Ducking Its Dues: County Still Owes Knox County Schools Over $10 Million


In May, I wrote a column asserting that Knox County Schools is entitled to recover more than $10 million in fees that have been wrongfully collected by the Knox County trustee on a portion of the local option sales tax revenues that go to schools.

These wrongful fee collections, going back to 1998, fly in the face of a 1965 agreement between the City of Knoxville and Knox County that no trustee fee shall be imposed on the original 1-cent local option sales tax that was adopted at that time. State law provides for just such an exemption: “as set out in an approved intergovernmental agreement” from an otherwise mandated 1 percent trustee fee on sales tax collections.

Of the $131 million in sales tax revenues budgeted for schools, more than $80 million is derived from that original 1 cent, which went entirely to schools. So that’s $800,000 in trustee fees that Knox County owes to schools for this year alone. And while the amounts have grown over the years, the total that’s owed since the trustee began collecting in 1998 easily exceeds $10 million. (Of the subsequent increases in the local option sales tax rate to the current 2.25 cents, only half goes to schools and is not covered by the 1965 agreement.)

State Attorney General Robert Cooper made it clear earlier this year that there is no statute of limitations on the period over which a school board is entitled to a recovery. Indeed, the Knox County law director, on behalf of schools, is currently suing the Town of Farragut for an unpaid share of mixed-drink tax due to schools and also claiming interest that’s just about equal to the $1.2 million in unremitted taxes. If interest were applied on the same basis to trustee fee restitution, the total amount that’s owed would rise to at least $20 million.

On May 27, I furnished school board Chair Lynne Fugate and Superintendent Jim McIntyre an opinion by my attorney, Tom McAdams, affirming the validity of all my assertions. Fugate, in turn, furnished the opinion to deputy law director David Sanders, who purports to serve the school board, and asked for a response from the law director, Bud Armstrong.

Three months have passed and no response has been forthcoming. Instead, Armstrong’s only known communication on the matter (of which I’m aware) was in a July 8 memorandum to, of all people, County Commissioner Dave Wright. This is egregious behavior that borders on dereliction of duty on the part of the law director who is obliged to represent all branches of county government co-equally.

In his memorandum, Armstrong claims that the 1965 agreement was “held to be invalid and unenforceable by the Chancery Court in 1995” and subsequently abrogated by a 1998 settlement of that court proceeding.

Nothing could be further from the truth, and Armstrong’s claims are pure poppycock. Indeed, if there’s anything worse than the law director’s improprieties, it’s his incompetence.

I obtained a copy of Armstrong’s memorandum from another county commissioner and furnished it to Fugate and McIntyre as well as McAdams for review. My attorney’s conclusion: “The 1965 agreement remains in full force and effect, enforceable in accordance with its terms.” 

To enforce it and seek recovery, the school board will plainly have to retain its own attorney to act on its behalf. State law clearly entitles school boards to do so. But that right was somewhat compromised in Knox County by a 2003 settlement of a lawsuit between the school board and County Commission stipulating that the board’s right to counsel would require an agreement with the law director that there is a conflict of interest. If the two do not agree, the Tennessee Board of Professional Responsibility will decide.

Patently, a conflict exists with a law director who is much more beholden to County Mayor Tim Burchett and County Commission. Having repeatedly spurned the school board’s request for additional funding, they aren’t about to fork over anything like $10 million without a fight.

While the county trustee collects the fees on all local taxes, he doesn’t have a lot of say in the matter. Most of the fees collected, including those on school funds, are remitted to the county’s general fund from which any recovery would be made. Still, newly elected Trustee Ed Shouse could make a difference by supporting a prospective waiver.

The prospect of another lawsuit between the school board and county government is not a pleasant one. The last one in 2002-03 brought public opprobrium on both sides. But a suit is probably the only way the schools are going to recover—although there could be room for a settlement.

The recovery would represent a one-time payment that could not, or should not, be used to cover recurring expenses such as a teacher pay raise, which our cheapskate county mayor and Commission refused to fund this year. But it would go a long way toward covering the one-time cost of a system-wide instructional technology initiative that would put a laptop or tablet in the hands of every student for inventive and differentiated learning. This, too, was rejected by the mayor and Commission but remains a centerpiece of the school system’s strategic plan. 

An investment in education is far preferable to letting the money sit idle in the county’s $50 million undesignated general fund balance.

Correction: An earlier version of this story said the deputy law director who handles school board matters is Daniel Sanders. Although he is also a deputy law director, that Mr. Sanders does not deal with the school board. David Sanders, however, does.

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