A 10 Percent Reduction in Local Aid Would Be a Hit for Municipalities, But Problems Run Deeper

By: Christopher Ryan Crisanti

The final two months of the General Assembly spring session normally shifts public conversation towards the upcoming fiscal year budget, with lawmakers needing to pass a budget based on the governor’s proposals.

While economic activity seems to be picking up due to the COVID pandemic end in sight, state revenues have nonetheless been hammered and lawmakers will need to make difficult decisions on where to cut to help balance the budget.  The current budget deficit is projected at about $3 billion.

One proposal currently being deliberated is to reduce how much municipalities receive from the state by 10 percent from the Local Government Distribution Fund (LGDF).

Municipalities receive the balk of state money through the LGDF and it is funded from revenue collected via the state income tax.  The LGDF then distributes the funds to Illinois counties and cities to help fund municipal operations and deliver public services. The total amount of money each county and city receives is based on population. However, the state distributes 6.06 percent of the total amount collected on individuals and 6.85 percent on corporations to states and municipalities.

The governor’s current proposal is to cut this distribution given to municipalities to help sore up room for a balanced budget. While a reduction in state aid would be detrimental for municipalities trying to recover from the pandemic, problems with the LGDF run deeper.

First, the trend of reducing the distribution amount to local government has unfortunately been nothing new the last decade. Some contend that the state should not be allowed do this, with the village of Orland Park recently passing a resolution requesting the governor to restore funding back to its original levels. Prior to 2011, the state distributed 10 percent of total amount of income taxes collected to municipalities.

Facing a budget shortfall, then Gov. Pat Quinn’s partial solution was to temporarily raise the flat income tax rate from 3 percent to 5 percent while also reducing the 10 percent distribution to local governments. The income tax rate was again reduced to 3.75 percent in 2015.

Then, in 2017, the distribution again was reduced to the current 6.06 percent for individuals and 6.85 percent for corporations. The state also increased the current flat income tax rate to its current 4.95 percent that year as well.

So what’s going on here? Shouldn’t municipalities be receiving more in local government aid if the state is collecting more in income tax revenue?

The second big issue is the state’s structural deficit, meaning that meaning that the state’s system of taxation (e.g. the flat income tax rate and overreliance of the sales tax on goods, not services) is inadequate to fund services long-term. So when the state raised the income tax, all of the additional revenue was just pocketed by the state to help meet funding demands.

The fair tax was partially meant to help fix this. In its defeat, it’s now no surprise that reducing the LGDF distribution is on the table. Moreover, many of same suburban officials who opposed the fair tax are the very ones who have also been vocal against cutting any sort of funding for their community. How ironic.

Finally, the elephant in the room is that we can probably tie this all back to the pension problem. Rising pension liabilities will continue to eat up more of the state’s general fund and the extra revenue from the fair tax was meant to help alleviate that burden. Total pension liabilities are expected to take up roughly 26 to 27 percent of the general fund moving forward until about 2045.

Add to the fact that the state still needs to meet its pension obligations despite the impact of the pandemic and the reality is some entity, whether or not it’s local government, will certainly feel the effect of painful budget cuts.

This piece was also published in The Des Plaines Valley News.

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