Hamilton County schools sue city for back taxes

Hamilton County schools sue city for back taxes

April 12th, 2014 by Andy Sher, Joy Lukachick Smith and Kevin Hardy in Local Regional News

Document: Complaint for Declaratory Judgment

Hamilton County Schools headquarters

Hamilton County Schools headquarters

Photo by Staff File Photo /Times Free Press.

With talks stalled and a potential change in state law threatening the mounting tab owed to the Hamilton County school system over past-due liquor taxes, school officials filed a lawsuit against Chattanooga on Friday as a safeguard.

School officials said talks were going nowhere with the city.

And details of a bill pushed by the state comptroller and backed by the Tennessee Municipal League have changed frequently in recent days. But it's clear the legislation could impact the Hamilton County school system and others across the state that say they went years without their fair share of a state-mandated liquor-by-the-drink tax.

"Some of these proposals would have actually been very helpful to our claim. Some of them would have sought to eliminate our claim altogether," said school board attorney Scott Bennett. "In view of the uncertainty, we believed that the prudent course of action would be to file suit to protect that claim."

The suit asks the city to pay the $11.7 million in taxes owed from 1998 to 2014, and an unknown amount that spans three decades before that. Bennett said he didn't know how much is due dating back to 1971, when Chattanooga approved sales of liquor by the drink.

That, along with a claim for interest and legal fees, could balloon the city's obligation millions beyond the already-established amount.

The school system and the city have taken turns blaming each other for the dispute.

Both sides said they were willing to work out a solution and have held two joint meetings since the school board voted in late March to authorize a suit.

Schools Superintendent Rick Smith says that as recently as Tuesday, he offered two ways the city could repay the full debt. But the city didn't respond, he said.

The suit was filed about 2 p.m. Friday in Hamilton County Chancery Court.

About 90 minutes later, Mayor Andy Berke sent Smith a letter outlining the city's offer to repay the disputed $11.7 million over the next five years -- the first time the city has formally offered to fully repay the debt.

"I'll put it this way, we didn't get a whole lot of movement until our board took action at the board meeting in March," the superintendent said. "And we didn't get much movement the last two weeks until we filed suit."

Berke's staff said the most recent offer was discussed in the last two weeks of negotiations and was an "attempt to resolve this matter."

The city offered to pay the school system $3.33 million immediately plus $1.67 million a year for the next five years, and to keep tax payments current going forward.

But the payments would come with conditions: The school system must start making stormwater payments to the city for properties it owns within the city limits and the money the city pays must benefit schools the city's children attend.

"City taxpayers have an interest in seeing their tax dollars support children in the city," said Berke's spokeswoman, Lacie Stone.

School officials said this was the first tangible offer from the city since an attempt last year fell through.

But the city maintains it has been trying to come to a workable solution.

Berke's chief of staff, Travis McDonough, said he was surprised when the school system filed suit Friday and still hopes to work something out.

The schools and the city have argued about the taxes owed since Berke took office in April 2013 and his administration sought to repay only part of the debt using pieces of property and some cash.

No deal was ever officially approved.

And since taking office, records show, Berke's administration has withheld more than a half-million dollars from its payments as it worked to find an alternative to paying the full bill. For months, the two agencies were at a standstill. But in the days after Board of Education members voted to sue the city, the sides sought to reconvene talks.

School leaders were bolstered by a Feb. 26 opinion from Tennessee's attorney general that said school boards can't waive any past-due liquor taxes.

Smith and Berke had a one-on-one meeting, and Smith said the mayor also came to the first joint meeting for a few minutes. The superintendent said he, too, still hopes to come to an agreement outside the court system.


In Nashville, a bill has been moving in the final days of the Legislature seeking to address a situation faced by dozens of cities across the state.

Many cities for decades have not shared revenue from liquor-by-the-drink taxes with local school systems. At least a hundred cities -- including Chattanooga -- collectively owe public school systems millions of dollars.

Now, state Tennessee Comptroller of the Treasury Justin Wilson is attempting to provide what his office considers a structured approach to the problem and repayment of the debt.

It establishes a deadline for lawsuits against municipalities and sets a framework for cities to repay 15 years' worth of back taxes over 10 years at no interest.

The bill has not passed out of various House and Senate committees. On Tuesday, it was stopped dead in its tracks as several local lawmakers, including Rep. Mike Carter, R-Ooltewah, raised concerns about an amendment that would have given schools just a few weeks to file lawsuits.

Carter said Berke recently wrote Hamilton County officials and asked them to hold off on a lawsuit while the city and school board sought to work things out.

"They [school officials] agree. They get a call saying a bill's headed to the Senate floor that eliminates their lawsuit. And they smell a rat," Carter said, hastening to add, "Just because you smell one doesn't mean there may be one."

But Berke spokeswoman Lacie Stone said the mayor "didn't write a letter" asking county school officials to hold off on the lawsuit.

The mayor's chief of staff, Travis McDonough, said "what there was was a request to do was what's in the March 28 letter, and that is, let's spend the next 30 days focused on a solution. and we made it two weeks" before the system filed suit on Friday.

Berke's Feb. 28 letter to Smith outlines a meeting earlier he had that day with the schools' director.

"I am encouraged that you agreed to the creation of a working group that will tackle the following," Berke wrote, outlining issues such as liquor back tax payments, a payment schedule "that is responsible to Chattanooga taxpayers," the school systems' delinquent storm water fees and more.

"As we agreed we will pull together a team of people from HCDE [county] and the city to find solutions to these issues over the next 30 days," Berke wrote. "I am encouraged the HCDE is willing to collaborate to find a constructive solution."

Huddling in a Legislative Plaza hallway Tuesday with Wilson and his chief of staff, Jason Mumpower, Carter argued the amendment's deadline on lawsuits would become effective at the end of April. Wilson said he would try to recast the amendment to take effect June 1, as Carter proposed.

Wilson said he'd had "no contact with anybody from Chattanooga," but has discussed the issue with various government groups including the Tennessee Municipal League and statewide county government and school board associations.

Hamilton County school board members had feared the amendment would hamper their claim for the past-due taxes.

"There's a tremendous push by TML to drastically change the law and pretty much keep schools out of the loop," said school board member David Testerman. "It's amazing to me; you break the law, so what do you do -- change the law?"

McDonough said Berke and the city administration have not been involved in the comptroller office's discussions about the bill.

A new amendment seeking to address concerns voiced by Carter; House Majority Leader Gerald McCormick, R-Chattanooga; and Sen. Todd Gardenhire, R-Chattanooga, is expected to be unveiled Monday or Tuesday.

Lawmakers hope to adjourn their annual session sometime Tuesday.

Contact Joy Lukachick at jlukachick@timesfreepress.com. Contact Andy Sher at asher@timesfreepress.com. Contact Kevin Hardy at khardy@timesfreepress.com.