CHICAGO -- Local governments in the five suburban Chicago counties are facing increased financial pressure because of property tax caps imposed by Illinois lawmakers in 1991, according to a report issued this week by Moody's Investors Service.

Harvey Zachem, a vice president in the Great Lakes regional rating group at Moody's, said that the rating agency believes that "the cumulative effects of the cap will become more burdensome and may have credit implications for certain" governments.

In its regional perspective on property tax caps in the five counties, Moody's said it has not revised the debt ratings for any of the 160 unenhanced general obligation issues of the affected local governments because of the limited history of the cap.

Moody's said, however, that it expects "municipalities will be increasingly challenged to balance available revenues with ongoing service demands."

Spurred by anti-tax sentiment, state lawmakers in 1991 passed a law limiting. annual property tax collection increases by non-home rule governments in the five affected counties to 5% or the rate of inflation, whichever is less. Home rule units have populations above 25,000. Communities with fewer than 25,000 residents can garner home rule status with voter approval.

The property tax caps apply to DuPage, Kane, Lake, McHenry, and Will counties, which surround Cook County, where Chicago is located.

The 1991 law requires the nonhome rule governments in the five counties to get voter approval before issuing bonds backed directly or indirectly by property tax revenues.

Zachem said that the inability of a local government to issue debt without voter approval has led to the increased use of weaker debt instruments that do not require a referendum, such as securitized lease financings or installment contracts.

Installment contracts are paid with revenues from a government's general fund revenues. Installment contracts could strain a government's financial position because revenues must be set aside within a budget to repay them, Zachem said.

"The use of these structures may have credit implications since debt service and operations are in effect competing for resources from what is a limited pool of revenues," Moody's said in the report.

Though all non-home rule communities in the five counties will be affected by the property tax caps, school districts appear to face the most pressure under the the cap, Zachem said.

Many of the 77 school districts, whose debt is rated by Moody's, are facing mounting pressure because of their limited ability to raise revenue under the cap, the rating agency said.

School districts that do not have alternative revenue sources or that cannot control their expenditures are most at risk, Moody's said.

Moody's said that the property tax cap has greatly restricted the issuance of working cash bonds, which are used by school districts and municipalities to provide internal liquidity.

The restrictions on working cash bonds may limit school districts' options and may "adversely" affect their financial operations, Moody's said.

Many school districts under the cap receive nominal amounts of state aid because of their wealth, Moody's said.

To offset the adverse effects of the cap, Moody's said that many local governments have shifted their reliance on property taxes to alternative revenue sources, such as sales taxes, or increased their sharing of services with other communities. The rating agency noted that before the cap went into effect in 1991 many local governments sold bonds without a voter referendum.

Anti-tax sentiment has spurred some home rule governments, such as Chicago and Cook County, to voluntarily impose property tax caps similar to the restriction in the five suburban Chicago counties, according to Moody's. Unlike non-home rule governments in the five suburban counties, however, both governments can reverse their ordinances upon a majority vote of their legislative bodies. In addition, the Cook County ordinance excludes from the cap debt issues and pension funding.

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