LAKE FOREST — Facing uncertainty of revenue sources arising from proposals in the Illinois General Assembly and escalating unfunded pension liabilities, Lake Forest is seeking ways to avert ill effects from state legislation and possibly cut expenses by as much as $500,000.
The Lake Forest City Council and Mayor Rob Lansing took a deep dive into what to do about a potential property tax freeze imposed by the state legislature and reducing pension liability during a workshop session September 18 at the Municipal Services Building.
Without any additional cuts to revenue the state shares with municipalities contained in the current Illinois budget, Lake Forest is already looking at a drop in income of $88,144, according to a presentation from Finance Director Elizabeth Holleb.
Holleb presented three more draconian scenarios labeled yellow, orange and red that could take the decline closer to $500,000. Yellow will have a minimal impact. It assumes a two-year property tax freeze with exemptions for debt payments and pension contributions, a smaller share of income tax and more administrative fees.
Under the orange suggestion, the local share of income tax will drop 25 percent and local sales tax 20 percent. This is part of legislation working its way through the legislature, though there is no guarantee of passage. It includes a four-year property tax freeze with no exclusions, which is part of a compromise suggested by Gov. Bruce Rauner. It will cut revenue nearly $500,000.
Red Plan Assumes Income Reductions Last Longer
The red picture shows a similar reduction in revenue to orange but lasts longer. It assumes loss of all state and federal revenue as well as a permanent property tax freeze with no exemptions. Holleb said that was Rauner’s original proposal. It also assumes a reduced return on pension investments.
Potential revenue increases could come from fees like the one imposed on homeowners last year to help balance the budget.
Lansing suggested a conservative approach. He said he favored planning for something between yellow and orange as the best way to temper the uncertainty coming out of Springfield. He suggested looking at cutting spending levels $500,000 from where they are in the current budget.
“They have fired a warning shot over the bow of the good ship Lake Forest and we have to take it seriously,” said Lansing. “We have to take a meaningful step in the face of this (potential) loss of revenue.”
Along with dealing with revenue reduction, the city is considering increasing the contributions it makes to pensions for its police officers and firefighters to reduce the burden it is putting on future taxpayers.
The state imposes a requirement on municipalities requiring unfunded liability of police and fire department pensions be reduced to zero by 2040. The city currently assumes a 5.5 percent payroll growth, according to Jason Franken, the city’s independent actuary. If the percentage is lower the current requirement is higher because there is no future growth to pay it.
The current unfunded liability for police and fire pensions is approximately $38 million, according to Franken.
City Wants It More Like a Mortgage
Increasing the current payments makes it more likely the city can meet its future burden without massive increases in later years, according to Franken. He said using level payments is like a standard house mortgage where the principle reduction keeps getting bigger over the years.
“Otherwise you have an incline,” said Franken. “If you keep doing it with your current assumptions it will be more like a mountain. You will have negative amortization. If you did that with a mortgage you would never pay it off.”
The council directed Franken to base his assumptions on an annual contribution of more than $2.5 million rather than the approximate $1.86 million it makes now. Holleb said it will cost the owner of an $800,000 home around $100 more a year in property taxes. Lansing pushed for a more fiscally conservative approach than the current one.
“It’s time we stepped up and stopped laying it off on our future generation,” said Lansing. “This may be the first time in America a government has done that.”
The council will start its consideration of the real estate tax levy for next year in October and complete it by the end of the year.