State Tax Return. Another Blow To State And Local Funding Options -- Georgia Supreme Court Diminishes The Value Of "Tax Allocation District" Funding

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April 2008 State Tax Return Volume 15 Number 2 Another Blow To State And Local Funding Options -- Georgia Supreme Court Diminishes The Value Of "Tax Allocation District" Funding E.

1 April 2008 State Tax Return Volume 15 Number 2 Another Blow To State And Local Funding Options -- Georgia Supreme Court Diminishes The Value Of "Tax Allocation District" Funding E. Kendrick Smith Mace Gunter Atlanta Atlanta (404) (404) In an unanticipated but unanimous ruling handed down on February 11, 2008 in Woodham v. City of Atlanta, 1 the Georgia Supreme Court held that using school property tax revenue for non-educational purposes violates the Educational Purpose Clause of the Georgia Constitution. This strikes a major blow to the much anticipated BeltLine Project -- an ambitious redevelopment plan intended to transform the City of Atlanta. 2 At least for now, it also diminishes the value and usefulness in Georgia of Tax Allocation Districts -- a popular and effective economic development tool. Background On November 7, 2005, the Atlanta City Council by ordinance adopted the BeltLine Redevelopment Plan (the Redevelopment Plan ), an expansive citywide improvement plan aimed at transforming a 22-mile loop of old railroad tracks encircling the core of Atlanta into greenspace, parks, trails, and transit the so-called BeltLine Project. The ambitious Redevelopment Plan seeks to create more than 1,200 acres of parks, improvements to 700 acres of existing parks, 33 miles of continuous trails, a 22- mile public transit system, 31 miles of new streetscapes connecting neighborhoods and parks to the BeltLine, and the creation of 30,000 permanent jobs and 48,000 year-long construction jobs. 3 These proposed improvements are expected to spur a $20 billion increase in the City s property tax base over a 25-year period. 4 To help fund the planned improvements, the Redevelopment Plan calls for the creation of a BeltLine Tax Allocation District, or TAD. 5 Under Georgia s 1 Nos. S07A1309, S07A1566, 2008 WL (Feb. 11, 2008). 2 Atlanta BeltLine Redevelopment Plan 1. 3 Id. 4 Id. 5 A TAD (Tax Allocation District) is a contiguous geographic area within a redevelopment area which is defined and created by resolution of the local legislative body of a political subdivision... for the purpose of issuing tax allocation bonds to finance, wholly or partly, redevelopment costs within the area. O.C.G.A (13).

2 Redevelopment Powers Law, 6 counties and municipalities may create TADs as part of a redevelopment plan for the purpose of securing the necessary funding for proposed improvements. Essentially, property values within the TAD are frozen and tax revenue generated by the frozen values continues to fund the government. 7 However, as improvements to the development area result in property value increases, the additional tax revenue generated by the increased values secure bonds to finance more improvements. The revenues to fund the improvements in the BeltLine Redevelopment Area were to be derived from the taxes generated by the expected increase in property values (the tax increment), as explained in the Redevelopment Plan: The BeltLine TAD funds will be generated by new growth in the tax base within the defined TAD Redevelopment Area. Based on this growth, as private development begins, bonds will be sold and the proceeds will be used to fund a portion of the total cost for acquiring land and building parks, trails, transit and other government projects. (The bonds are secured by the anticipated growth of the tax base within the TAD; the taxpayers of the City of Atlanta will not be obligated to repay the bonds.) The remaining portion of the project costs is expected to be funded through various philanthropic and federal sources. 8 Under the Redevelopment Powers Law, when a tax allocation district is created within a municipality by the local legislative body of such municipality, property taxes for computing tax allocation increments shall be based on all ad valorem property taxes levied by the municipality. 9 A tax allocation increment is: that amount obtained by multiplying the total ad valorem property taxes... levied within a tax allocation district in any year by a fraction having a numerator equal to that year s taxable value of all taxable property subject to ad valorem property taxes within the tax allocation district minus the tax allocation increment base and a denominator equal to that year s taxable value of all taxable property subject to ad valorem property taxes within the tax allocation district. In any year, a tax allocation increment is positive if the tax allocation increment base is less than that year s taxable value of all taxable property subject to ad valorem property 6 O.C.G.A et seq. 7 See id. 8 Id. 9 Id (a) (emphasis added).

3 taxes and negative if such base exceeds such taxable value. 10 The allocation increment base is the taxable value of all taxable property subject to ad valorem property taxes... located within a tax allocation district on the effective date such district is created. 11 The Redevelopment Powers Law further provides: If the municipality has an independent school system, ad valorem property taxes levied for educational purposes by the municipality shall be included in computing the tax allocation increments if the local legislative body of the municipality is empowered to make the determination of the municipal ad valorem tax millage rate for educational purposes. If the board of education of the independent school system is empowered to set the ad valorem tax millage rate for educational purposes and the local legislative body of the municipality does not have the authority to modify such rate set by the board of education, the tax allocation increment shall not be computed on the basis of municipal taxes for educational purposes unless the board of education of the independent school system consents, by resolution duly adopted by said board of education, to the inclusion of educational ad valorem property taxes as a basis for computing tax allocation increments. 12 On December 12, 2005, the Atlanta Board of Education, citing the Redevelopment Powers Law, passed a resolution providing that it would consent to inclusion of the positive tax allocation increments derived from the educational ad valorem property tax millage rate established by the Board and levied by Fulton County in the computation of the positive tax allocation increment for Tax Allocation District Number Six Beltline. 13 Atlanta intended to sell TAD bonds to help support the BeltLine Project. As required by Georgia law, the State instituted a bond validation proceeding in the Fulton County Superior Court pursuant to the Georgia Revenue Bond Law. 14 In that proceeding, John F. Woodham, a local attorney and resident of the City of Atlanta, intervened, claiming that the use of school taxes as security for the bonds was 10 Id (14) (emphasis added). 11 Id (15). 12 Id (a) (emphasis added). 13 Resolution of the Atlanta Board of Education 1 (Dec. 12, 2005). 14 O.C.G.A et seq.

