School fund withholding goes to court

Justices question legality

— Arkansas Supreme Court justices quizzed attorneys for close to an hour Thursday morning on the legality of the Arkansas Department of Education withholding $2.2 million in property tax funds from the Fountain Lake and Eureka Springs school districts in the name of “recouping over payments.”

The districts refused to hand the money over to the state, as requested, after they collected more money locally from a statewide 25-mill tax designated for school maintenance and operations than other districts did in the 2010-2011 school year.

In 2003, in an attempt to equalize the amount of money allotted per pupil throughout the state, regardless of whether the district itself is rich, poor or somewhere in between, the state imposed a minimal millage that must be assessed in each school district. Any districts that don’t collect enough money through the local 25-mill tax to assure that $6,023 is available per pupil is to be compensated with “Foundation Funding” until that amount is met.

“Foundation Funding,” or State Foundation Funding Aid, is paid out of the Public School Fund and is supported with general revenue.

But what the Legislature didn’t anticipate was that at some point - in this case, in the 2010-2011 school year - a school district’s 25-mill tax might actually generate more money than $6,023 per pupil.

In fact, Fountain Lake’s millage generated $7,160.49 per student, while the Eureka Springs district’s millage generated $7,290.50.

Under the law, the districts are required to collect the millage money locally, turn it over to the state, and then the state returns the money to the districts for distribution to the schools, along with any necessary Foundation aid to ensure that the per-pupil minimum is met.

But when excess funds were raised for the first time, the districts decided to keep the extra money generated in their districts, applying it to school maintenance and operations, which state law requires that any funds raised from the 25-mill tax be used for.

Those districts and two others, the Armorel School District and the West Side School District, which also generated extra funds per pupil through the 25-mill tax, applied the extra funds as ongoing revenue in their projected budgets.

Then the Department of Education learned of the excess revenue and demanded that the extra be paid to the state. They argued that the special 25 mills is, after all, a state tax, and as a state department, they control it.

Although the Armorel and West Side districts surrendered the extra funds to the department as requested, Fountain Lake and Eureka Springs refused to remit the funds, which amounted to $824,914.35 for Eureka Springs public schools and $1,386,969.45 for the Fountain Lake schools.

The state, which had sought repayment of the total $2.2 million by June 15, 2011, retaliated by declining to approve the two districts’ budgets because they included the extra funds as ongoing revenue.

When the two districts refused to adjust their budgets accordingly, the Department of Education withheld “categorical funding,” which is funds it supplies to districts for things other than maintenance and operations,in an attempt to compensate. That amounted to withholding $63,973 from Fountain Lake and $47,417 from Eureka Springs.

The districts responded by filing suit in Pulaski County Circuit Court on May 11, 2011, asking Judge Tim Fox to impose an injunction to prevent the department from recouping the excess millage funds or withholding other money to compensate.

On Sept. 20, 2011, Fox issued the injunction, prohibiting the department “from undertaking any action against the ... school districts seeking repayment of any portion of the 25-mill URT (Uniform Rate of Tax).”

The state, however, refused to return the categorical funds to the districts, prompting them to seek a motion of contempt against the department. Fox denied the contempt request but “clarified” his earlier ruling to explain that he intended that the department return the withheld categorical funds.

In oral arguments Thursday before the Supreme Court justices, with Justice Karen Baker absent and Justice Jim Gunter replaced by George Ellis of Benton after recusing in the case, Assistant Attorney General Collin Jorgensen argued that the department has the authority to recoup the funds. He also said that doing so is in line with the Legislature’s intent, in resolving issues from the long-standing Lakeview school-funding case resulting in lawmakers’ efforts to equalize funding among districts.

The 25-mill tax dedicated to maintenance and operations is set by Amendment 74 to the state constitution.

Jorgensen argued that the Arkansas Constitution prohibits distribution of school funds based on an individual district’s wealth, which is what happens if the districts keep the excess funds.

He said the Supreme Court has said the state department has an “absolute duty” to ensure all public school students have access to an adequate education, which requires it to recoup “bonus money” from any districts, to avoid inequality.

Some of the justices indicated they had a hard time reconciling that all money generated within the district for school operations and maintenance, which continues to be used for operations and maintenance alone even if the total collected surpasses the $6,023 per-pupil minimum, could be considered a “bonus.”

Jorgensen agreed that Amendment 74 permits variations in funding among districts as long as the excess funds come from voters’ approval of additional millage for that purpose. He also conceded that the state, which he said cannot keep the “bonus” funds itself, would probably redistribute the excess funds to all school districts. But that doesn’t apply to funds raised through the 25-mill special tax, he said.

The judges asked why, if legislators intended that the districts cannot keep the excess funds, the state wouldn’t explicitly state that.

Little Rock attorney Eugene Sayre, who represents the districts, argued that the 25-mill tax is a “base line,” to ensure that every district receives at least $6,023 in per-pupil funding, but he said that doesn’t mean the districts can’t keep any excess.

He said he disputes that the money collected under Amendment 74 is a “state tax,” though he agrees it’s a “special tax.”

Sayre also said that as a result of the proliferation of natural gas fracking operations that has generated gas revenue in many counties, which wasn’t anticipated in 2003, “there will probably be more than 20 school districts come into this situation,” of collecting excess funds under the 25-mill tax.

He also argued, “There’s not a clear directive or delineation to the department to do what they’re doing.” He emphasized that Arkansas statutes require any money raised within a district from the 25-mill tax to “go back to the district.”

“If the Legislature wants to change it, it has the power to do that,” Sayre said. He also criticized the state for “recouping” excess funds from the West Side and Armorel districts, which as a result are now “in financial distress.”

Standing in front of superintendents and school board members for the Fountain Lake and Eureka Springs districts, Sayre said, “The Eureka Springs district has scrimped and saved ... It would cost them over $1 million to pay it back. In three to five years, they would be in fiscal distress themselves.”

The case is Thomas W. Kimbrell et al v. Bob Allen McCleskey, et al, Case. no. 11-1289.

Arkansas, Pages 9 on 10/05/2012. Note: A correction has been appended to this story since its original publication.

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