Arkansas Court Decision Jeopardizes Lake View Funding Reforms

Last Updated: April 11, 2013

This article appeared in the April 2013 Rural Policy Matters.

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In a ruling issued November 29th, the Arkansas Supreme Court held that school districts whose property tax revenues exceed state-mandated levels may keep the overage rather than remit it to the state.

The ruling in Kimbrell v. McCleskey currently affects fewer than five percent of all school districts in Arkansas. However, education policy experts, stakeholders, and political leaders, including Governor Mike Bebee, have expressed concern that the decision undermines the state’s commitment to fair school funding and threatens many of the painstaking reforms developed in response to the Lake View school finance lawsuit.

The case was brought by the Fountain Lake and Eureka Springs school districts, two communities with large numbers of retired residents and high property values. It challenges a practice in place since 1996, when Amendment 74 was passed in response to the filing of the Lake View school funding lawsuit. Amendment 74 mandates a 25-mill property tax for schools, also known as the Uniform Rate of Tax (URT).

Revenue from the URT is submitted to the state for use in foundation formula funding for all districts. It has served as a mechanism for maintaining adequacy of school funding by helping to ensure a minimum funding floor for all schools. And it has also served to increase equity among districts by requiring a similar 25-mill local effort. State funding helps offset differences between high wealth districts where 25 mills yields significant revenue and low wealth districts where it does not.

(Editor’s note: For a more in-depth discussion of adequacy and equity principals, click here to see Installment Seven of the ten-part RSFN Special Series “Financing Rural Schools: Characteristics of Strong Rural School Finance Systems.”)

In a handful of districts, including Fountain Lake and Eureka Springs, the URT generates more local revenue than is required for the formula. That overage has always been remitted to the state, which the state argues prevents a statewide tax from disproportionately benefitting more affluent districts. The suit argued the high wealth districts should be able to keep overage.

Many people in Arkansas are concerned that the court’s ruling, which allows districts to retain excess funding, will increase the inequity that results from significant differences in property values across districts. The fear is that Arkansas will lose many of the improvements in school funding that resulted from reforms driven by the Lake View litigation.

The majority ruling in the 4–3 decision held that the millage collection was not a state tax to be controlled solely by the state, but a special tax. "It is a one-of-a-kind 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," wrote Justice Paul Danielson in the majority opinion. The opinion further stated that the legislature had the authority to craft laws mandating that overage be turned over to the state for use in foundation funding for all districts if it wished to do so.

But Governor Beebe and others have responded that rewriting that provision would set a bad precedent and open the door to tinkering with the myriad school finance reforms that resulted from the Lake View case and could upset the adequacy and equity issues at the heart of Amendment 74.

In his dissent, Chief Justice Jim Hannah summed up the concerns of many who participated in and were impacted by the long-running Lake View school funding case: “The majority nullifies ten years of difficult and painstaking work diligently undertaken by the General Assembly, the Department of Education, the Attorney General, and the Governor, to provide this state with a constitutional school-funding system. The state’s carefully crafted constitutional system of state-funded public education is obliterated by the majority’s decision.”

Bebee and Arkansas Attorney General Dustin McDaniel separately asked the court for a rehearing in the case, which was denied. Many in the state are concerned that if lawmakers file legislation designed to revert to the pre-Lake View funding system, as some have indicated they plan to do, the gains in adequacy of funding for schools made as a result of the case could be lost.

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Read more from the April 2013 Rural Policy Matters.