TAX DIVERSION: District Considers Suit

ATTORNEY: INTENT IS TO GET COURT TO REVERSE ASSESSOR’S RULING

— Administrators will ask the school board Thursday to sue the county assessor over his decision to divert part of a 2.75-mill, voter-approved tax increase to expand the high school to pay off a city project.

Fayetteville School District voters in 2010 approved the property tax increase to pay for the second phase of a $92 million expansion and renovation of Fayetteville High School.

AT A GLANCE

What is Tax-Increment Financing?

Tax-increment financing captures increases in property taxes within a defined district as a way to pay to remove blight, provide infrastructure and encourage development within the district's boundaries. Typically, bonds are issued to pay for infrastructure improvements. City officials determine a baseline of property values on land and structures within the district. Any tax dollars derived from future property value growth beyond the baseline goes toward repaying the bonds.

When the project is complete and the bonds are paid off, property tax proceeds return to local governments, schools and other taxing entities at their full, increased value.

Source: Staff Report

In 2005, the city of Fayetteville invoked a funding mechanism called a tax-increment finance district to purchase and demolish the old Mountain Inn at Mountain Street and College Avenue. The $3.7 million city expense was supposed to clear the way for private construction of an 18-story hotel that never came to pass. The site is now a parking lot.

To pay off that expense, the City Council created the tax-increment finance district that set a baseline of property values within a 350-acre downtown area that includes about 1,300 properties. Any tax revenue collected on property value growth beyond that baseline is to be diverted until the city’s costs are paid back.

The tax district is sometimes referred to as a TIF.

The potential litigation is over Washington County Assessor Jeff Williams’ decision that, within that tax district, 1.45 of the 2.75-mill property tax increase for the high school project within the tax-increment district must be diverted to pay off the Mountain Inn demolition debt.

Rudy Moore, the attorney for the school district, said the intent of a lawsuit is to get the court to reverse Williams’ ruling.

“The argument is relatively simple,” Moore said. “The new millage is not included in the TIF.”

About the same time as the creation of Fayetteville’s tax-increment finance district, the Arkansas Legislature amended state law to prohibit new millage from being placed in such tax districts. Moore contends the new law applies to the 2.75 mills school district voters approved in 2010.

Moore said Williams’ ruling will cost the school district about $25,000 a year that would otherwise go to pay off its high school construction debt. City officials originally planned to pay the demolition debt off in about 25 years, meaning the district could lose more than $600,000.

But paying off the Mountain Inn debt has lagged behind schedule because property values have not increased as anticipated when the tax-increment finance district was created. The diverted tax revenue continues until that debt is paid off.

“The advice I was receiving was that I had to go by what the law was at the time,” Williams said. “I did everything to find a way to provide the school that money. I wanted to give voters the opportunity to give the money to the schools.”

Fayetteville City Attorney Kit Williams said prior court decisions support the assessor’s interpretation of the law.

The City Council in creating the tax district faced a “difficult decision” at the time because the old Mountain Inn, long considered a blight on the city, was a fire hazard and dangerous, Williams said. It was often used as refuge by the homeless.

Mayor Lioneld Jordan was on the City Council and voted for the project. His vote would have been different had he known then what he knows now, he said Monday.

“It was the correct vote at the time,” Jordan said. But looking back, he added, “I made a mistake in voting for this.”

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