Millage decision favors schools

High court:Tax excess not state’s

— The Arkansas Supreme Court ruled Thursday that the state cannot force wealthier school districts to surrender excess property-tax revenue to subsidize poorer districts.

Each district in the state has a uniform tax rate of 25 mills, the money from which is collected and given to the state to be distributed among all the districts to ensure an adequate education for every student. In 2011, the adequate-education, per-student amount was $6,023.

The court Thursday affirmed 4-3 a circuit court’s decision that allows the districts to keep any money that exceeds the minimum perstudent amount.

The court called the 25-mill tax a “special tax” and said it could not be considered state revenue.

The ruling was a victory for the Fountain Lake School District in Hot Springs and the Eureka Springs School District, where the 25-mill uniform rate of tax generated more than the $6,023 per student in the 2010-11 school year. The districts had refused to turn over excess tax revenue to the state Department of Education.

Justices Paul E. Danielson, Karen Baker, Courtney Hudson Goodson and Donald L. Corbin made up the majority in the ruling. Chief Justice Jim Hannah, Justice Robert L. Brown and Special Justice George D. Ellis were the dissenters.

Danielson wrote in the majority opinion that there was “no basis on which to find that the URT [25-mill uniform rate of tax] is a state ad-valorem tax.”

“Instead, it is a one-of-akind tax, a school-district tax, approved by the voters of the State of Arkansas, and levied, assessed, and collected by the counties for the sole use of the school districts,” Danielson wrote in the 22-page opinion. “Any conclusion by the circuit court that the URT revenues were state revenues was simply erroneous.”

The case dates back to 2003, when the state imposed the 25-mill minimum to be assessed in every school district. It was an attempt to equalize the amount allotted per pupil throughout the state, regardless of whether the district itself is rich, poor or somewhere in between. The 25-mill tax in most districts generates only a portion of the minimum amount of money the state says a district must have to educate each child. That amount was $6,023 in 2010-11 when the lawsuit was filed. It changes each year. Last school year the amount was $6,144, and it is $6,267 this school year.

Because most districts can’t generate the minimum required funding amount with the 25 mills, the state makes up the difference with “foundation” funding that is paid out of the state’s Public School Fund and is supported with general revenue.

For example, 25 mills generated $3,437 per student in the Little Rock School District last year, and the state provided $2,706 per pupil to reach the minimum $6,144 required.

Voters in school districts can levy mills above the 25-mill requirement, and many do. However, the money generated by mills above the 25 state-required mills remains in the district to be spent as the local district desires.

The money from the extra mills is not included in the calculation for state aid.

In the 2010-11 school year, the Fountain Lake and Eureka Springs school districts’ 25 mills both generated more than the $6,023 per-pupil amount. Fountain Lake raised $7,160.49, and Eureka Springs generated $7,290.50 per student.

Statewide, money generated from the 25 mills is designated for school maintenance and operations.

The Fountain Lake and Eureka Springs districts kept the excess money and applied it to their school maintenance and operations.

After the districts, and two others that had raised excess funds, applied the money to ongoing revenue in their projected budgets, Department of Education officials demanded those extra funds, arguing that the 25 mills was a state tax and as a state department they controlled it.

The two other school districts — Armorel and West Side — turned the money over to the department, but Fountain Lake and Eureka Springs refused.

The Education Department then refused to approve the districts’ budgets and withheld “categorical funding,” which is money for expenses such as alternative education, teacher training and poor children.

The districts filed a lawsuit in Pulaski County Circuit Court on May 11, 2011, asking that Judge Tim Fox intervene to prevent the department from withholding money from the districts and attempting to claim the tax revenue.

Fox issued an injunction on Sept. 20 of that year, prohibiting the department “from undertaking any action against the ... school districts seeking repayment of any portion” of the tax.

Fox then ordered the state to pay $137,790 to Fountain Lake and $87,629.19 to Eureka Springs.

Both sides appealed the ruling, with the department stating that it had the authority to “recoup and redistribute” the excess uniform-rate-of-tax funds and the school districts arguing that that money should not be considered state-tax revenue.

During oral arguments in October of this year, the justices asked the question: If the legislators who wrote the law had not intended for the districts to keep the excess funds, why didn’t they explicitly say so.

In finding that the school districts were entitled to the excess funds, Danielson wrote that Thursday’s ruling was not “in violation of our decisions in Dupree and Lake View,” two previous court decisions that addressed school funding.

Danielson stated that in the Dupree case, the court was “faced with a schoolfunding system, which bore ‘no relationship to the educational needs of the individual districts,’ but was ‘determined primarily by the tax base of each district.’”

Danielson said the current system is based on the “need to provide an adequate and substantially equal education to every student,” which the court upheld in the Lake View cases.

Each of the three dissenting justices, agreeing in their dissent on the potential effects of the ruling on the state’s school funding system, wrote individual opinions.

Hannah wrote that the majority re-creates “an unconstitutional school funding system in interpreting Arkansas Code Annotated 26-8-101(b)(1)(B)(Supp. 2009) to distribute state funding to school districts based upon their wealth.”

Hannah referred to the Lake View and Dupree rulings, stating that the funding a school district receives “may not depend upon the wealth of the school district.”

Brown agreed, saying the decision “returned this court to a pre-Dupree standard where property wealth can be used ... to benefit some school districts more than others.”

Brown said that under the new ruling, if the excess funds “resulted in education funding that was two or three times that paid to other school districts in the state because of property wealth, that would pass constitutional muster. That, of course, is manifestly wrong.”

Ellis said, “It is as if the majority has entered a time machine.”

Eugene Sayre, the attorney representing the Fountain Lake and Eureka Springs districts, said he didn’t agree with the dissenters that the ruling ruins the state funding system. He said that, instead, the ruling clarifies the system.

“There is no mechanism statutorily created for the redistribution of the money that the Department of Education sought,” Sayre said.

He said he expected a request to be filed for a rehearing, a petition that the state has 18 days to file.

Gov. Mike Beebe said Thursday afternoon that a petition for rehearing would be “appropriate” in the case and that he felt that the three judges “who called [the majority] out” were “absolutely right.”

Beebe said the ruling “opens the door” for future governors or legislatures to backtrack on the rulings from the Dupree and Lake View cases.

“Four people on the majority have really set back 25 or 30 years’ worth of court rulings and what the people did,” Beebe said, referring to previous court cases and constitutional amendments.

Danielson wrote in the majority opinion that the General Assembly created the law and could also address redistribution.

Front Section, Pages 1 on 11/30/2012

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