paper
   ADDITIONAL REQUESTS                                                                        estimated that about 70 percent of the
                                                 The high school district also agreed to
      There has been additional interest in                                                   sales tax is paid by nonresidents.3
                                                 allow the city to use the high school dis-
   using tax-sharing agreements in the
                                                 trict’s stadium when it would not               If a city is considering raising the sales
   three cities. In Mt. Vernon, the high
                                                 impose a conflict with events spon-           tax rate to help the school district, it is
   school district officials requested addi-
                                                 sored by the school district.                important to check what is legally
   tional city assistance to help fund a
                                                                                              allowed within a particular state. States
   local match for a state grant for the con-       Downstate, Southern Illinois Univer-
                                                                                              vary in terms of whether this type of
   struction of a new high school. The           sity Carbondale (SIUC), a university
                                                                                              agreement is allowed, the types of provi-
   city’s share was not to exceed $800,000       with enrollment of approximately
                                                                                              sions that are allowed,how the funds can
   per year for up to a maximum of 30            22,000,was undertaking fund raising for
                                                                                              be used, and the procedures required to
   years. The city revenue source was not        a project that would include replacing
                                                                                              approve a tax-sharing agreement.
   specifically identified; however, the two       a sports stadium and reconstructing a
   main options discussed were an                basketball arena. The mayor of                 It is also a good idea for city officials
   increase in the sales tax or the fuel tax.    Carbondale proposed the idea of rais-        to address how the school district will

62 Government Finance Review | February 2009
use the funds. One local official noted        structure and nature of the arrange-
that sharing city revenues for a new          ment.The participating entities need to          Exhibit 2: City Review
school facility appears to be a win-win       address the terms of the agreement               and Approval Process
situation, but that using city funds to       (e.g., how much the sales tax will
address the financial operating prob-          increase, how much the school district
lems of a school district should be           will receive, the length of the agree-                        Receive Request
avoided.In the latter scenario,he noted,      ment). They may also want to address                        from School District
the school district might not make            other issues such as how funds can be
many changes during the period in             used,what type of reporting or approval
which city funds are received, in             process will be used,and what happens
essence putting off the changes that          if sales tax revenues are less than what
will ultimately be needed to balance          was anticipated. East Peoria, for exam-                      Consider Request
the budget. This is not always the case,      ple,included a provision stating that the               ■   Legal Issues
however; in the case of the East Peoria       city’s sharing of tax revenue would be                  ■   Plans for Use of Funds
high school district, the superintendent      decreased if projections indicated that                 ■   Competing Needs
noted that the district made changes to       actual sales tax revenues would be less
its operating budget during the tax-shar-     than the amounts the city received in
ing period, leading to a balanced budg-       either 2003 or 2004.                                         Educate the Public
et after the original agreement expired.                                                                   and Get Feedback
                                                 After the agreement is implemented,it
                                                                                                           ■ Public Hearings
  City officials should think about how        is useful for the parties involved to assess
                                                                                                           ■ Voter Referendum
the proposed sharing of tax revenue           what went well and what could be
                                                                                                             if Needed
would affect the city’s ability to finance     improved. This information will be
competing needs. As illustrated in            important if a similar situation arises in
Mt.Vernon’s original agreement with           the future or if other jurisdictions request
                                                                                                            Pass a Resolution
the school district and the City of           advice or information on sales tax shar-
                                                                                                              and Develop
Carbondale’s agreement with the uni-          ing. (Exhibit 2 summarizes the steps in                           a Written
versity, one option is to increase the        the review and approval process.)                            Intergovernmental
local sales tax rate and designate one                                                                         Agreement
portion of the increase for financing          OTHER COMMUNITIES
the city’s needs and the other portion        PURSUE OPTIONS
for school needs.                                A law passed by the Illinois                          Implement Agreement
                                              Legislature in late 2007 gave voters in                       and Conduct
  The city and the school district need
                                              Illinois counties the authority to estab-                  a Post-Agreement
to educate the public and determine
                                              lish a local option sales tax for school                        Review
whether the public supports the use of
                                              facility purposes (e.g., construction,
the sales tax to help the school district.
                                              rehabilitation, financing).4 With voter
Even if a city is not required to obtain
                                              approval, a county school facility sales
voter approval, it is still prudent to hold                                                  enrollment within the county. As of
                                              tax can be imposed in quarter percent-
public hearings and provide a means                                                          early 2008,the voters in one county had
                                              age-point increments up to a maximum
for alternative views to be presented                                                        approved an increase, and other school
                                              of 1 percent.The sales tax proposal can
and discussed.                                                                               boards were discussing this option.5
                                              be placed on the ballot through a reso-
   If it does decide to raise the sales tax   lution by the county board or a resolu-          Other municipalities in Illinois also
rate in order to help the school district,    tion by school district boards that con-       are planning to share city tax revenues
the city will need to prepare a resolu-       stitute at least 51 percent of the student     with school districts or are doing so. For
tion authorizing the increase. It is also     enrollment within the county.The funds         example, in 2007, the voters in the non-
helpful to develop a written intergov-        are distributed among the county’s             home-rule Village of Forsyth, Illinois
ernmental agreement describing the            school districts on the basis of student       (estimated population 3,500), approved

