Illinois Senate Ready to Vote on School Working-Cash Bond Bill

CHICAGO — The Illinois Senate is expected to vote this week on legislation that would clarify school districts’ rights to tap working-cash bond proceeds for some construction projects or to cope with late state school aid payments, reducing the risks of costly challenges to the long-standing practice under the tax law.

The House approved the legislation, which amends working-cash fund rules under Article 20 of the Illinois School Code, and the Senate was expected to take up the bill as soon as Tuesday, according to legislative aides.

“This legislation doesn’t really change anything. The intent was to clarify existing law and the procedures that districts have employed for decades so that districts do not have to spend money defending themselves against repeated tax objections,” said Lynda Given, one of the bill’s co-authors and a partner at Chapman and Cutler LLP, which serves as bond counsel to school districts across the state.

Under existing law, districts can establish a working-cash fund either with proceeds of a working-cash bond issue or through an annual tax levy. They can then use it to “meet ordinary and necessary” expenses for salaries and other school purposes by transferring the funds to the district’s general fund.

The new legislation replaces the “ordinary and necessary” language, making clear that the district can use the funds for “any and all school purposes.” The legislation also makes clear the ability of a district to permanently transfer money from the fund and to re-establish a fund after closing it.

It also eliminates language requiring that the cash in the fund be transferred to “the educational fund” and disbursed from there for use, allowing the funds go to “such other funds of the district” where it can be “used for any and all” school purposes. 

The amount held in the fund will continue to be governed by a formula based on a percentage of a district’s educational fund tax levy. The tax levies of most Illinois school districts fall under state property tax caps.

School districts have long relied on such funds for cash-flow purposes or to cover the costs of more minor school construction projects. Under state law, voters must approve bonds being issued by a school district to fund a new freestanding ­building. 

Those practices have come under fire and faced tax challenges, forcing the districts to finance their defense of the challenges or to settle. Backers of the challenges and lawmakers who have voted against the legislation contend that it would allow districts to skirt referendum requirements.

The legislation comes after an appellate court ruling last year that favored a taxpayer’s challenge against West Chicago School District 33’s transfer of working-cash funds to its operation and maintenance fund. The district more than a decade ago created the working-cash fund to “build and equip additions to and alter, repair, improve, and equip the existing school buildings.”

After the transfer, taxpayers filed an objection, arguing that under the law, the funds should have gone to an educational fund. The challenge then argued that if the district had moved the bond proceeds to that fund, it would have exceeded tax levy caps. The Second District Appellate Court ruled the district could not permanently transfer the funds to the operation and maintenance fund and remanded the case to district court where it is still pending.

The legislation — in HB 6041 and SB 3544 — was drafted after John Izzo, an attorney at the firm Sraga Hauser LLC, which represents school districts, brought together Given and district lawyers to discuss possible legislative action to help districts deal with the tax challenges.

Working-cash funds are an especially important tool for poorer districts that lack strong reserves or other forms of liquidity, especially given the state’s chronically late aid payments due to its own liquidity crisis, advocates of the legislation said.

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