published Friday, February 28th, 2014

Tennessee AG ruling prods cities to pay school systems

State Attorney General's opinion on the liquor tax
State Attorney General's opinion on the liquor tax
Andy Berke letter to the school staff
Andy Berke letter to the school staff

Cities across Tennessee need to start paying school districts millions of dollars in unpaid mixed-drink taxes, the state attorney general says.

Local school officials say the opinion released this week by Attorney General Robert Cooper means Chattanooga officials must pay the $11 million-plus it owes to Hamilton County Schools and can't negotiate a lesser settlement or use land to offset the debt.

"It's wonderful news. It's the best news since Santa Claus," said school board member David Testerman. "Our school system is in desperate need of funds."

But Mayor Andy Berke's spokeswoman, Lacie Stone, said the city is still reviewing the opinion to decide what it means for Chattanooga.

While it may help answer a nearly $12 million question here, the attorney general's opinion has implications for school districts and municipalities across the state.

Cities owe millions of dollars to county school systems after failing for years to send the required mixed-drink taxes to support local schools. The state-imposed taxes are shared with municipalities, which are required to give half the receipts to county school systems.

There was widespread confusion over the liquor tax issue -- aside from Chattanooga, at least 15 other cities including Cleveland, South Pittsburg, Jasper and Manchester owe money.

Officials noticed last year that the payments had been inadvertently overlooked, said Gary Hayes, government consultant with the University of Tennessee's County Technical Assistance Service. After Hamilton County Schools officials discovered the shortfall, they asked state Rep. Gerald McCormick, R-Chattanooga, to request the attorney general opinion. The nonbinding opinions are the attorney general's effort to interpret legal issues that have not been decided in court.

Chattanooga agreed to start paying the liquor tax beginning last year. For the back taxes owed, city officials offered to donate the site of the former Maurice Poss Homes and give a half million dollars to start an early childhood education center.

At the time, Travis McDonough, Berke's chief of staff, called it an appropriate solution. But in November, city officials said Hamilton County Schools Superintendent Rick Smith told McDonough the school system didn't intend to go through with the agreement.

The day after that meeting, McDonough wrote Smith a letter saying he was disappointed with the school district's decision. He pointed out that after the city school system merged with the county in 1998, the city gave $58 million in local option sales tax until 2004 that was not required by the state.

"That's nearly five times" the disputed amount, he wrote. "The past decision to account for these funds as something other than liquor tax payments is not a basis to seek even more funding from the city."

Stone repeated that point Thursday, but Hayes and Hamilton County Schools officials don't think the two matters are tied.

"Based on that opinion when you look at it," Hayes said, "I don't think the city's is going to be able to do that."

The attorney general's opinion found that county school boards can't waive any past-due fees. Cooper said there is no statute of limitations on the fees and municipalities can't offset the costs with local-option sales tax revenue. But, Cooper wrote, municipalities don't have to pay it back all at once -- they may agree on a payment plan.

Chattanooga officials say the county school system owes between $1.5 and $2 million in outstanding stormwater fees. But the attorney general's office wrote that cities can't offset any payments because of school systems' unpaid water-quality fees.

Some cities might decide to disagree with the attorney general's interpretation of the law, Hayes said, which could prompt lawsuits by the school districts. Yet the opinion would likely weigh into the court's decision, he said.

In Southeast Tennessee, where at least six cities or local governments owe almost $2 million, Hayes said the opinion is clear that even cities with their own school systems still have to divvy out payments to the county school district.

In the region's largest rural county, Bradley, the school system is owed more than $800,000 by the county and Cleveland, which has the lion's share of the bill at $725,547, according to Hayes.

Earlier this year, Cleveland City Manager Janice Casteel said she believed the law exempts cities from sharing mixed-drink tax collections with the county if a municipal school system exists. Casteel couldn't be reached for comment Thursday.

In Marion County, Monteagle owes $124,054 to the schools.

Monteagle Mayor Marilyn Nixon said she hasn't had a chance to review the opinion but said the city would do what's right. If the city shells out the money this year, Nixon said she will have to amend the budget to make the payment.

For Hamilton County school board members, the opinion is "cut and dried," said board Chairman Mike Evatt.

"The city needs to pay up," he said.

Staff writer Andy Sher contributed to this story.

Contact staff writer Joy Lukachick at 423-757-6659 or jlukachick@timesfreepress.com.

Contact staff writer Kevin Hardy at 423-757-6249 or khardy@timesfreepress.com.

about Kevin Hardy...

Kevin rejoined the Times Free Press in August 2011 as the Southeast Tennessee K-12 education reporter. He worked as an intern in 2009, covering the communities of Signal Mountain, Red Bank, Collegedale and Lookout Mountain, Tenn. A native Kansan, Kevin graduated with bachelor's degrees in journalism and sociology from the University of Kansas. After graduating, he worked as an education reporter in Hutchinson, Kan., for a year before coming back to Chattanooga. Honors include a ...

about Joy Lukachick Smith...

Joy Lukachick Smith is the city government reporter for the Chattanooga Times Free Press. Since 2009, she's covered crime and court systems in North Georgia and rural Tennessee, landed an exclusive in-prison interview with a former cop convicted of killing his wife, exposed impropriety in an FBI-led, child-sex online sting and exposed corruption in government agencies. Earlier this year, Smith won the Malcolm Law Memorial Award for Investigative Reporting. She also won first place in ...

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