Locally-Collected Fines & Penalties: Calculating and Distributing Clear Proceeds

The Village of Paved Paradise is located on the North Carolina coast. It is a small municipality with a vibrant downtown. Because of its size and location, parking in the downtown area is scarce. There is a strict two-hour limit in the single town-owned parking lot, imposed by local ordinance. The ordinance assesses a $50 penalty for violating the parking time limit. (The ordinance is criminally enforceable under G.S. 14-4.) Despite the steep penalty, citizens and visitors regularly violate the parking ordinance—often parking in the lot for an entire day. The town employs a parking officer who issues multiple parking citations each day. However, the village has not been vigorous in its collection efforts, resulting in a measly 30% collection rate of the penalty amounts. In response to numerous citizen complaints about the lack of available parking, the village’s governing board decides to beef up its collection efforts in the hopes of discouraging violators. It hires DogtheBountyHunter, Inc., a local collection agency, to aid the village in collecting a variety of fees and charges, including the parking penalties. Pursuant to its agreement with the village, the collection agency retains 15% of the amounts collected, disbursing the remaining funds to the village. Having read this recent Coates’ Canons blog post, the village board is aware that by operation of N.C. Const. Art. IX, Sect. 7 and G.S. 115C-437 some of the monies collected by the agency, including the “clear proceeds” of the parking penalties, must be distributed to the local school administrative unit(s) in the county in which the village is located. The board members need help in calculating the amount that must be disbursed to the public schools, though. Assume that the collection agency reports that for the preceding month it collected $600 in outstanding parking penalties. After retaining its 15% fee, the collection agency forwards $510 to the village. What amount must the village disburse to its local school administrative unit(s)?

(a)    $459

(b)   $510

(c)    $540

(d)   $600

(e)    None of the above

The answer is (c) $540. But wait, that is more money than the village actually received from the collection agency. That does not make sense. Well, it may not make sense from a business perspective, but it is, in fact, what is required. Calculating Clear Proceeds N.C. Const. Art. IX, Sect. 7 provides, in relevant part, that

the clear proceeds of all penalties and forfeitures and of all fines collected in the several counties for any breach of the penal laws of the State, shall belong to and remain in the several counties, and shall be faithfully appropriated and used exclusively for maintaining free public schools.

