Changes to County/School Dispute Resolution Process

Published for Coates' Canons on June 26, 2018.

As detailed here and here, if a local school board believes that it has not received sufficient funding from the county for the fiscal year, for either capital or operating expenses, the local school board may initiate a dispute resolution process. For many years, the process has had three stages—joint meeting of the two governing boards; mediation; and litigation. The General Assembly has replaced the litigation stage with a mandated funding formula for operating expense funding disputes. See S.L. 2018-83. Litigation will continue as the third stage for capital funding disputes. This post summaries the new dispute resolution process.

Trigger for Dispute Resolution Process

If the local school board “determines that the amount of money appropriated to the local current expense fund [for operating expenses], or the capital outlay fund [for capital expenses], or both, . . . is not sufficient to support a system of free public schools,” it may initiate a dispute resolution process with the board of county commissioners to challenge the appropriation (dispute resolution process). G.S. 115C-431(a).

Stages of Dispute Resolution Process

As stated above, there are three stages in the dispute resolution process—joint meeting of the two governing boards; mediation; and default funding formula (for operating expense disputes) or litigation (for capital outlay disputes).

Joint Meeting of Boards. To trigger the process, a local school board must so notify the county board within seven days of the adoption of the county budget ordinance. The boards then are required to meet and make a good-faith effort to try to resolve their differences. A mediator presides over the meeting and acts as a neutral facilitator.

Mediation. If the meeting is not successful, the boards proceed to official mediation. Unless the two boards agree otherwise, the participants in the mediation are the chairs, attorneys, and finance officers of each board; the school superintendent; and the county manager. The compensation and expenses of the mediator are shared equally by the local school administrative unit and the county. The mediation is conducted in private, and statements and conduct are not discoverable in any subsequent litigation. The mediation must end by August 1, unless both boards agree otherwise. If the mediation continues beyond August 1, the county must appropriate to the local current expense fund a sum equal to its appropriation for the previous fiscal year.

Default Funding Formula or Litigation. If mediation ultimately fails, what happens next depends on whether operational funding levels, capital funding levels, or both are in dispute. If the dispute at least partially involves operational funding amounts, to be appropriated to the school unit’s local current expense fund, then a failed mediation triggers a default funding formula. The funding formula is the final determination of the local current expense appropriation amount for that fiscal year. Neither the local board of education nor board of county commissioners may file any legal action challenging the determination.

The funding formula differs depending on whether or not the funding formula had been triggered in the prior fiscal year.

Local Current Expense Funding Formula if Statutory Funding Formula Not Triggered for the Prior Two Years

If the statutory funding formula was not triggered in the prior two fiscal years, the county’s appropriation to a local school unit’s local current expense fund derives from the following formula:

  1. Start with the amount of county appropriations allocated to the local current expense fund in the prior fiscal year that was actually expended by the local school unit or transferred to a charter school, innovative school, regional school, or laboratory school. In other words, begin the calculation with the amount of county appropriations that were actually spent for the year immediately preceding the budget year. Note that because county appropriations are commingled with other local revenue sources in the local current expense fund, it will be incumbent on the local school board to separately track the expenditure of county appropriations.
  2. Divide the amount from step (1.) by the sum of the average daily membership of the local school administrative unit from the prior year + the share of the average daily membership of any innovative, charter, regional, or laboratory school whose students reside in the local school administrative unit from the prior year. This number represents the per student allocation.
  3. Multiply the amount from step (2.0) by the sum of 1 + the twelve-month percent change in the second quarter Employment Cost Index for elementary and secondary school workers as reported by the Federal Bureau of Labor Statistics. Unfortunately, the new law does not precisely designate the data required to make this calculation. It is unclear if the reference is to the Employment Cost Index for total compensation for elementary and secondary school workers or the Employment Cost Index for wages and salaries for elementary and secondary school workers. Here is a graph that illustrates the difference. (Note that second quarter data is released on July 31.) The new law also does not indicate whether seasonally adjusted or non-seasonally adjusted data should be used. It will be up to the local school board and board of county commissioners to determine which set of data to use in the calculation.
  4. Multiply the per student allocation in step (2.) by the sum of the average daily membership of the local school administrative unit from the prior year + the share of the average daily membership of any innovative, charter, regional, or laboratory school whose students reside in the local school administrative unit from the prior year.

The resulting figure from step (4.) is the statutorily mandated local current expense appropriation for the budget year.

To illustrate, assume that the county appropriated $800,000 to the school unit’s local current expense fund in FY 2017-2018. This money was added to $300,000 in fines, penalties, and forfeiture proceeds, a $50,000 one-time appropriation from the General Assembly to fund a pilot program, and $130,000 in various donations to the school unit, and $45,000 in appropriated fund balance. Thus, the total funds for FY 2017-2018 in the school unit’s local current expense fund were $1,325,000. In addition, there is $200,000 in unappropriated fund balance associated with the fund. During FY 2017-2018, the school unit expended $1,000,000 of this total. The school unit separately tracked school appropriations, and spent appropriately $762,000 of the county appropriations amount.  

Assume also that the average daily membership of the local school administrative unit for the 2017-2018 school year was 3,500 and 100 additional students instead attended charter schools.

