McHenry officials seek new revenue sources to replace, maintain city equipment and other assets

McHenry’s elected leaders pushed back against a proposal from city staff this month to up tax revenue, such as a local sales tax hike, property tax increase or the creation of a utility tax for the first time.

The city staff wanted the McHenry City Council to consider raising taxes to put resources toward maintaining and replacing existing public assets, including playground equipment, bike paths, police cars and snow plows.

But the council was hesitant to get behind any of the three taxing tools the city staff included in its proposal, and instead discussed alternative methods to raise money and alleviate the shrinking margin between the city’s operating expenses and revenues.

City staff projects expenses for the general fund, which pays for the upkeep of city buildings and infrastructure like sidewalks and public parking lots, among many other city needs, will exceed operating revenues in about three years – unless a new funding source is implemented or public services or expenses are not reduced.

The cost of annual replacement and maintenance of existing capital assets should range between $1.4 million and $2.3 million to ensure equipment, vehicles and buildings remain in usable condition for as long as possible, staff said.

The city historically has spent an average of just more than $708,000, city records show.

Increasing the city’s local sales tax rate by 0.25%, taking it up to 1%, could generate more than $900,000 in new funding for the city, McHenry staff said.

The sales tax rate for general merchandise is currently 7.75% in McHenry with 0.75% going to the city through a home-rule sales tax and another 0.75% going to Regional Transportation Authority. The base sales tax rate in Illinois is 6.5%, which is split between the state and other local entities.

The city has not raised property taxes since 2010. Since then, the city’s property tax levy decrease by 3% to nearly $4.62 million in 2021, according to city staff.

The choices not to raise the property tax levy annually by the rate of inflation plus the value of new local growth as allowed by state law left $6.4 million in the pockets of taxpayers that the city could have collected, staff said.

If the City Council continues to keep the property tax levy flat through 2031, another $19 million would be left on the table, it said.

But staff favored installing a new utility tax on Nicor and ComEd customers in the city over raising either property or sales taxes.

An additional $760,400 could be generated by charging Nicor customers 5 cents per therm consumed and another nearly $1.3 million if the city charged the maximum allowed on ComEd customers, city documents show.

Staff noted that McHenry’s 0.75% home-rule sales tax and its property tax rate are both less than the combined municipal and local park district taxes charged by agencies serving Lake in the Hills, Huntley, Crystal Lake, Mundelein and Woodstock.

McHenry’s property tax rate is a bit higher than Algonquin’s and their sales tax rates are the same, but Algonquin takes in $902,000 in utility taxes while McHenry doesn’t charge those. Utility taxes also are collected by Crystal Lake, Lake in the Hills, Cary and Mundelein, according to McHenry officials.

“When you look at our municipal competitors, the resources that they have with their property taxes and their levies, ours are significantly lower,” Public Works Director Troy Strange said.

Strange said he thinks one of the three new revenue sources analyzed so far by McHenry’s staff will “become necessary” in the coming years.

Staff also recommended earmarking any of the new tax dollars that come in to a capital fund or a new fund specifically designated for capital maintenance and replacement, so they can’t go to other city needs.

But none of the new tax structures gained much traction with the council.

Second Ward Alderman Andy Glab, 1st Ward Alderman Vic Santi and 7th Ward Alderwoman Sue Miller said they opposed raising property taxes, although Glab expressed openness to a new transfer tax on certain real estate transactions charged at the time of sale.

Miller, a real estate professional, said she is against that.

“To continue to tax real estate will put people out of our community,” she said.

Santi suggested continued focus by city staff on filling vacant commercial buildings with new businesses, which is another way to grow the city’s revenue base. He noted doing so could require tax breaks for businesses to help keep their doors open while they’re getting started.

The COVID-19 pandemic has changed the market, perhaps permanently, for office and commercial space, Santi said, but also future demand is uncertain.

“I just want to make sure we can aggressively do our best to find people to get into those buildings and aggressively work with them,” Santi said. “And you know what, that means possibly a tax rebate to start them off – something to influence them to know that they can grow their business and hopefully they’re around for 20 years.”

Staff is likely to bring another discussion of establishing a new revenue source back to the council later this year, officials said.