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Increase in Property Taxes Was Contrary to State Law

Indian Hill School Board Did Not Show Revenue Was Needed for Next Fiscal Year’s Expenses

The Ohio Supreme Court today ruled that a school board in a Cincinnati suburb was permitted to spend operating funds to pay for permanent improvements, but that it could not formally designate some of its tax levies as permanent-improvement levies.

The court determined that, because redesignating the levies would lead to a higher “effective rate” of taxation on its “outside millage” and because the school district’s budget did not show the current need for that increased revenue, the county budget commission and the Board of Tax Appeals had erred by permitting the redesignation of the levies.

Writing for the unanimous court, Justice William M. O’Neill explained that the increased revenue was not “clearly required” to cover the school district’s expenses, and therefore violated state law. He emphasized, though, that the decision does not prohibit boards of education from obtaining approval of their tax levies while running budget surpluses, as long as any additional revenue generated by an increased effective rate of taxation is shown to be clearly required by the school’s budget.

A school levy provides a method for districts to collect property taxes above the 10 inside mills provided in the state constitution, but only with voter approval. The funds generated from levies are called “outside millage” or “outside mills.”

A school levy provides a method for districts to collect property taxes above the 10 inside mills provided in the state constitution, but only with voter approval. The funds generated from levies are called “outside millage” or “outside mills.”

In December 2009, the Indian Hill Exempted Village School District Board of Education passed a resolution to convert 1.25 inside mills for current expenses to pay for permanent improvements at the school. The improvements included building upgrades, equipment and furniture, technology changes, and buses.

A group of taxpayers objected to the conversion of the tax funds to the county budget commission, which reviews and approves school district tax levies and budgets. The district’s budget for the 2010-2011 fiscal year projected that converting the inside mills would generate a surplus of $151,643 in the permanent improvements category. The annual budget also showed an expected overall surplus of $1.85 million, on top of a $24.8 million surplus the district already carried.

By a 2-1 vote in April 2010, the budget commission approved the redesignation of 1.25 inside mills. The taxpayers appealed to the BTA. The board affirmed the budget commission’s decision, and the taxpayers submitted the matter to the Ohio Supreme Court for review.

The court returned the matter to the BTA to adjust the Hamilton County Budget Commission’s earlier ruling to align with the court’s opinion.

According to the state constitution, property may be taxed up to one percent, or 10 “mills,” of its taxable value for state and local purposes without voter approval. This taxation is referred to as “inside millage” or “inside mills.” In addition, a school levy provides a method for districts to collect property taxes above the 10 inside mills, but only with voter approval. The funds generated from levies are called “outside millage” or “outside mills.”

When the school district submitted its 2010-2011 budget, it was generating 20.17 mills from property taxes for its operating expenses. By converting 1.25 of the constitutionally allowed inside mills from operating expenses to permanent improvements, the district triggered a provision of law that prevents the operating-expense millage from falling below 20 mills. This in turn affected how reduction factors applied. 

Reduction factors are designed to ensure the collection of a consistent dollar amount from the outside, voter-approved millage by reducing the effective rate of taxation of the outside millage. But converting the 1.25 inside mills had the effect of lessening how much the outside mills were reduced so that the entire amount of operating levies remained at 20 mills. This represented an increase in taxes that generated additional revenue.

Given that the tax rate stayed within the amount of outside mills approved by the voters, the school district committed no constitutional violation, Justice O’Neill wrote.

However, he explained, the change in the inside mills had the effect of increasing the effective rate under the outside mills, and that change must comply with the standard set out in R.C. 5705.341, which governs appeals from the county budget commission to the BTA. The law states that the tax rate “for the ensuing fiscal year” must be “clearly required” by the district’s budget for that fiscal year.

“[I]t is evident that, as a matter of law, the increased effective rate for the outside mills was not ‘necessary to produce the revenue needed by the taxing district’ — and therefore not ‘clearly required’ — under R.C. 5705.341,” Justice O’Neill reasoned. “That is so because the amount of the projected surplus of revenue over expenditure for the ensuing fiscal year was $1,849,311, an amount exceeding the $1,450,000 raised by the increased effective rate.” 

“Indeed, far from defraying current operating expenses, the increased revenue from the outside mills padded the district’s surplus,” he wrote. “To permit a tax increase that performs no function other than to increase the amount of budget surplus would deprive the ‘clearly required’ standard of all meaning.”

“Nothing in this opinion should be construed to disapprove, as a general matter, the discretion of a board of education to budget with a surplus,” he added. “A school district is generally entitled to collect revenue under its inside millage and its voter-approved outside mills (the latter being subject to the H.B. 920 reduction factors), while maintaining a significant balance of unencumbered funds.”

“Here, [though,] the increased effective rate of taxation under the outside mills raised revenue and increased taxes overall, and our holding is that that increased revenue had to correlate to current expenditures, rather than constituting excess revenue for the district,” he concluded.

2013-1598. Sanborn v. Hamilton Cty. Budget Comm., Slip Opinion No. 2014-Ohio-5218.

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