CHICAGO -- Chicago will face a $22.5 million budget shortfall this fiscal year because of a change in the distribution of the Illinois income tax surcharge the General Assembly approved last week.

The legislature's move means that instead of getting $45 million in the remainder of its current fiscal year, which ends Dec. 31, Chicago will receive a $22.5 million share of the surcharge.

City officials announced on Friday, however, that the annual audit of the city's fiscal 1990 budget uncovered an unreserved general fund balance of $41.3 million, part of which could be used to bridge the budget gap. The city had already budgeted an expected $19.5 million general fund surplus, leaving $21.8 million that had not been budgeted.

Last week, the Democrat-controlled legislature and Gov. Jim Edgar, a first-term Republican, agreed on a plan to temporarily split with the state the $354 million of surcharge revenues that had been going to local governments. Under the plan, which was part of a compromise state budget package, the state and local governments will have a fifty-fifty share of the revenues during the state's 1992 fiscal year, which began July 1.

In fiscal 1993, the state's share of the revenues would decrease to 25%, with local governments getting 75%.

At the city's budget committee meeting yesterday, some aldermen suggested that the $21.8 million surplus from fiscal 1990 could be used to fill the budget hole caused by the decrease in surcharge revenues. Karen Danczak Lyons, the city's acting budget director, said that suggestion had "potential."

But she warned that the audit, conducted by Deloitte & Touche and a group of Chicago-based minority public accounting firms, represented a "snapshot" of the city's finances at the end of the year. "I can't make a jump in logic that the $21.8 million is available now," she said.

Ms. Lyons said city officials were still trying to determine the impact of the state budget on city finances, adding that the assessment and an update on the current budget would be available when Mayor Richard M. Daley's administration issues its preliminary budget for fiscal 1992 in early August.

In a statement released Friday, City Comptroller Walter Knorr said "cost efficiencies" in health care and employee overtime, "reasonable revenue estimates," and lower-than-expected interests rate on their short-term borrowings were reasons for the surplus. Even without the fiscal 1990 surplus, Ms. Lyons said the state legislature gave the city the ability to impose a series of new taxes, pending city council approval. These temporary taxes can be levied on interstate phone calls, big ticket personal and business items purchased outside the city, and on photo finishing. The lawmakers also voted to have the state temporarily collect the city's motor vehicle use tax.

House Speaker Michael Madigan, D-Chicago, estimated that those taxes -- along with the state collecting the motor vehicle tax -- would raise $30 million a year for the city.

Ms. Lyons said that estimate may be overly optimistic.

Chicago, due to its home-rule status, also escaped a one-year freeze on assessments, which was part of a property tax relief plan approved by the legislature.

Even with the potential for plugging the hole in the $3.18 billion budget this fiscal year, the city will face contract negotiations with union employees who make up 87% of the city's $1.1 billion payroll at the end of the year.

In addition, revenue from the income tax surcharge in fiscal 1992 will be $67.5 million instead of $90 million because of the distribution change. Also, after 1993, the surcharge will expire unless the lawmakers extend it or make it permanent.

While the legislature approved a permanent 10% income tax surcharge for education that also raises $354 million a year, local governments will face another cut-off of the surcharge on June 30, 1993, unless it is extended or made permanent by the legislature. THe original 20% income tax surcharge that raised the state's personal income tax to 3% from 2.5% and corporate income tax to 4.8% from 4% expired June 30.

Officials at Standard & Poor's Corp. and Moody's Investors Service said they were in the process of reviewing the impact of the state budget on both Illinois and on Chicago.

The city's general obligation debt is rated A-minus by Standard & Poor's and A by Moody's.

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