Tax District Lawsuit Still Alive

Arkansas Supreme Court To Hear Oral Arguments

— A property tax case pitting the city against the School District will be argued Thursday before the state Supreme Court.

About $625,000 in property taxes over 25 years could be diverted from bond payments for the high school construction project to pay city debt for downtown redevelopment, district attorney Rudy Moore Jr. has said. That figure could increase if property values increase.

David Ruff, Washington County tax collector, said the annual amount is $24,623.

Kit Williams, city attorney, said the tax money has been paid to the bond trustee toward the $3.7 million tax increment financing bond debt. If the Supreme Court upholds a lower court decision, the money will have to be paid back to the School District.

This is the second time the city’s tax increment financing district has been the subject of a lawsuit before the Supreme Court.

At A Glance

What is Tax-Increment Financing?

Tax-increment financing captures increases in property taxes within a predefined 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 property value growth beyond the baseline goes to repaying the bonds.

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

Source: Staff Report

The city is appealing the ruling by former Circuit Judge Chadd Mason in favor of the School District.

The city “wants a final answer so the litigation will be over” once and for all, Williams said.

The School District filed its lawsuit in November 2011.

Jeff Williams, Washington County assessor; Ruff; Roger Haney, county treasurer and Fayetteville were named as defendants.

Voters approved a 2.75 property tax millage increase in September 2010 to complete phase II of the high school reconstruction.

Williams has said he was following the law in diverting the dollar equivalent of 1.45 mills to the tax increment financing district to help repay the city’s $3.7 million bond issue.

The amount of debt remaining is $3.25 million. The debt is expected to be repaid by 2029, according to Paul Becker, city finance director.

The city created the tax district in 2005. The district covers about 350 acres downtown and includes about 1,300 property owners.

Less than 30 days after the district was formed, the Legislature passed a law excluding new millage be used to repay the bonds.

The city’s position is the law in effect at the time the tax district was organized should prevail, meaning a portion of the new millage approved in 2010 is subject to helping the city pay off the bonds.

Chris Lawson, an attorney with Friday, Eldredge and Clark Law Firm in Fayetteville, said Mason’s order was “well reasoned, thorough and based on sound principles of law. We’re hopeful the Supreme Court will affirm that.”

Lawson has assisted School District attorney Rudy Moore Jr. since the school lawsuit was filed.

In the first lawsuit, the state Supreme Court ruled in April 2007 the city couldn’t use a state-mandated 25-mill property tax for schools to pay for a downtown redevelopment district aimed at reducing blight.

The City Council issued bonds to pay to demolish the dilapidated Mountain Inn so a new hotel could be built at Mountain Street and College Avenue. The $3.7 million in bonds was secured as part of Arkansas first tax increment financing district.

Amendment 74 to the state constitution set the 25-mills and mandates it be used solely for school maintenance and operations. Fayetteville argued Amendment 78, which allows creating a tax increment financing districts, superseded the 25-mill requirement.

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Ron Wood and Joel Walsh contributed to this report.

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