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School Finance in Alabama — How Not to Do It Right

Posted on February 19, 2007 by Jennifer Carr and Cara Griffith
Document originally published in State Tax Notes

on February 19, 2007.




Recently the U.S. Court of Appeals for the Eleventh Circuit entered a judgment in a 25-year-old case involving Alabama's education system. The case was originally brought to challenge whether the state had completely desegregated its colleges and universities. However, the most recent claim involved whether the state's property tax system so drastically underfunded Alabama's lower education system that there was continuing segregation in the higher education system. Although the court determined that the case was not properly included as part of the original litigation, the claim highlights the inadequacies in how the state funds education, particularly in its property tax system.

Knight v. Alabama

In 1981 the Justice Department filed a lawsuit in the U.S. District Court for the Northern District of Alabama, alleging that the state had failed to complete the desegregation of its colleges and universities (Knight I). In 1991, after two bench trials, the district court entered an opinion in which it found that several of Alabama's higher education policies tended to result in the racial identifiability of its colleges and universities. The court ordered the state to modify those policies to increase black students' access to historically white institutions and to encourage white attendance at historically black institutions.

Six months later the U.S. Supreme Court entered a judgment in U.S. v. Fordice, in which it enunciated constitutional standards governing claims of persistent segregation in higher education. The Court held that to challenge the policies governing higher education, plaintiffs must show that the policies are traceable to the state's earlier de jure system of segregation. The state must then prove that the policies don't have a continuing segregative effect. When Knight I reached the U.S. Court of Appeals for the Eleventh Circuit on appeal, the court affirmed the district court's opinion almost entirely, but remanded for limited review of a few elements. In 1995 the district court entered its remedial decree, which ordered several changes to the state's higher education policies. Over the next decade the parties worked to implement the changes called for in the decree.

In July 2003 the plaintiffs filed a motion for additional relief, requesting an injunction ordering the state to adequately fund its lower education system by developing an entirely new method of public school finance. The plaintiffs alleged that there would be sufficient funds to achieve the remedial goals of Knight I only when the state's public schools are adequately funded. Therefore, the plaintiffs asked the court to "invalidate the property tax limitations of the Alabama Constitution and to enjoin the State to reform its method of public school finance within one year to provide adequate and equitable funding for its K-12 schools." The plaintiffs' chain of causation was elaborate. They alleged that the state's property tax limits underfunded public schools, which in turn resulted in the diversion of state funds from higher education to lower education. As a result, the state failed to adequately fund its higher education system, which led to higher tuition at state colleges and universities. At the same time, the diversion of funds meant less state money was available for college scholarships. All of that, the plaintiffs asserted, "impacts negatively and disproportionately on Alabama's black students . . . because most cannot attend college without financial assistance."

A year later the district court held that the plaintiffs had failed to establish that the "alleged funding crisis" in the state's lower education system had a segregative effect on its higher education system. The court said that the state constitutional provisions limiting the state's maximum rates of ad valorem taxation, classifying property for tax purposes, and providing for differential assessment and valuation based on types of property and current use "may represent poor public tax policy." However, the court found that "those provisions do not violate the Fourteenth Amendment." Although it "appreciate[d] Plaintiffs' argument," the court concluded that the lower education system funding problem was not sufficiently related to the desegregation of the state's higher education system to permit relief.

On appeal, the Eleventh Circuit agreed. The court reasoned that for the past 25 years, Knight has been about remedying segregation in the higher education system, not about how the state raises the money to meet its obligations or about how the state funds its system of lower education. The court determined that the plaintiffs "really sought adjudication of a new claim," because never before had they claimed that segregation in the state's higher education system was "caused by Alabama's constitutional limitations on its ability to raise property taxes for K-12 education." The court acknowledged that "no one disputes" that the state's tax policies "seriously limit" the state's ability to raise revenue from property taxes. The court agreed that the district court has held that the tax policies "were adopted for segregative purposes and with discriminatory intent," but it nonetheless held that the tax policies cannot be challenged under Fordice as policies that perpetuate segregation in the state's higher education system. The court's reasoning was that the property tax policies govern revenue raising, not higher education. Only policies governing the state's university system can be challenged under Fordice. The court said that "plaintiffs are attempting to transform their Fordice attack on Alabama's segregative education policies into an attack on the adequacy and fairness of Alabama's entire public school finance system" and that that claim "is not properly before" the court. The court said that even if it were to overlook the inapplicability of Fordice, Alabama has demonstrated that its property tax policies do not have a continuing segregative effect on the higher education system.


