Overdue Repayment: The County Owes Knox Schools Over $10 Million

Knox County government owes Knox County Schools more than $10 million in reimbursement of wrongfully collected trustee's fees on local option sales taxes to which the school system has been entitled over a span of more than 15 years.

At least since 1998, the Knox County trustee has been imposing an invalid 1 percent fee on a majority of the 1.625 cents of local option sales taxes that are dedicated to schools. Under a 1965 agreement between the City of Knoxville and Knox County, the county agreed to waive the fee on the first penny of the tax that was instituted at that time and, per the agreement, went entirely to schools.

In 1989, then County Law Director (now Circuit Judge) Dale Workman opined that state law required the trustee to begin collecting a 1 percent fee on the rest of the then 2.25 cent sales tax, which hadn't been assessed up to that time. However, Workman's opinion underscored that "no commission or compensation would be paid to the trustee for receipt and distribution of that original 1 cent sales tax."

After a period of adherence in the early 1990s, county trustees starting with Mike Lowe in the later 1990s and his successors ever since, have been imposing a 1 percent fee on the entire amount of the sales tax going to schools in disregard of the 1965 agreement and Workman's 1989 opinion.

In fiscal year 2013, Knox County Schools got $127.6 million in sales tax revenue—representing all of that first penny plus the one-half of subsequent increases that state law requires to be allocated to schools. Since the penny constitutes 61.5 percent of the total, that produces $78.5 million in taxes on which $785,000 in trustee fees were wrongfully collected and for which restitution should be made by returning the funds to the school system.

In addition to the year at hand, it's also very clear that there is no statute of limitations on how many years back in time that the school system is entitled to recovery of the improper fees. The state attorney general very recently so opined in relation to a suit by the Hamilton County Board of Education to get its statutory share of more than a decade's worth of mixed-drink tax collections by the City of Chattanooga on which it hasn't been paid. "General statutes of limitations do not apply...when the matter at issue involves the local government's exercise of sovereign function," the attorney general ruled. And he made it clear that a Board of Education is a sovereign in this regard.

County budget data that's readily available on the Internet only goes back to fiscal year 2003, so I only calculated the total amount that's owed back that far. For the years 2003 through 2013, school system sales tax revenues totaled $1.31 billion. Thus, the 1 percent fee on 61.5 percent of that equals a little over $8 million that the school system is entitled to. The amount due for several prior years pushes the grand total to well over $10 million. And then there's the additional $785,000 for fiscal year 2014 that ends June 30.

Another thing that's clear is that neither County Mayor Tim Burchett nor county commissioners, let alone the county trustee, can apply this reimbursement as a reduction of funds otherwise budgeted for schools in the fiscal year ahead. A state "maintenance of effort" requirement forbids a funding body from reducing a school system's budget from one year to the next. If sales tax revenue growth was budgeted, there might be some wiggle room to shave property tax revenues budgeted for schools. However, sales tax revenues for the fiscal year ahead are budgeted to be flat.

If Burchett and Commission and/or the trustee aren't forthcoming in making restitution, then the school board should sue for recovery just as Hamilton County's has done. If the mayor squawks that a $10 million hit will force a tax increase, that is pure baloney. In fact, such a one-time payment could be funded with a bond issue on which the annual debt-service cost and budget-hit would be no more than $1 million that can be readily absorbed.

Garnering a one-time payment of upwards of $10 million would seem perfectly suited to fund an instructional technology initiative that was a big component of a $30 million budget increase that the school board sought and failed to get two years ago. The one-time money would go to purchase a laptop or tablet for every student above a certain grade level and for the wireless networking and other infrastructure to support them. The school system has managed to fund such an initiative on a pilot basis in nine schools this year with good success. But as matters stand, there's no money for expansion of the pilot this coming school year even though the day when standardized testing will be conducted online draws nearer.

Another possibility would be to allow the payment to be made over three years at the rate of $4.5 million a year. That way the money could perhaps be used to cover the cost of the 2.5 percent teacher pay raise for which the school board has sought additional funding from Burchett and been rebuffed.

Nearly four years ago, I made Superintendent Jim McIntyre aware of the 1965 agreement and Workman's 1989 opinion. He met with then County Trustee John Duncan seeking to get the sales tax fee waived prospectively. But as far as I can tell, he got the runaround from some combination of Duncan, Burchett, and then County Law Director Joe Jarrett, and I failed to press the matter.

As it has now become clear that the stakes are vastly larger, McIntyre and the school board should proceed forthwith to obtain recovery of the full amount that's due.