A local municipality needs temporary financing for a large public works project for water and sewage services. Eventually, the city hopes to obtain permanent financing through an EPA loan program. In the meantime, can we provide temporary financing? How do we secure the loan? Who from the city would sign the loan documents?

The Illinois Municipal Code does expressly permit municipalities to borrow money for corporate purposes from any bank or other financial institution, subject to certain conditions. Since the municipality itself will be the borrower (rather than a water or sanitary district), the Illinois Municipal Code requires that the mayor or president of the municipality execute a promissory note or similar debt instrument. The municipality also must authorize the promissory note “by an ordinance passed by the corporate authorities” of the municipality, which in this case would appear to be the city council for the municipality.

We are not aware of any provisions in the Municipal Code that expressly authorize a municipality to grant a security interest for its loans. The Code provides that municipal loan payments are “payable from the general funds of the municipality and such other sources of payment as are otherwise lawfully available.” If you do intend to take municipal property or investments as security for the loan, we recommend specifying the loan collateral in the authorizing ordinance.

Also note that limitations on municipal debts apply and should be reviewed before entering into a loan with the municipality. An exception to the municipal debt limitations would apply only if an “enforceable compliance schedule” under the Clean Water Act or a compliance order from the Environmental Protection Agency mandates that the municipality acquire, construct or improve water or wastewater treatment facilities. We do not have enough facts to determine whether this exception applies in your situation.

For resources related to our guidance, please see:

Illinois Municipal Code, 65 ILCS 4/8-1-3.1 (“The corporate authorities may also borrow money from any bank or other financial institution provided such money shall be repaid within 10 years from the time the money is borrowed. The mayor or president of the municipality, as the case may be, shall execute a promissory note or similar debt instrument, but not a bond, to evidence the indebtedness incurred by the borrowing. The obligation to make the payments due under the promissory note or other debt instrument shall be a lawful direct general obligation of the municipality payable from the general funds of the municipality and such other sources of payment as are otherwise lawfully available. The promissory note or other debt instrument shall be authorized by an ordinance passed by the corporate authorities and shall be valid whether or not an appropriation with respect to that ordinance is included in any annual or supplemental appropriation adopted by the corporate authorities. The indebtedness incurred under this Section, when aggregated with the existing indebtedness of the municipality, may not exceed the debt limitation provided in Section 8-5-1 of this Code. . . .”)

Municipal Code, 65 ILCS 4/8-5-1 (“Except as hereinafter provided in this Division 5, no municipality having a population of less than 500,000 shall become indebted in any manner or for any purpose, to an amount, including existing indebtedness in the aggregate exceeding 8.625% on the value of the taxable property therein . . . . The indebtedness limitation set forth in this Section shall not apply to any indebtedness of any municipality incurred to finance the cost of the acquisition, construction or improvement of water or wastewater treatment facilities mandated by an enforceable compliance schedule developed in connection with the federal Clean Water Act or a compliance order issued by the United States Environmental Protection Agency or the Illinois Pollution Control Board. . . .”)