Education Law Publications

The firm publishes a monthly "Issue of the Month" on current issues or matters of interest in the education law area.

If you want more information about our education law practice or a copy of any of our articles, contact David Duff at dduff@ddtwb.com

SCHOOL LAW
"ISSUE OF THE MONTH"
June 2007

"Property Tax Relief" and "Minimum Local Tax Effort"

The passage last year of the so-called "property tax relief" bill, officially named Act 388 of 2006, has raised numerous interpretive issues and significant practical problems for South Carolina school districts. As all of us in public education now are aware, beginning June 1, 2007, Act 388 increases the state sales tax by one cent on all items except accommodations, groceries, and items with a maximum sales tax cap. As a trade off, Act 388 provides that homeowners will no longer make any property tax payment toward school operations on the homes they occupy.

Further, as of January 1, 2007, millage caps on property tax levies for operating purposes went into effect for all local governing bodies, including school districts. The millage caps allow local governments, including school boards (or whichever governmental entity has the fiscal authority for particular school districts) to increase operating millage rates only by the percentage increase in the Consumer Price Index (CPI), plus the percentage population increase of the entity from the prior year. The local governing body can exceed this cap only with a 2/3rds majority vote of the membership of the governing body, and only for a specific purpose. These purposes include: (1) deficiency from the previous year; (2) natural disaster or act of terrorism; (3) compliance with a court order; (4) closure of a business that decreases tax revenues by more than 10%; or (5) compliance with an unfunded state or federal mandate, effective after passage of Act 388.

Numerous questions have arisen regarding the interplay between and among Act 388, other state statutes, and local legislation pertaining to school districts. One of the most important and unsettled questions with Act 388 is the impact of the Act on the minimum effort provision of Section 59-21-1030 of the Education Improvement Act of 1984 (EIA); Section 6-1-320 of the Local Government Fiscal Authority Act of 1997 (LGFA); and local school legislation that provides for either full or limited fiscal autonomy. Although the formula for determining minimum local effort under Section 59-21-1030 of the EIA was amended by Act 388, the Act did not abolish the EIA's requirement to generate a minimum local tax effort each year, adjusted for inflation. Prior to Act 388, Section 6-1-320 of the LGFA imposed a CPI millage limit on local governments, including school districts. There was an exception to the cap, however, if a millage increase above the cap was necessary to meet the EIA local effort requirement.

Furthermore, a subsection of Section 6-1-320 of the LGFA stated, in somewhat ambiguous terms, that Section 6-1-320 was not intended to amend or repeal any local fiscal laws pertaining to school districts which place a limit on school millage (limited fiscal authority) or which impose no limit on school millage (full fiscal autonomy). Act 388, by amending Section 6-1-320, now has eliminated the prior exception to the millage cap that allowed a school district to increase millage above the cap limit to raise minimum local effort. The subsection of Section 6-1-320 which seemed to recognize local laws that allow limited or full fiscal authority, however, was not amended or repealed by Act 388.[1] These legislative developments throw the entire matter of millage caps and the minimum effort requirement into confusion and uncertainty.

The State Department of Education (SDE) has determined that 39 school districts failed to meet the minimum effort requirement for fiscal year 2005-06, the latest fiscal year audited by the SDE. Of those 39 districts, 20 will not be able to seek a waiver of the local effort requirement under the waiver provisions of the EIA because they received an "unsatisfactory" improvement rating on their district report card. Many of those 20 districts are unable to generate current minimum effort, plus any prior years' shortfall, under the new caps.

The statutory penalty for failing to meet the EIA's minimum effort obligation is loss of EIA funding. The SDE has indicated that, given the present uncertainty and confusion in the law, it does not wish to pursue the loss of funding penalty against districts that have not satisfied local effort, that cannot seek a waiver, and that are limited by a "hard" cap under Act 388. Hopefully, the Department will not be pressured to cut off EIA funds to those districts caught "between a rock and a hard place," which failed to raise local effort and could not obtain a waiver, but were unable to raise the millage under the Act 388 millage cap.

To add even greater interpretive confusion and uncertainty to the situation, Act 388 -- aside from any cap limits placed on the governing body -- did not repeal a provision of Section 59-21-1030 of the EIA that places an independent obligation on county auditors "to establish a millage rate" so that minimum local effort is "maintained." To keep all options open and to demonstrate a good faith effort to satisfy the EIA requirement, districts may wish to consider building their 2007-08 budgets on the local effort amount, regardless of the millage cap limit of Act 388, or on the amount generated by the Act 388 cap, whichever amount is greater.

To summarize, there is great tension between the EIA's minimum local effort requirement and Act 388's hard caps. Act 388 does not repeal the minimum effort requirement, yet in some situations the Act's millage cap makes it impossible to generate minimum effort. Simultaneously, many districts that cannot meet the local effort requirement will be unable to obtain a waiver of the requirement because of academic achievement decline. Hopefully, either through guidance from the appropriate state agencies, further action by the legislature, or possibly litigation, answers to these important questions will be forth coming. In the meantime, we are available to provide legal guidance and assistance in particular situations, in accordance with our interpretation of seemingly conflicting legal obligations.

Past Issues of the Month may be accessed at http://www.ddtwb.com/

[1] A bill that has passed the General Assembly provides that districts will fall under the millage limitation of Section 6-1-320 of the LGFA, as amended by Act 388, or the local law limit, whichever is more restrictive.