In the FY 2018-2019 budget ordinance, the county again appropriated $800,000 to the school unit’s local current expense fund. The school board had requested $1,400,000, and initiates the dispute resolution process. The two boards have moved through the first two stages in the process (joint meeting and mediation) without any resolution, thus triggering the statutory funding formula. To calculate the amount owed, the county and school board will have to agree on the amount of county appropriations expended by the school unit from the local current expense fund during FY2017-2018. (Again, local school boards should separately track expenditures of county appropriations.) Once that amount is agreed upon, the parties apply the formula. In this example,

Step 1: $762,000 (the amount of county appropriations to local current expense fund actually expended by school unit in prior year)

Step 2: $762,000/3,600 (average daily membership of school unit for prior year + share of average daily membership of charter school, innovative school, laboratory school, or regional school attended by school unit district students) = $211.67

Step 3: $211.67 * 1.02 (1 + the twelve-month percentage change in 2nd quarter Employment Cost Index for elementary and secondary school workers (2.38%)) = (Note that I used seasonally-adjusted first quarter data on total compensation for purposes of this example because second quarter data is not available until July 31.) = $215.90

Step 4: $215.90*3,600 (average daily membership of school unit for prior year + share of average daily membership of charter school, innovative school, laboratory school, or regional school attended by school unit district students) = $777,240

The amount that the county must appropriate to the local school administrative unit’s local current expense fund for FY 2018-2019 is $777,240. Note that this is less than the county initially appropriated. In this case, a school board is likely to have either accepted the initial appropriation or the amount negotiated through the joint meeting or formal mediation.

Local Current Expense Funding Formula if Statutory Funding Formula Triggered in Prior Two Fiscal Years or More

If the statutory funding formula is triggered a second year in a row, the formula is altered to increase the inflationary factor. The formula then becomes:

  1. Start with the amount of county appropriations allocated to the local current expense fund in the prior fiscal year that was actually expended by the local school unit or transferred to a charter school, innovative school, regional school, or laboratory school. In other words, begin the calculation with the amount of county appropriations that were actually spent for the year immediately preceding the budget year.
  2. Divide the amount from step (1.) by the sum of the average daily membership of the local school administrative unit from the prior year + the share of the average daily membership of any innovative, charter, regional, or laboratory school whose students reside in the local school administrative unit from the prior year. This number represents the per student allocation.
  3. Increase by 3 percent the twelve-month percent change in the second quarter Employment Cost Index for elementary and secondary school workers as reported by the Federal Bureau of Labor Statistics. This provision, again, leaves a great deal of ambiguity. As stated above, it is unclear if the reference is to the Employment Cost Index for total compensation for elementary and secondary school workers or the Employment Cost Index for wages and salaries for elementary and secondary school workers. Here is a graph that illustrates the difference. (Note that second quarter data is released on July 31.) The new law also does not indicate whether seasonally adjusted or non-seasonally adjusted data should be used. It will be up to the local school board and board of county commissioners to determine which set of data to use in the calculation. Finally, it is not clear how to interpret the mandate to increase the percentage change by 3 percent. It could mean that you add 3 percent to the percent change. It could also mean that you multiply the percent change by 3 percent. The former interpretation seems the most consistent with legislative intent. To illustrate how that calculation would work, if the 12-month percent change is 2.38 percent, you add 3 percent to that for a total of 5.38 percent or 0.05. (Note that second quarter data is released on July 31.)
  4. Multiply the amount from step (2.) by the amount in step (3.)
  5. Multiply the per student allocation in step (4.) by the sum of the average daily membership of the local school administrative unit from the prior year + the share of the average daily membership of any innovative, charter, regional, or laboratory school whose students reside in the local school administrative unit from the prior year.

The resulting figure from step (5.) is the statutorily mandated local current expense appropriation for the budget year.

Litigation for Capital Funding Dispute

If the dispute, or part of the dispute, involves capital funding amounts, the local board of education may file an action in superior court related to the capital funding only. The action must be filed within five days of the failed mediation. Either side may demand a jury trial. The judge or jury must determine the “amount of money legally necessary from the board of county commissioners to provide the local school administrative units with buildings suitably equipped, as required by G.S. 115C-521.” G.S. 115C-521 specifies that a local school board provide adequate school buildings “equipped with suitable school furniture and apparatus.”

In Union County Board of Education v. Union County Board of Commissioners, 771 N.C. App. 590 (2015), the court of appeals held that the amount “legally necessary” is the amount needed to enable the local school board to fulfill its constitutional duty to provide every child with the opportunity for a sound basic education. The court also clarified that the judge or jury is limited to considering the needs of the school unit, and resources available to the school unit and the county, in the fiscal year in which the dispute arose.

In making this determination, a judge or jury must consider

the educational goals and policies of the State and the local board of education, the budgetary request of the local board of education, the financial resources of the county and the local board of education, and the fiscal policies of the board of county commissioners and the local board of education.

G.S. 115C-431.

If the school board succeeds in the litigation, the court will order the board of county commissioners to appropriate a specific amount to the local school administrative unit and, if necessary, to levy property taxes to cover the amount of the appropriation. Any payment by the county may not be considered or used to deny or reduce appropriations to a local school administrative unit in subsequent fiscal years.

Either board may appeal the superior court’s judgment in writing within ten days after the entry of the judgment. Final judgments at the conclusion of the appellate process are legally binding on both boards.

Although the statute directs the trial court to take up the matter as soon as possible, it is silent as to the timing of appellate review. In practice, the appellate review process often takes over a year or more to complete. Thus, even if a judge or jury determines that a local school board needs additional funds from the county to meet its constitutional and statutory educational responsibilities for a particular school year, the school unit may not receive those additional capital funds that school year.

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Topics - Local and State Government