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Potential Tax Hikes Tied to Alternate Revenue Bonds

by Bob Tivnan, Chicago, June 2016

 

Many property owners are unaware that they could face a bigger property tax bill if local governmental debt payments are not paid on alternate revenue bonds.

 

The Chicago Public School District (CPS) is one of many tax jurisdictions nationwide that utilize alternate revenue bonds as a source of additional funding. If the debt is not timely paid, it triggers a property tax increase.

 

How it Works

 

Alternate revenue bonds are a common funding source. They are backed by pledging an existing revenue stream other than property taxes. Governments lacking home-rule power can raise revenue in this way without voter approval for their spending plans.

 

Property taxes serve as the back-up payment plan for these “backdoor referendums” because creditors are given the ability to trigger a property tax hike if the pledged alternative revenue comes up short.

 

Chicago Schools Have Good Track Record

 

The Chicago Public Schools have issued alternate revenue bonds since the late 1990s. So far, the school district has never failed to make a debt service payment.

 

In Illinois, state law limits the school district's ability to raise property taxes. However, the cap applies only to taxes collected for operating revenues. There is no limit on the amount of money CPS can collect to pay bondholders.

 

The school district sets aside money every February to cover debt payments. Once the money is deposited, officials must pass a measure abating the tax increase, which is spelled out in the bond contracts.

 

Concerns about the Future

 

The most recent CPS bond sale was $725 million issued to primarily reimburse operating funds for expenses already paid, and for debt restructuring to achieve immediate budget relief.

 

CPS is scheduled to set aside money for its next debt payment of $540 million in February 2017. Some officials are worried that the precarious condition of the school district's finances could lead to a surprise tax hike.

 

There is currently an $800 million deficit in the district's preliminary budget for the 2016-2017 school year, according to a CPS presentation to investors. The budget relies on concessions by the Chicago Teachers Union (CTU) and a $458 million bailout by the state legislature. Presently though, the CTU opposes meeting the demands of the CPS, and the Governor has expressed a lack of interest in endorsing a CPS subsidy without major financial reforms.

 

School officials are looking to the Legislature to ultimately revamp the system. In a statement, the CPS said, "Over the long term, stabilizing our finances means that we cannot continue to borrow at current levels. The State of Illinois must fix the broken funding formula."