Analysis of the Opinion


One could argue that the state's property tax system still contains policies and procedures traceable to the state's de jure system of segregation regarding higher education. However, the issue was not properly brought as part of the Knight litigation because the argument had not previously been made. The plaintiffs sought to bring the issue through the Knight litigation because the Alabama Supreme Court dismissed the public school funding litigation known as the Equity Funding Cases and because of its announcement in that case that public school funding was a political question not properly addressed by the judiciary. The plaintiffs believed they had little choice but to try to use the Knight litigation to get the issue, which was raised in the Equity Funding Cases but not ruled on, before a court. Nonetheless, it still was not properly before the Eleventh Circuit as part of a lawsuit dealing with segregation in the state's higher education system. The issue, as the Eleventh Circuit said, is a school funding issue, not a segregation issue.

The Equity Funding Cases were initially filed in 1991 to challenge the state's education finance system on adequacy and equity grounds. The trial court ruled for the plaintiffs, and a remedy was negotiated that included increased funding for several educational programs. Although the Alabama Supreme Court upheld the remedy several times over the next 10 years, in 2002 the court reopened the case on its own initiative and dismissed it, reasoning that the judicial branch of government must "never exercise the legislative and executive powers, or either of them." Previously, the court had concluded that the Education Clause in the Alabama Constitution, which states that "[t]he legislature shall establish, organize, and maintain a liberal system of public schools throughout the state for the benefit of the children thereof," created a legal entitlement to an "adequate" education. At that time, the court was willing to determine what constituted an "adequate" education. But there was a change in the composition of the supreme court between 1993 and 2002, and the court altered its thinking on whether it was proper for the court to interfere with school funding issues. It decided it was not. By dismissing the case as nonjusticiable, the court "retreat[ed]" from the "province of the legislative branch" and "return[ed] the Equity Funding Case in toto to its proper forum" -- the Legislature.

Although it is good for all three branches of government to be aware of their boundaries, school finance and ensuring all students receive an adequate education are issues many courts across the nation have been willing to entertain. In those courts, and previously in Alabama, the political question and separation of powers doctrines were not barriers. But the Alabama court has decided school finance is an issue for the Legislature, and with the Equity Funding Cases, it completed its "judicially prudent retreat from this province of the legislative branch in order that [it] may remain obedient to the command of the people of the State of Alabama."

The Knight plaintiffs are in a tough position. They could attempt to appeal the decision to the U.S. Supreme Court, but because the Court takes so few cases each year compared with the number that are appealed, doing so is always a long shot. The plaintiffs could also attempt in a separate lawsuit to raise the issue of whether the state's constitutional limitations on property taxes have a segregative effect on the education system, but they will have to bring the case in federal court. Alabama state courts will follow the state supreme court in what it called its "judicially prudent retreat" from school finance litigation. There would, of course, be many issues involved in bringing the case in federal court, including the 11th Amendment, the Tax Injunction Act, and the availability of a state remedy, all of which could pose barriers to the lawsuit.

The Tax Injunction Act provides that "district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State." A state remedy is considered "plain, speedy and efficient," provided state procedures do not "preclude presentation and consideration of . . . federal rights." More than likely, a federal court would dismiss the case for lack of jurisdiction because state procedures provide for a remedy in state court, even though the state court won't grant that remedy. Without a remedy in state or federal courts, the plaintiffs are probably going to have to rely on a political solution.


Property Taxation and School Finance in
Alabama


The recent request for additional relief in Knight stems from the plaintiffs' belief that the property tax system in Alabama inadequately funds lower education and forces state and local governments to rely disproportionately on income, sales, and other regressive types of taxes to fund public education. They are largely correct. Alabama's property tax is limited compared with the state's reliance on other taxes, particularly the sales tax. The sales tax generates half of Alabama's revenue, with combined state and local tax rates reaching as high as 10 percent in some areas. Alabama's income tax system is also problematic because it is considered to be among the most regressive in the nation as a result of its relatively flat rate structure, low filing threshold, and low personal exemptions. Unlike Alabama's robust sales and income tax system, the property tax system is on the puny side. Alabama's property taxes are among the lowest in the nation. The primary reason is a web of overlapping constitutional provisions that curb the amount of tax that can be levied.

