William H. Phillips is an associate professor of educational administration at the University of Illinois-Springfield. Deanna Sullivan is director, governmental relations, with IASB.

British statistician and professor Sir Claus Moser once said: "Education costs money, but then so does ignorance." The unfortunate reality for many school districts in Illinois is that there just is not enough money.

Local money generated through property tax is not able to meet the increasing demand for either facility improvements or new buildings in many school districts. To help remedy the problem, and over the governor's veto, the County Schools Facility Occupation Tax Law took effect October 17, 2007.

Rock Island area Representative Patrick Verschoore first introduced the idea in January 2007. He and Senator Mike Jacobs then worked to successfully pass SB 835 on to the governor in May 2007.

The legislation was then vetoed by Governor Rod Blagojevich in August 2007. In his veto message, the governor said, "Such projects should be funded through a statewide capital plan, not a sales tax increase." The House and Senate disagreed with him, overriding his veto, and the County Schools Facility Occupation Tax Law took effect last October.

This new law provides an excellent opportunity for school districts to generate money through sales taxes rather than property taxes. This tax money is available to all school districts having territory within the county where the tax is implemented, providing revenue that is dispersed equitably based on enrolled students residing in the county.

The sales tax increase is limited to a maximum of 1 percent, or a penny on each dollar, and can be raised in increments of a quarter-percent. General merchandise is taxable (excluding vehicles, watercraft, aircraft, trailers, mobile homes and medical supplies), but the county sales tax will not be collected on food and drugs. Agricultural sales, such as farm equipment, feed, seed, fertilizer, chemicals and livestock reproduction, are subject to the tax.

Under the Act, money generated through the county sales tax can only be used for "school facility purposes," defined as "acquisition, development, construction, reconstruction, rehabilitation, improvement, financing, architectural planning, and installation of capital facilities consisting of buildings, structures and durable equipment." It can also be used for the "acquisition and improvement of real property; Interest in real property required, or expected to be required, in connection with the capital facilities." Usage does also extend to updating systems for fire prevention, safety, security, energy conservation and disabled access.

The tax is collected by the Department of Revenue and placed into the School Facility Occupation Tax Fund. Each month, the Department of Revenue dictates the specified amount to the state comptroller. This amount is then distributed to the regional superintendent of schools in the county where the tax was collected.

The amount distributed to each local school is based on the fall housing report enrollment data. Thirty days after receiving the funds, the ROE issues the money to any school district having territory in the county where students attending that school live in the county adopting the sales tax. Schools receiving these funds are required to keep them in a specific, separate account designated for school facility purposes.

Who benefits?

Both the school district and the community can reap benefits by implementing a county wide sales tax. While the district benefits from access to additional funds, the community benefits as money generated through the county sales tax can potentially replace some of the dependence on local real estate taxes.

The county sales tax also allows all school districts to benefit directly from tax generated based on their student enrollment, not just on the local business base. This new revenue source for school facilities is also significant because the tax is not based on property wealth and state foundation level funding sources but rather whether the student attends a school where the county sales tax has been adopted.

Because each district's percentage of the tax is adjusted annually, if enrollment increases, the school district will be eligible for more money from the pool generated.

While the county sales tax has its positives, it also has a few negatives. The first is that this is a tax and will result in a slight cost increase in merchandise for consumers. The other negative is that it is regarded as a "regressive tax," one that affects lower income population more than upper income brackets.

But the County Schools Facility Occupation Tax Law does provide significant revenue potential for school districts. This law is beneficial because it spreads the income generated to all the school districts in the county, even when the majority of the sales revenue may only be accrued in one part of the county.

By encouraging voters to support a local sales tax increase, the school district could gain tremendous revenue without making the voters in their district incur a property tax increase.

How it works

Under the County Schools Facility Occupation Tax Law, either the county board unilaterally, or school boards representing 51 percent of the county student enrollment that would like to implement the law, must submit a ballot question to the voters to be approved or rejected. The question must be placed on the ballot by the county board either way.

A sample question that could be put to the voters in St. Clair County would read: "Should St. Clair County be authorized to impose a retailers' occupation tax and a service occupation tax (commonly referred to as a 'sales tax') at a rate of 1 percent to be used exclusively for school facility purposes?"

The question needs only a simple majority of votes countywide to be put into law. After the vote is cast, the county board still has the final say in determining whether the tax will be applied or not.

For the next election cycle, a proposed question regarding the sales tax increase must be presented for balloting no later than September 2, 2008, to be on the ballot for the November 4, 2008 election. If the question is approved, the tax will be filed with the Department of Revenue before April 1, 2009. Taxes will then be placed on merchandise in July 2009.

Once a sales tax question is passed in the county and the schools learn how much revenue it will generate, the district can sell alternate revenue bonds or "double-barreled" bonds. These bonds combine the benefits of revenue bonds with general obligation bonds.

The following from Stas Bekman, a Canadian consultant and author on www.stason.org, explains revenue and general obligation bonds:

"Revenue Bonds are bonds that are payable from a pledge of the proceeds against a specific tax. Unlike General Obligation bonds and their unlimited ability to raise taxes, with these bonds, the issuer is limited as to its source for the revenue to pay the bonds. These bonds are quite safe.

"General Obligation Bonds are backed by the full faith and credit of the issuer for prompt payment of principal and interest. Many bonds issued by a city, county, or school district, also have the added security that they can raise property taxes to assure payment. This guarantee is of an unlimited nature. The issuer can raise taxes as high as they want to pay the bonds. If the property tax is not paid, the property can be sold at auction giving the bond holder a superior claim above mortgages, mechanical liens, and other encumbrances.

"General Obligation bonds are usually analyzed in terms of the size of the taxable resources. These bonds are regarded as very safe."

Combining these two types of bonds is often referred to as "double-barreled bonds." These bonds are considered safe as they have two pledged sources of security: revenue from the project and the taxing power of the issuer.

Alternate revenue bonds do not count against the district's bonded debt limit or the Debt Service Extension Base if they are a PTELL district. Because of this, the school is permitted to sell bonds up to the amount that the revenue from the sales tax can support.

The sales tax can be applied as long as there is outstanding bonded debt and can not be eliminated as long as that debt exists. As long as debt remains on bonds issued by any district in the county, the county board is prohibited from terminating the sales tax. Twenty years is typically the longest term for these types of bonds and in some rare cases, up to 40 years. Once the bond payment has been fulfilled for any bonds issued relying on the sales tax for payment, the sales tax can be eliminated.

One problem with the law as written is that the wording makes it fairly open-ended. The current wording states that the county board may not reduce or terminate the tax as long as doing so would inhibit the ability to repay outstanding bonds.

The hole in the law regards who makes the decision that the school district can repay the bonds out of other funds or not. A possible solution is to amend the law to state that as long as outstanding bonds are not paid in full, the tax will remain in place.