4 unconstitutional. The trial court overruled Woodham s objections and validated the bonds. Woodham appealed, however, and the Georgia Supreme Court reversed, holding that the use of school taxes for non-educational purposes violated Article VIII, Section VI, Paragraph I, of the Georgia Constitution (known as the Educational Purpose Clause ). The Woodham Decision The Georgia Constitution provides that [s]chool tax funds shall be expended only for the support and maintenance of public schools, public vocational-technical schools, public education, and activities necessary or incidental thereto, including school lunch purposes. 15 Woodham asserted that this proposed use of school taxes to fund the BeltLine Plan violates [the Educational Purpose Clause] because it contemplates the expenditure of school taxes for non-educational purposes. 16 Under prior Georgia Supreme Court precedent, [w]here a constitutional provision expressly provides that funds derived from taxes levied and collected may be used only for particular purposes, such funds cannot be utilized for or diverted to any other purpose. 17 The Georgia Supreme Court noted that it is without dispute that the use of school tax revenue to fund the BeltLine TAD is not an explicit expenditure for educational purposes under [the Educational Purpose Clause]; however, the question remains whether such funding is necessary or incidental to public schools or public education under that subsection. 18 Citing its earlier decision in DeKalb County, 19 in which the Supreme Court held that the expenditure of school taxes for improvements to a county public road adjacent to a DeKalb County school would stray too far from the [school] District s principal task of educating young people in favor of providing a benefit to all citizens that the County generally has a duty to provide, 20 the Court determined that the use of school taxes to secure funding for the BeltLine Plan similarly violated the Georgia Constitution: If the use of school revenue to improve a county road which provided access to a school was held to be an impermissible expenditure, it follows that school taxes cannot be used to fund the BeltLine Plan which provides a benefit to all citizens, and which has little, if any, nexus to the actual operation of public schools in the city of Atlanta. Although appellees assert that the BeltLine TAD will likely produce 15 GA. CONST. art VIII, V, I(b). 16 Woodham, 2008 WL , at *1. 17 Id. at *2 (quoting Wright v. Absalom, 224 Ga. 6, 8 (1968)). 18 Id. 19 DeKalb County Sch. Dist. v. DeKalb County, 263 Ga. 879 (1994). 20 Woodham, 2008 WL , at *2. (quoting DeKalb County Sch. Dist. v. DeKalb County, 263 Ga. 879, 881 (1994)).

5 future revenue for the school system, such potential benefit will not suffice where the constitutional authorization for such expenditure is lacking. 21 Accordingly, the Court held that school tax funds levied and collected by the school system cannot constitutionally be applied to benefit the BeltLine project. 22 Conclusion The Georgia Supreme Court s decision in Woodham strikes a blow to the expected funding for the BeltLine Project and numerous other projects planned for tax allocation districts throughout Georgia. The school tax portion of the BeltLine Project funding was estimated to be more than $800 million. This financing now must either be replaced by different sources or the Georgia Constitution must be amended to accommodate the use of school taxes in redevelopment plans that involve TADs. As of the publication date, the Georgia General Assembly has passed legislation to allow voters in November 2008 to approve a constitutional amendment by referendum that would allow TAD project funding to include school taxes. 23 This article is reprinted from the State Tax Return, a Jones Day monthly newsletter reporting on recent developments in state and local tax. Requests for a subscription to the State Tax Return or permission to reproduce this publication, in whole or in part, or comments and suggestions should be sent to Teresa M. Barrett-Tipton ( ) in Jones Day s Dallas Office, 2727 N. Harwood, Dallas, Texas or StateTaxReturn@jonesday.com. Jones Day All Rights Reserved. No portion of the article may be reproduced or used without express permission. Because of its generality, the information contained herein should not be construed as legal advice on any specific facts and circumstances. The contents are intended for general information purposes only. 21 Id. (internal quotation marks omitted). 22 Id. 23 On April 4, 2008, the General Assembly passed a House of Representatives substitute to Senate Resolution 996 thereby allowing voters to determine whether the Georgia Constitution should be amended.

S07A1309, S07A1566. WOODHAM v. CITY of ATLANTA et al. (two cases). The State of Georgia instituted a bond validation proceeding under the

In the Supreme Court of Georgia Decided: February 11, 2008 S07A1309, S07A1566. WOODHAM v. CITY of ATLANTA et al. (two cases). THOMPSON, Justice. The State of Georgia instituted a bond validation proceeding