Background

The Village has historically used conservative budget assumptions when budgeting the Village’s key operating fund, the General Fund.  During the upside of economic cycles, this has allowed the Village to buttress the financial position of our various capital funds through the transfer of surpluses in the General Fund to these funds.  Conversely, during the downside of an economic cycle, General Fund reserves have allowed the Village to weather these uncertain times.

Since the end of the pandemic through the first part of 2023, American consumers purchased goods and services at comparatively high levels. This spending continued in the face of higher costs due to inflation and increasing credit card debt levels.  Average wages also increased substantially during this time period.  As a result, the Village’s share of State income tax receipts and our sales tax receipts grew at a faster pace than our expenditures.  For the years 2021 and 2022, the Village experienced sizable General Fund surpluses which allowed us to transfer needed funds to the Parking and Vehicle Replacement Funds, which were adversely affected by the pandemic and supply-chain issues.  Transfers were also made to the Capital Projects Fund, the Lead Service Line Replacement Fund, and the Police and Fire Pension Funds.  All of these transfers have put the Village in a better financial position overall.  Last year, the Village was also in a position to approve a $1.6 million property tax abatement.

The 2023 General Fund budget included a projected $4.9 million surplus based on continued projected increases in our revenue base.  However, during 2023, sales tax revenue slowed substantially and came in under budget by $1.2 million, while income tax receipts came in $188,000 under budget.  On the expenditure side, 2023 total General Fund expenditures came in $2.7 million or (3.1%) under budget.  This is a fairly normal result for expenditures, as the Village conservatively budgets for full employment with no vacancies.  The actual General Fund surplus for 2023 came in higher than budgeted at $7.36 million, due in part to $1.7 million in additional revenue credited to the General Fund from the termination of the Lexus sales tax abatement agreement.  The dealership was unable to produce the development expense documentation needed to receive this abatement payment, and after eight years of Village requests for the required documents, a termination notice was sent to the dealership in 2023.  At this point, it appears that 2023 may be the last year for a General Fund surplus at this larger level, as the 2024 budgeted surplus is down to $772,000 due to plateauing sales and income tax receipts and increasing costs.

As of the beginning of 2023, the unassigned General Fund balance equaled 43.7% of expenditures.  The projected 2023 General Fund surplus allows the Village an opportunity to transfer 2023 surplus funds over the 40% maximum General Fund reserve level to other fund(s), as defined in the 2024 Budget under Reserve Performance Goals.  It is proposed that the Village transfer $5.75 million from the General Fund to the Lead Service Line Replacement Fund. 

 As per a January 30th Public Works memo on Lead Service Line Replacement Requirements previously shared with the Village Board, by State law, the Village is required to submit an inventory of all lead water service lines in the water distribution service to the IEPA no later than April 15, 2024.  The legislation requires further that the Village remove and replace these service lines by 2044.  Lead water service lines are located on nearly 4,200 or 23% of the residential services in the Village.  This includes lines on just public property, on both public and private property, and just private property.  Public Works/Water Staff developed the Village’s inventory list with the help of a consultant.  Over the last two years, Village Staff has worked to plan and implement an aggressive program to eradicate lead service lines in the Village, in compliance with State mandates.  These plans have included transferring available surplus monies from the General Fund to the Lead Line Replacement Fund, and in-house completion of some of the required work.  In addition, in 2024 the Village will have another bond opportunity as a portion of our existing debt will mature.  Current plans call for a large portion of the 2024 bond issue to be used toward the lead service line replacement program.  The Village had hoped to cover the public portion of the lead line replacement expenses, and to develop a cost sharing plan for the private portion of the project.  The actions outlined above would have covered most of these costs with a completion date by 2044.

However, the Federal Environmental Protection Agency (EPA) has recently proposed that lead service lines be removed from service even earlier, by 2034.  Even though the Village’s water system is treated and deemed to be safe, this is a politically charged topic that could result in additional Village expenses mandated by federal or state agencies at a date considerably earlier than previously outlined. 

The Village has applied for IEPA’s 0% loan program to help cover a portion of this new capital program’s costs.  However, to date, these funds have been allocated to communities with more pressing financial needs.  The Village will continue to apply for these and any other state or federal grant funds that become available for lead service line replacement.

RECOMMENDATION:

It is recommended that the Village Board approve the attached Ordinance amending the 2023 Budget transferring the 2023 General Fund surplus amount of $5.75 million to the Lead Service Line Replacement Fund.