                                                                                                          February 2009 | Government Finance Review 63
   a referendum to increase the village         local school district requests financial                3. Smothers, October 22, 2003.
   sales tax for public infrastructure.6 The    assistance? One local official’s answer                 4. Illinois Public Act 095-0675, SB0835 Enrolled.
   village will transfer the revenues from a    to that question was that it is the taxpay-            5.Tara Malone,“Lake County schools consider
                                                                                                         sales tax for education,” Chicago Tribune,
   sales tax increase of half a percentage      ers’ money — let them decide. This                       February 28, 2008.
   point to the school district, which will     would entail educating the public and                  6. In the case of Forsyth, the state legislature
   use the funds to pay debt service on         then having a voter referendum,or using                   revised the definition of public infrastructure
                                                                                                          to include public schools.
   bonds that were issued to finance a           some other means to determine if there                 7.Village of Lincolnwood, Illinois and Lincoln-
   new school facility. The plan is for the     is sufficient public support. In about a                  wood Elementary School District No. 74,
   school district to repay the village annu-   dozen states,voters have the authority to                Intergovernmental Agreement, September 9, 1997.
                                                                                                       8. Gary Kelly, Utilization of a Local Sales Tax to
   ally over a specified time period. The        approve a local option sales tax to be
                                                                                                          Provide a Source of Revenue for Three Selected
   village and school district are dis-         used for school purposes.8 As one local                   Illinois School Districts, a dissertation prepared
   cussing joint uses of the new facility. In   official noted, each community is differ-                  at Southern Illinois University at Carbondale,
                                                                                                          December 2006.This dissertation is a good
   the Chicago metropolitan area, the           ent.The city and school district need to                  source of additional information on the initial
   Village of Lincolnwood (population           work together to discuss options and                      tax-sharing agreements developed in the three
                                                                                                          cities addressed in this article.
   12,400) agreed to share specified sales       determine if there is sufficient support
   tax revenues with the school district in     for some type of joint effort. ❙
   exchange for the district’s support of       Notes                                                  BEVERLY BUNCH is an associate professor
   Village TIF districts and efforts to         1. Michael Smothers,“Sharing tax revenue isn’t
                                                                                                       at the University of Illinois at Springfield. She
   become a home-rule community.7                  new in East Peoria — School district may be
                                                   forced to cut football if request is denied,”       conducts research on state and local gov-
                                                   Peoria Journal Star, October 22, 2003.              ernment budgeting and financial manage-
   CONCLUSION                                   2. Michael Smothers,“Council throws EP schools         ment and intergovernmental issues. She
                                                   a curveball — Citizen committee’s contingen-
     Is it reasonable to expect a city gov-        cies could thwart sales tax deal,” Peoria Journal   previously worked for the State of Texas
   ernment to share tax revenues when a            Star, July 16, 2004.                                and the City of San Antonio.

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