Appeal by plaintiffs-appellants from judgment entered 3 September 1996 by Judge Ronald E. Bogle in Buncombe County Superior Court.
Walker, Judge. Judge Wynn Dissents. Judge Smith concurs.
The opinion of the court was delivered by: Walker
Buncombe County (the County) contains two separate school districts, the Buncombe County Schools (County Schools) and the Asheville City Schools (City Schools). The average daily membership (ADM) for the County Schools for fiscal years 1993-94 (FY 1993-94) and 1994-95 (FY 1994-95) was eighty-four percent (84%) of the total student population of the County, while the ADM for the City Schools during the same time period was sixteen percent (16%).
On 10 March 1995, plaintiffs filed suit against the County and the County Board of Commissioners challenging the County's method of distributing funds to the two school districts. In their complaint, plaintiffs made the following allegations and requests for relief: (1) that the County is bound to follow N.C. Gen. Stat. § 115C-430 in apportioning the residual local sales and use taxes between the two schools, and that N.C. Gen. Stat. § 105-472 was repealed by N.C. Gen. Stat. § 115C-424; (2) that N.C. Gen. Stat. § 115C-430 and N.C. Gen. Stat. § 105-472 are in conflict, and the County is bound to follow N.C. Gen. Stat. § 115C-430; (3) that the County is a taxing district under N.C. Gen. Stat. § 105-472(b)(2), and is therefore entitled to a share of the residual sales taxes; (4) that plaintiffs' constitutional rights to equal protection of the laws have been violated "by virtue of this arbitrary, capricious and irrational system of funding public education in Buncombe County;" (5) that plaintiffs have been deprived of liberty and property without due process of the law by virtue of the North Carolina Compulsory Attendance Law and the County's distribution of the residual sales taxes; and (6) that plaintiffs are entitled to a preliminary injunction prohibiting the County from distributing any residual sales taxes after 1 July 1995 until a final judgment is reached in this matter.
On 10 June 1995, the trial court allowed the City Schools to intervene in the action pursuant to Rule 24 of the North Carolina Rules of Civil Procedure. All the parties filed stipulations of facts and issues on 10 June 1996, in which the third claim for relief and the request for a preliminary injunction were withdrawn. Following a trial, judgment was entered for the defendants and intervenor-defendant on all issues on 3 September 1996.
The trial court made the following findings and Conclusions in support of its judgment. The County Schools and City Schools receive funding from a variety of sources, including local sales taxes, ad valorem taxes, and Federal and State grants. See N.C. Gen. Stat. § 115C-426 (1994). Since figures for fiscal year 1995-96 (FY 1995-96) were incomplete, the trial of this matter focused on FY 1993-94 and FY 1994-95. For these two fiscal years (FYs 1993-95), the County appropriated the following total amounts from its General Fund to the local current expense fund of each school district on an ADM basis: $8,400,696.00 to the City Schools and $43,328,225.00 to the County Schools.
In addition, the County is authorized to levy additional local government sales and use taxes (sales taxes) pursuant to Articles 39 (1 cent tax), 40 ( 1/2 cent tax) and 42 ( 1/2 cent tax) of Chapter 105 of the N.C. General Statutes. These sales taxes are collected by the N.C. Department of Revenue (Department of Revenue) and re-distributed to the County pursuant to statute.
By special local legislation in Chapters 134 and 534 of the 1983 Session Laws, fifty percent (50%) of the Article 39 sales taxes are paid into the County's School Capital Reserve Fund (Capital Reserve Fund) for the purposes of funding school capital projects. The County then distributes the Capital Reserve Fund to the two school districts on an ADM basis. For FYs 1993-95, the County distributed $2,356,603.00 to the City Schools and $12,151,749.00 to the County Schools from this fund.
Further, under N.C. Gen. Stat. § 105-487 and N.C. Gen. Stat. § 105-502, respectively, thirty percent (30%) of the Article 40 sales taxes and sixty percent (60%) of the Article 42 sales taxes are restricted for school capital outlay purposes. At all relevant times, the County has appropriated these restricted funds on an ADM basis. For FYs 1993-95, the County distributed restricted funds totaling $1,717,550.00 to the City Schools and $8,856,879.00 to the County Schools.
In addition, the citizens of the City Schools district have approved a special ad valorem tax (supplemental tax) in their district to supplement the funds from the State and the County and "thereby operate schools of a higher standard...." See N.C. Gen. Stat. § 115C-501 (1994). The citizens in the Enka High School attendance area of the County Schools district also approved a supplemental tax; however, this tax was repealed in 1994. For FYs 1993-95, the amount of supplemental taxes levied on behalf of the City Schools was $6,987,923.00, while the amount levied on behalf of the County Schools was $772,428.00 (no tax was levied on behalf of the County Schools in FY 1994-95 since the supplemental tax was repealed in 1994).
On a quarterly basis, the Department of Revenue allocates to each taxing county the net proceeds of the sales taxes collected in that county. See N.C. Gen. Stat. § 105-472(a)(1995). The net proceeds received by each county from the Department of Revenue, less the restricted portions of the Articles 39, 40 and 42 sales taxes, are referred to as the residual local sales and use taxes (residual sales taxes). It is a portion of these residual sales taxes that are at issue in this case.
Pursuant to N.C. Gen. Stat. § 105-472(b), a county must choose one of two methods for distributing the residual sales taxes--the per capita method or the ad valorem method. Under the per capita method, the residual sales taxes are distributed to each taxing district within the county according to the percentage of the county's population which the taxing district represents. Under the ad valorem method, the residual sales taxes are distributed to each taxing district within the county according to the percentage that the ad valorem taxes levied in the taxing district bears to the total county ad valorem tax levy.
As the trial court correctly noted, if the County had chosen to utilize the per capita method of distribution, they would not have been required to distribute any of the residual sales taxes to the two school districts. However, at all relevant times, the County has elected to utilize the ad valorem method of distributing the residual sales taxes. As a result, for FY 1993-94, the County distributed a total of $1,427,393.00 of the residual sales taxes to the City Schools and a total of $326,773.00 to the County Schools. And, for FY 1994-95, the County distributed a total of $1,400,128.00 of the residual sales taxes to the City Schools and a total of $332,465.00 to the County Schools.
However, since the supplemental tax in the Enka High School attendance area of the County Schools district was repealed in 1994, the County Schools no longer receive a portion of the residual sales taxes under the ad valorem distribution method. Plaintiffs contend these residual sales tax proceeds should be distributed to the school districts on an ADM basis in accordance with N.C. Gen. Stat. § 115C-430. The parties represent that if the residual sales taxes were distributed to the two schools systems on an ADM basis for FY 1995-96, the ...