Commentary: DuPage County, Ill., Shows the Power of Tax-Exemption

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DuPage County, Ill., has a rich history of financial stability that has helped us stay afloat during these turbulent economic times. We've cut the budget by more than $13 million over the past two years, trimmed costly employee benefits, and reformed several independent taxing bodies in an effort to yield greater savings for our taxpayers.

Although these actions were met with some resistance, they were necessary in order to bolster the future sustainability of DuPage County, home of nearly one million residents.

Despite our prudent actions, there are real threats on the horizon that will have a negative impact on our bottom line: the state of Illinois' credit rating and the potential removal of the tax exempt status for municipal bonds.

DuPage County uses the bond market to finance projects such as drainage and sewer upgrades, road construction and stormwater projects. Currently, the county has roughly $295 million in bonded debt. Of this amount, $208 million is general obligation, which is only 0.2% of county property values. We use only 2% of our available legal debt limit.

Despite our frugal budgeting, limited use of debt and stellar triple-A bond rating, DuPage County has been required to pay additional basis points on borrowing to compensate for an irresolute political climate in Illinois and deteriorating fiscal conditions. The "Illinois Effect" is essentially guilt by association.

For example, it's estimated that DuPage has been penalized by between 15 and 35 basis points on recent triple-A bonds. This means our taxpayers will pay an additional $100,000 for a recent $5.3 million drainage bond and another $4 million over the life of the county's $67 million GOs issued in 2010. These bonds financed improvements to the county's highways, nursing home, sewer treatment plant, courthouses, and flood control facilities.

It is a frustrating set of circumstances, particularly when we make tough budget decisions to save tax dollars and then waste those saved funds to pay for higher borrowing costs. In addition, the state's recent woes with the Securities Exchange Commission may add to the Illinois penalty as well.

Another threat on the horizon for local government is legislation to repeal the federal income tax exemption of municipal bond income. For more than 200 years, municipal bonds have helped finance state and local investments. These bonds provide a low-cost way for government to finance critical infrastructure projects such as roads and bridges in addition to water and sewer systems.

The current structure provides a mutually beneficial partnership between the bond investors and the taxpayers due to market stability, low default rates, and most importantly lower interest rates. This combination ultimately translates into lower borrowing costs for capital projects. If the tax-exempt status is repealed, borrowing fees will increase, which will result in higher taxes, more user fees and scaled- down projects.

Using the scale of $67 million from the 2010 GO issue, taxpayers would be charged an additional $17 million in financing costs over the term of the bond for taxable bonds, not assuming federal rebates.

There is a misconception that the investor would actually bear the real impact of the tax; however, at the end of the day, the cost would be borne directly by local taxpayers through increased property or sales taxes used to fund the debt. This is because, if taxed, the investor would still demand the same after-tax income value, which will be rolled into the debt.

The federal government's recent sequestration could also affect the U.S. Treasury's ability to fund a portion of the Build America Bond payment commitments to state and local governments.

The BAB program promised full payment, yet officials have indicated that the rebates, which were originally not tied to the federal budget, could be affected by up to 8.7%.

That means local governments may have to find additional funding from other sources to meet bond obligations or, such as DuPage, absorb general revenue loss. The change in the system could impact DuPage County by at least $70,000.

The rebate issue underscores the critical need for state and local governments to have a funding source independent of the federal government. The tax-exempt status provides local governments an independent, reliable, low-cost funding source for infrastructure projects that our residents want and are willing to pay for.

Local government's efforts to build and repair the nation's deteriorating infrastructure should not be diminished through the repeal of the tax exemption for municipal bonds in order to address the federal government's fiscal issues. Therefore, DuPage County strongly opposes any attempts to repeal the tax exemption for municipal bonds that help local economies create jobs and address the critical infrastructure needs of our communities.

Instead of repealing the tax-exempt status, we need to rebuild the economy by reinvesting in our infrastructure that will ultimately create jobs. One of the best ways to do this is through low-cost borrowing at the local level.

Dan Cronin is chairman of the DuPage County, Ill., Board.

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