City and county officials are beginning to form contingency plans in the wake of last week’s Chrysler property tax announcement, plans that could include massive cuts to at least the city’s budget.

Officials with the Fiat-led Chrysler Group LLC are expected to pay only a portion of the 2009 property taxes owed by the now-defunct Chrysler LLC.

And that decision could cost all of the county’s taxing units — including school districts — a combined $12.2 million in anticipated property taxes this year.

Next year, the new Chrysler will begin paying all of the property taxes for the company’s four Kokomo plants. But even a one-year gap from the county’s largest taxpayer is a big hit.

The immediate reaction by Howard County officials was that state loans would be needed to cover the funding gap.

Without the money — which would equal more than 20 percent of the city and county general funds — services would have to be cut drastically.

But Kokomo Common Councilman Mike Karickhoff, R-At Large, said Friday his fellow council members might want to consider simply taking the hit.

Assuming the Indiana General Assembly passes a budget — a budget which in turn authorizes the state to offer loans to Howard County’s local taxing units — the general understanding locally is that the money would have to be paid back eventually.

Currently, the city owes the state $2.3 million. That money was borrowed to make up for tax revenue Delphi Corp. failed to pay in 2005, when the company declared bankruptcy.

The city must pay that money back to the state if it receives payment from Delphi, or within 10 years.

If need be, the city could raise the property tax levy to pay off that loan.

Karickhoff’s argument is that borrowing more money could mean long-term property tax increases.

“I’m concerned that if we borrow that money, that’s almost $10 million we’ll owe,” Karickhoff said. “Even if we pay that back over 10 years, that’s a 4 percent increase in property taxes — which we just got down.”

On top of that, Karickhoff said, the special homestead credit homeowners are now enjoying will go away after next year. That means property taxes for homesteaders should increase across the state.

Howard County Council president Dick Miller, R-4th, said the idea of accepting a one-year hit to the county’s tax levy just wouldn’t work.

Unlike the city, which offers services not mandated by state law, the county offices — assessor, clerk, treasurer, etc. — are all mandated, Miller explained.

“It’s interesting, from a distance, what the city has been doing; during all of the issues and turmoil, they’ve reduced I don’t know how many folks and programs, in order to just prepare for normal circumstances,” Miller said.

The fact the city has been able to cut more than 50 full-time employees without any apparent reduction in services raises numerous questions about why those positions weren’t cut years ago, Miller said.

Even so, he said he doesn’t see the same flexibility to cut personnel costs in county government.

“With a gap of these numbers, I can’t envision a reduction of that magnitude,” Miller said.

Friday, Kokomo city officials were busy crunching numbers.

City director of operations Randy Morris said the administration is putting together a plan to deal with the Chrysler non-payment.

Karickhoff said another idea — which was briefly discussed during former Mayor Matt McKillip’s tenure — is to establish a new cumulative capital property tax.

County officials have had a “cum cap” tax for years, and have used it to purchase the Key Bank Building and to renovate the Howard County Courthouse.

A cum cap tax wouldn’t count against the state property tax caps, but it would add to current property tax bills.

Whether that idea would pass muster with the full city council is something Karickhoff doesn’t know.

But the Chrysler non-payment is probably forcing the city administration to come up with what could essentially be called a “shadow budget.”

In other words, the city council might budget based on the expectation that the Chrysler money will be made up through loans.

But administration officials don’t have to ask for state loans they don’t want to pay back. And it’s legal for a mayor to spend less than what the council budgets.

“When we get [the administration’s] budget presentation, we’ll know a lot more,” Karickhoff said.

• Scott Smith is a Kokomo Tribune staff writer. He may be reached at (765) 454-8569 or via e-mail at scott.smith@kokomotribune.com