Constitutional provisions limiting the amount of tax that can be levied are not unusual -- many states have similar limitations. However, Alabama's restraints on property taxation are particularly severe. Taxation of Class III property, the class of property designated for agriculture and timber, is quite low on a per-acre basis when compared with agricultural property in surrounding states. Utility and commercial property have assessment ratios of 30 percent and 20 percent, respectively, whereas agricultural property has a maximum assessment ratio of 10 percent, which may go much lower under current use provisions. Also, utility, commercial, and agricultural properties have maximum tax rates of 2 percent, 1.5 percent, and 1 percent, respectively, under the Lid Bill, which was enacted by a public referendum in 1978 as Amendment 373. Of course, not everyone agrees that Alabama's property taxes are too low. The Alabama Farmers Federation has argued that Alabama property owners saw a 17 percent increase in their taxes between 1998 and 2000 and that the assessed value of their property tripled between 1978 and 2003.

Alabama's education system reflects the state's tax system. Nationally, the state ranks 48th in per-pupil funding. It also ranks near the top in percentage of education funds that come from the state. One would think that having such a large percentage of education funding come from the state would have an equalizing effect, resulting in adequate funds for both rural and urban areas. However, the property tax system is so underfunded that it appears that the state revenue is insufficient to provide adequate school finance in poor rural areas. Although the property tax plays a smaller role in school funding than in most other states, it still provides over 40 percent of a local government's school revenue.

The state's Department of Education likes to praise the achievement of its students when compared with others in the region, but the fact is that rural areas are operating at a serious disadvantage. Local contribution to school funding ranges from a low of $302 per student to a high of $5,175 per student in the suburban Birmingham's Homewood City district. One commentator places the blame for the discrepancy squarely on the shoulders of undertaxed timber property, saying that "by severely limiting the ability of these areas to impose fair taxes on timber acres, their only significant source of wealth, the property tax structure bears primary responsibility for the inadequately funded state of the local public tax schools."


Recent Developments in School Financing


Amid the litigation, there have been political attempts to amend Alabama's taxation and school funding systems. In 2003 Alabama voters defeated by 2 to 1 a proposal by Gov. Bob Riley (R) that would have increased several taxes, including income, sales, property, and cigarette taxes. The proposal, which was passed by the Legislature but also required voter approval, included significant education and government accountability components as well. The next year another significant vote on education was held. Amendment 2 would have removed blatantly segregationist language from the state constitution. It also would have removed a passage inserted in 1950 stating there is no right in Alabama to a public education. Opponents of the measure, playing to fears of federal control, convinced enough of Alabama's citizens that enacting the measure would lead to federal courts mandating tax increases to pay for school improvements. Finally, in 2006 Alabama voters approved a constitutional amendment requiring every school to levy at least 10 mills for school purposes. The amendment has been described as "peculiar" because only 30 of the state's 101 school districts were not already levying at least that percentage.

Conclusion

The Alabama property tax and education funding systems are a mess. Both are entangled in the state's segregationist past but, at this point, solutions are in short supply. Although the Eleventh Circuit properly dismissed the claim as it relates to the current Knight litigation, the plaintiffs may attempt to bring the case as a separate lawsuit or may even appeal the case to the U.S. Supreme Court. Given the inequities in the Alabama property tax and education systems, we hope they do, but we are skeptical whether such a case would ever make it before a judge. The state supreme court has effectively removed state judicial intervention as a potential solution. Another potential source of relief is political action. However, the recent attempts at fixing the problems, at least partially, failed at the ballot box. That leaves the federal courts as a potential remedy, which unfortunately also seems unlikely. In the end, the state is hurting its students by failing to provide a better system of education funding. Although public education is not a constitutional right, the "American people have always regarded education and [the] acquisition of knowledge as matters of supreme importance."


Jennifer Carr and Cara Griffith are State Tax Notes legal editors.