FAYETTEVILLE — The Arkansas Supreme Court affirmed Thursday money from a property tax increase approved in a school millage election cannot be used by the city for a downtown redevelopment project.
“We’re pleased with the decision,” said Alan Wilbourn, spokesman for the School District.
The decision means no money from a 2.75-mill tax increase approved by voters in 2010 will be diverted to pay off the city’s Tax Increment Financing bonds. Instead, the full 2.75-mill increase will be used to pay for the second phase of the $93 million high school renovation.
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 School District also expects to receive about $24,000 that was diverted to the tax increment financing district.
The city contended part of the tax should be used to pay the city’s bond debt from demolishing the dilapidated Mountain Inn so a new hotel could be built at Mountain Street and College Avenue. The private, commercial development did not happen.
The $3.7 million in bonds for the demolition was secured as part of the state’s first tax increment financing district. 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 a month after the district was formed, the Legislature passed a law excluding new millage from being used to repay bonds for a district.
The School District filed a lawsuit in November 2011 after Jeff Williams, Washington County assessor, certified that 1.45 mills of the tax increase collected form the 1,300 property owners should go to the district.
Williams; David Ruff, county tax collector; Roger Haney, county treasurer, and Fayetteville were named as defendants.
The School District prevailed in circuit court, and the city appealed the case to the Supreme Court.
Williams said Thursday he decided to divert money from the School District based on attorneys’ advice. He said he personally believed the money should go toward high school construction.
“Money that voters decide to go to the schools should go to the schools,” Williams said. “Now it’s clear that we can take into consideration statutes that came into effect after the fact.”
The Supreme Court said Thursday the law didn’t hurt the city’s ability to sell bonds. The court said city bond documents stated it anticipated some property tax revenue could change during the term of the bond issue.
“The 2010 school millage increase did not exist when the bonds were issued in 2005, and the official statement specifically anticipated that legislation might be enacted to restrict certain millages,” according to the opinion. “Thus, the statute did not ‘abolish’ a source of revenue for the bonds.”
From the city’s perspective, the decision means a longer period of time will be needed to pay off the bonds, said City Attorney Kit Williams.
“There will be no millage coming from the School District,” Williams said Thursday.
New, taxable property development will help with the bond payoff, as will overall increases in property values within the district, Kit Williams said. Two new apartment complexes under construction are in the district as is the major renovation of The Chancellor Hotel. A city parking deck likely will be exempt from taxation and won’t help the bond payoff, he added.
Kit Williams said he doesn’t plan to seek a rehearing before the Supreme Court.
This was the second time the city and School District have gone to court over a millage and financing district issue.
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 the downtown redevelopment district aimed at reducing blight.
Amendment 74 to the state constitution set the 25 mills and mandates it be used solely for school maintenance and operations. Fayetteville had argued Amendment 78, which allows for creation of the financing districts, superseded the 25-mill requirement.
Joel Walsh contributed to this report.