Sharing city sales tax revenues with local school districts: facing financial challenges, three cities in Illinois turned to city officials, who raised the local sales tax rate to generate funds in order to help the local school districts.

• Author: Bunch, Beverly S.
• Position: Solutions

Good schools are an important component of a strong community. Therefore, it is in the best interest of both city government officials and school district officials for the local school district to perform well, both financially and academically. But does that mean that a city should be willing to share its tax revenues if school district officials request financial assistance from the city government?

When called upon to answer that question, three small to mid-sized cities in Illinois decided to increase their sales tax rates and share the revenues with their local school districts. Their experiences provide useful lessons for other jurisdictions under similar circumstances.

THE THREE CITIES

The cities of Carbondale, Mt. Vernon, and East Peoria, Illinois, were among the first in the state to share city sales tax revenue with one or more local school districts. Carbondale (population 26,000) and Mt. Vernon (population 16,000) are home-rule cities located in southern Illinois, and East Peoria (population 23,000) is a non-home-rule city located in central Illinois.

In Illinois, home-rule cities can raise the local sales tax in quarter percentage-point increments without obtaining voter approval. Non-home-rule cities must obtain voter approval to raise the sales tax, are constrained to a maximum rate of 1 percent, and must use the funds for public infrastructure or property tax relief. The non-home-rule sales tax statute did not originally include public schools as public infrastructure; however, the statute has been revised to include public schools for at least two communities that requested this change. The local sales tax is imposed on top of the state sales tax, which is currently 6.25 percent on most items.

THE REQUEST, AND THE RESPONSE

After two failed voter referendums for the construction of a new high school, school district officials in Carbondale approached the city government in the late 1990s requesting financial assistance for the proposed new facility. After a number of options were explored, the city proposed the idea of raising its home-rule sales tax to help finance a new school. At that time, the school district also was eligible for a construction grant from the state government.

The school district held another voter referendum for the construction of a new high school, and this time the referendum passed. Although the city sales tax increase was not mentioned in the referendum, local officials noted that the city's role was well publicized prior to the referendum.

In 1999, the City of Carbondale raised its home-rule sales tax rate by a quarter of a percentage point, to 1 percent, bringing the total sales tax rate in Carbondale to 7.25 percent. The city agreed to give the school district $800,000 a year over the 20-year life of the bonds that were issued to finance the new school facility. This constituted more than half (57 percent) of the annual debt service on the $16 million bond issue.

About five years later, a similar situation occurred in East Peoria when officials from several school districts approached city officials requesting financial assistance. The grade school district wanted help in financing a new school facility and two other districts wanted assistance with operational costs. The local high school was faced with a budget deficit and was trying to avoid cuts in staffing and extracurricular activities. (1) After considering alternatives, city officials agreed to increase the non-home-rule sales tax and use the revenues to assist four local school districts (the fourth district was added prior to the final agreement).

East Peoria is a non-home-rule community; however, as a result of special state legislation that was previously passed in relationship to a tax increment financing (TIF) issue, East Peoria is allowed to raise its non-home-rule sales tax rate without voter approval. A school referendum was not necessary since the local elementary school district put its facility plans on hold when the state failed to appropriate funds for the state school construction grants program. The city and school districts held public meetings to discuss the...