School Money Can't Be Used To Fund TIF Districts, Supreme Court Rules

Last updated Thursday, April 26, 2007 10:42 PM CDT in News

By Ron Wood
The Morning News

The districts are allowed under the state Constitution.

The city filed a "friendly lawsuit" asking which property taxes could be used to pay off bonds issued to pay for improvements in the tax district. Schools, the city library and two pension boards argued their tax money should not be used.

Circuit Judge Kim Smith said 25 mils of tax money dedicated to the maintenance and operation of schools cannot be used to fund a tax increment finance district under state law that was in place at the time the project was approved.

The city appealed Smith's ruling.

Amendment 74 to the state constitution sets the 25-mil requirement for schools and says the mils cannot be used for other purposes. Fayetteville argued Amendment 78, which allowed for the creation of the development districts, supersedes the 25-mil requirement.

The court ruled, however, that Amendment 78 was "permissive" but did not change the property tax amendment of the earlier amendment.

"The critical stumbling block we see with the city's interpretation of Amendment 78 is that the voters of this state were never put on notice that Amendment 78 would effectively undo Amendment 74 by funding redevelopment projects with a portion of the uniform rate of 25 mils that had previously been designated solely for the maintenance and operation of the public schools," Justice Robert L. Brown wrote in the court opinion.

Brown later added, "It would have been an easy matter for the drafters of the amendment to have also stated that the 25 mils would be part of the TIF formula, if that was their intent, but they did not do this."

Brown added any change to the basic property tax for schools or diversion of it for other purposes must be approved by the state's voters.

The high court, however, reversed the circuit court's decision on the amount of mils allocated to the Fayetteville School District for the redevelopment district's formula. Fayetteville had challenged a county's assessor's calculations for the millage and said it included 4.5 mils more in property taxes than school district voters had approved in a 2000 election.

Williams said the ruling was a victory for Fayetteville, because the city can now apply the 4.5 mils assessed by the county beyond what voters approved for school operations.

"It more than doubles the millage we can use to pay off the bonds, which will pay them off more quickly," Williams said.

Approximately 8 mils will be used to pay off Fayetteville's TIF district bonds, Williams said, when the additional 4.5 mils are applied.

"To me, that was the key part of the lawsuit," he said.

John Nock, one of the developers of the Renaissance hotel and condominium project on the former Mountain Inn site, said he was glad the issue had been resolved. The ruling did not have a direct effect on the project, Nock said, but he was pleased the city could possibly pay off its bonds more quickly.

"For economic development, paying off the bonds faster is always a good thing," Nock said.

Moore said the decision shouldn't hurt the schools, financially, over time. It only applies to property within the Tax Increment Financing District and, as the area is built out, the property will become more valuable, producing more property taxes, Moore said.

The court also ruled 1 mil dedicated by voters to fund the public library also cannot be used for the Tax Increment Funding District. As with the Amendment 74 argument, Amendment 30 provides that any tax approved by voters for the library can only be used for that purpose.

The court didn't address whether the millages from the fire and police pension funds could be used for the Tax Increment Financing District because those entities did not participate in the appeal.

The ruling will have a long-term effect on how all cities approach tax increment financing districts, Fayetteville Finance Director Paul Becker said.

Now that the funding options are outlined, Becker said cities will have to consider how large a district will need to be to bring in enough money.

"It changes the feasibility of TIF districts in general," Becker said.

Williams agreed, saying all municipalities in the state should take notice.

"This is going to slow down TIF districts across the state," Williams said.

He said whether Fayetteville uses tax increment financing districts again will have to be left up to the city council and mayor. Thursday's ruling, Williams noted, at least gives them a better idea of what they're doing.

Assistant City Attorney David Whitaker said the ruling could also protect the city from lawsuits.

"They ruled on everything, thankfully," Whitaker said as he read the ruling.

He said residents who challenge the tax increment funding districts will be less likely to prevail in a lawsuit, now that the court has defined the protocol of funding the districts.

The Morning News' Dug Begley contributed to this report.

Rogers Reaction

Rogers dropped its plans for a tax increment financing plan two years ago.

Uncertainty and complexity of the financing method for building infrastructure forced the city to look for other funding options, Mayor Steve Womack said Thursday.

"Our economic development strategy is so tied to infrastructure, we had to look for alternatives," Womack said, noting that November's vote approving a $13 million bond issue for street projects was part of that strategy.

SOURCE: Staff Report

Bentonville reaction

City Attorney George Spence said he doesn't believe the ruling will affect Bentonville's tax increment financing district because it didn't include the 25 mills in its scenario, approved by the City Council in November 2005. A consultant has said the city could raise $12 million through its district, which includes a 2.8-square-mile area from Walton Boulevard east to J Street and from 14th Street north to Tiger Boulevard.

SOURCE: Staff Report

What's a tax increment financing district?

Tax increment financing districts freeze property tax payments to cities and counties for up to 25 years. The property taxes within the district would continue to grow because of rising property values and new construction, but the increased money from the growth would go to the tax increment financing district. There is no new tax associated with the districts. Property tax in Fayetteville is currently 52.7 mils. Arkansas law to permit tax increment financing districts was approved in 2001, and a revised version that further clarified the bill was approved in 2005. Fayetteville was the first city in the state to adopt a tax increment financing district

What is a mil?

A mil is one-tenth of a cent, and each mil produces $1 of tax for each $1,000 of assessed valuation on property. A property's assessed value is 20 percent of its appraised value.

Source: Staff report

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