The constitutional provision does not define the term “clear proceeds.” The North Carolina Supreme Court has held that the term is synonymous with net proceeds such that the “reasonable costs of collection constitutionally may be deducted from the gross proceeds of the [penalties and fines] collected . . . .” Cauble v. City of Asheville, 314 N.C. 598, 336 S.E.2d 59 (1985). The court noted that the costs of collection “do not include the costs associated with enforcing the ordinance but are limited to the administrative costs of collecting the funds.” What then constitutes “reasonable costs of collection?” In executing the constitutional provision, the General Assembly has specified that “[t]he clear proceeds . . . as referred to in Article IX, Sect[ion] 7 of the Constitution, shall include the full amount of all penalties, forfeitures or fines collected . . . diminished only by the actual costs of collection, not to exceed ten percent (10%) of the amount collected.” G.S. 115C-437. (Although G.S. 115C-437 states that it applies to revenues collected by counties, in Shavitz v. City of High Point, 177 N.C.App. 465, 630 S.E.2d 4 (2006), the North Carolina Court of Appeals assumed that the provision also applied to penalties and fines collected by municipalities.) Thus, in calculating clear proceeds a unit must start with the gross amount of the penalty or fine collected that is subject to Art. IX, Sect. 7. It then may subtract (and retain) up to 10 percent of the penalty or fine proceeds to the extent that the amount retained reflects the actual costs of collection. If the administrative costs of collecting a particular fine or penalty are less than 10 percent, then the unit only may retain the actual costs of collection. And, if the administrative costs of collecting a particular fine or penalty exceed 10 percent, the unit still may retain only 10 percent of the gross amounts collected. Furthermore, in calculating clear proceeds, a unit may not subtract any costs associated with enforcing its local ordinances or statutory requirements. See, e.g. Shavitz v. City of High Point, 177 N.C.App. 465, 630 S.E.2d 4 (2006). It only may include costs associated with actually collecting the penalties or fines. Hypothetical Example Back to the hypothetical...The village (through the collection agency) actually collected $600 in penalties. The amount retained by the collection agency is the cost to the village of collecting the penalty amounts. And G.S. 115C-437 specifies that the full amount of the collected penalties subject to Art. IX, Sect. 7 must be distributed to the public schools, less only the actual costs of collection which may not exceed 10 percent ($600 - $60 = $540). The fact that the village’s actual collection costs exceeded 10 percent does not matter. (The village may want to rethink the propriety of engaging the collection agency to collect these particular penalties.) Distributing Clear Proceeds to Public Schools Once the clear proceeds are calculated how often (and to whom) must they be disbursed? G.S. 115C-437 provides that “revenues accruing to the local school administrative unit by virtue of Article IX, Sec. 7, of the Constitution . . . shall be remitted to the school finance officer by the officer having custody thereof within 10 days after the close of the calendar month in which the revenues were received or collected.” For counties with a single local school administrative unit, this directive is fairly straightforward. A county, or a municipality in the county, that collects penalties or fines that are subject to Art. IX, Sect. 7, must disburse the clear proceeds of the amounts collected to the local school administrative unit’s finance officer within 10 days after the end of the month in which the proceeds were collected. What if a county has more than one public school system? The provisions of G.S. 115C-437 do not directly address this issue. To answer this question we also must look to G.S. 115C-430, as well as case law interpretations of the provision. G.S. 115C-430 specifies that if there is more than one local school administrative unit in a county then “all appropriations by the county . . . must be apportioned according to the [average daily membership] of each unit.” And, in Francine Delany New School For Children, Inc. v. Asheville City Board of Education, 150 N.C.App. 338, 563 S.E.2d 92 (2002), the North Carolina Court of Appeals held that the allocation of fines, penalties, and forfeitures to a local school administrative unit constitutes a county appropriation. Thus, a reasonable interpretation of these provisions is for counties with more than one local school administrative unit to distribute the applicable penalties and fines to each of the school districts based on their respective average daily membership (ADM) figures. Municipalities likely can either (1) apportion the funds among the local school administrative units in the county according to ADM figures provided by the county finance officer; or (2) submit the funds to the county finance officer to distribute to the local school administrative units. This interpretation also comports with the constitutional directive that the funds “belong to and remain in the several counties, and shall be faithfully appropriated and used exclusively for maintaining free public schools.” Cauble v. City of Asheville, 301 N.C. 340, 271 S.E.2d 258 (1980) provides an alternative statutory interpretation that leads to the same result. In addressing the allocation of the city’s overtime parking penalties to the local school administrative units in the county, the court looked to G.S. 115-100.10, which provided that:

The clear proceeds of all penalties and forfeitures and of all fines collected in the General Court of Justice in each county shall be remitted by the clerk of the superior court to the county finance officer, who shall forthwith determine what portion of the total is due to each administrative unit in the county and remit the appropriate portion of the amount to the finance officer of each administrative unit. Fines and forfeitures shall be apportioned according to the projected average daily membership of each administrative unit as determined by and certified to the administrative units and the board of county commissioners by the State Board of Education pursuant to G.S. 115-100.10.

Although the provisions of G.S. 115-100.10 (now codified in G.S. 115C-452) appear to apply only to penalties, fines, and forfeitures collected by the courts, the North Carolina Supreme Court determined that this statutory process governed the distribution of locally-collected penalties and fines to the public schools. Either statutory route leads to the same conclusion—locally-collected penalties and fines that are subject to Art. IX, Sect. 7 should be proportionally allocated among multiple local school administrative units in a county according to the relative ADM figures.