North Carolina Municipalities Authorized to Fund Schools

Published for Coates' Canons on June 26, 2018.

In North Carolina, the majority of funding (approximately 63 percent in aggregate, according to the 2018 Highlights of the North Carolina Public School Budget) for public school operations derives from the state income tax and sales tax proceeds, as appropriated by the state legislature. County governments supplement the state’s operational funding and provide the majority of capital funding for schools, from a combination of property tax and local sales tax proceeds. Municipalities, however, have had no statutory authority under general law to fund schools.

Effective July 1, 2018, the legislature has altered the public school funding scheme by authorizing a municipality to make appropriations to “supplement funding for elementary and secondary public education” that benefit the residents of the municipality. See Sec. 38.3 of S.L. 2018-5, as amended by Sec. 11.1 of S.L. 2018-97. In some respects, this newly granted authority is broader than that afforded to county governments. It comes with some limitations, though. This post attempts to address some frequently asked questions about the new law.

To what types of schools may a municipality appropriate funding? The new law, to be codified as Article 30 in Chapter 115C, allows municipalities to provide funding to “public schools.” Public schools are defined to include (1) a school under the control of a local board of education (traditional public school); (2) an innovative school (G.S. 115C, Art. 7A); (3) a laboratory school (G.S. 116, Art. 29A) (4) a charter school (G.S. 115C, Art. 14A); and (5) a regional school (G.S. 115C, Art. 16, Part 10). Unlike a county government, a municipality will be able to appropriate funds to each of these entities directly.

May a municipality fund school operating expenses? Yes. Under the new law, a municipality may appropriate money to a public school that serves the residents of the municipality to fund the school’s current operating expenses or any “other specific uses directed” by the municipality. G.S. 160A-690(a) & (b). A municipality’s appropriation authority is further delineated by location of the public-school unit.

Schools located within Municipality. For schools located within municipal limits, municipal appropriations may be made as a lump sum to each school or on a per pupil basis.

School Located Outside Municipality. For schools located outside municipal limits, a city may allocate money to a school attended by a resident student on a per pupil basis to fund current operating expenses or other specific uses directed by the city. A municipality may not make a lump sum appropriation.

May a municipality fund school capital outlay? The answer depends both on where the school is located and the nature of the capital project.

Schools located within Municipality. For public schools that are located within the municipality, funding may be used for the following:

  • to construct, repair, maintain, repair, upgrade existing capital assets of the school;
  • to purchase vehicles, furniture, computers, and other supplies;
  • to enter into operational and financing leases for real property or mobile classroom units (Note that there is very limited authority for traditional public schools to borrow money or enter into these types of leases. See G.S. 115C-528 (lease purchase and installment purchase financing for vehicles, certain equipment, and mobile classrooms; G.S. 115C-530 (operational leases for schools); and Sec. 5.3(e2) of S.L. 2018-3 (Needs-Based Public School Capital Fund grant-funded capital leases for school facilities).); and
  • to make payments on loans made to public schools for facilities, equipment, or operations.

There is one significant limitation on municipal funding. Municipal appropriations may not be used to purchase land or school facilities.

Schools Located Outside Municipality. A municipal board may not provide any capital funding to schools that are located outside a municipality’s territorial boundaries.

Must a municipality provide equal funding to all the public schools that serve municipal residents? No. There is no requirement that a municipality provide equal funding to all of the schools that serve its residents. A municipal board may choose only to fund the schools that are located within municipal boundaries, or it may choose to only fund a category of schools, such as only charter schools, or it may choose to only fund a single school unit. It is up to the municipal board to determine which school or schools to fund and for what purposes.

This funding authority is very different than that of county governments. County funding for operational expenses must be proportionally apportioned, based on average daily membership (ADM), among all of the traditional public school units within the county. Additionally, county appropriations to a traditional public school’s local current expense fund must be proportionally shared, on a per pupil basis, with other public schools (e.g. charters, innovative schools, laboratory schools, regional schools) attended by a student who would otherwise be served by the traditional public school.

May a municipality direct how a school expends the appropriated funds? Yes. G.S. 160A-690(a) authorizes a municipality to “direct or restrict the use of funds appropriated for specific purposes, functions, projects, programs, or objects….” These categorizes correlate to the chart of accounts used by traditional public schools, whereby operating expenditures are broken down by purpose code, function code, object code, and program report code, and capital expenditures are delineated by category. For the other public schools that may not follow this chart of accounts, a municipality is free to direct its funding to specific programs or expenditure items.

A municipality thus, has broader authority to direct school expenditures than does a county, which is limited to allocating operating expense appropriations to traditional public schools by purpose and function, and capital outlay appropriations by project or category.

What revenues may a municipality use to provide the school funding? A municipality may use property tax proceeds or any unrestricted revenues from other sources to fund appropriations to public schools. There is one limitation, though. Only property tax proceeds that are generated from taxes levied on or after July 1, 2018, may be used for this purpose. A municipality may not use fund balance that was derived from property tax collections on levies from prior fiscal years, even if those amounts are collected after July 1, 2018. In short, the appropriations must come from new tax proceeds, not existing reserves.

May a public school solicit funds from a municipality? Yes. State law expressly authorizes traditional public schools, charter schools, innovative schools, regional schools, and laboratory schools to solicit municipal funding. 

How will municipal appropriations impact state and county funding for schools?  The answer to this question is unclear. The new law does not, itself, alter the general state and county funding schemes. The legislature makes its school appropriations in the annual state budget, and is free to change its appropriations method at any time. A legislative school finance reform task force is looking at potential new state funding models. See Sect. 7.23D(f) of S.L. 2017-57 and Sec. 7.10 of S.L. 2018-3. It is possible that a new funding model will cause state appropriations to decrease (or increase) based on the availability of municipal appropriations. The task force will submit a final report, including proposed legislation, to the Joint Legislative Education Oversight Committee by October 1, 2019.

With respect to counties, as detailed here, county commissioners are required to provide sufficient funding, when added to all other revenues available to a traditional public school unit, to allow the school unit to meet its constitutional minimum education requirements. Although the new law appears to envision that municipal funding will supplement state and county funding (“A city may use property tax revenues authorized under G.S. 160A-209(c)(26b) and other unrestricted revenues to supplement funding for elementary and secondary public education that benefits the residents of the city.” G.S. 160A-690(a)), there is no explicit non-supplant provision. Thus, a board of county commissioners may reduce its appropriations to a traditional public school unit by the amount of the revenue appropriated by the municipality to that school unit. (The only exception would be if the municipality funds a specialty program that does not serve the core educational requirement of the school.)

Note, however, that in a county with more than one traditional public school unit, the county board of commissioners must apportion all appropriations for operating expenses proportionally among the school units based on ADM. So, if a municipality provided supplemental funding to one of the county’s school units and not the other, any resulting reduction in county appropriations for operating expenses would affect both school units.

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Topics - Local and State Government