The unpopularity of property taxes and the simplicity and perceived fairness of sales taxes have made the 1% Special Purpose Local Option Sales Tax for Educational Purposes (“Education SPLOST”) a popular method for funding capital outlay projects for public schools in Georgia. That the voters must approve the Education SPLOST through referendum reinforces democratic principles and is popular with school board officials. The voters will decide whether the described projects are funded through Education SPLOST, and the board of education need not raise property taxes for funded projects. Out-of-county shoppers will pay a portion of the sales tax, adding to its appeal.
The Education SPLOST statute and procedures are difficult, however, and any glitch can result in a failure to properly impose the Education SPLOST. Common questions concern what language is to appear on the referendum ballot, how long the tax will remain in effect, what projects can be funded and how the projects are to be described, what happens if a project changes after the imposition of the tax, when borrowings may be incurred and repaid from Education SPLOST monies, and how excess Education SPLOST monies are to be used.
Education SPLOST funding is inherently slow, as the 1% tax will be collected over the several years for which the tax is imposed. Since as a general matter construction of a project cannot be contracted for until sufficient monies for that purpose are actually available, taxpayers may not see the project they voted to fund until years after the Education SPLOST election. This delay can be alleviated by financing the Education SPLOST-funded project. The Education SPLOST referendum can be used to authorize the issuance of Education SPLOST/general obligation bonds. Alternatively, in some instances lease-purchase or certificates of participation (“COPs”) financing, which is not directly addressed in the Education SPLOST statute but is authorized by other provisions of Georgia law, has developed as a method of financing Education SPLOST projects.
All of these issues will be dealt with in more detail in this Overview. This Overview should not be regarded as a full statement of the applicable laws, as these laws are too detailed to be fully described below. However, the primary issues, general principles and relevant authorities are described below, and knowledgeable attorneys can fill in the details.
Imposition of the Education SPLOST
The board of education of a school district encompassing an entire county may impose the special 1% sales and use tax for up to five years, subject to renewal. If there is an independent school district in the county, the board of education of the county school district and the board of education of each independent school district in the county must impose the Education SPLOST by concurrent resolutions. The imposition of the Education SPLOST and any renewal is subject to a voter referendum.
The school board or boards may by resolution call for the imposition of the tax, subject to a voter referendum, and forward a copy of that action to the county election superintendent. The resolution must describe the specific purposes for which the tax will be used, the maximum period of calendar years or quarters (not to exceed five years) that the tax will be imposed, the maximum cost of the projects and/or the maximum amount of indebtedness to be retired (which is also the maximum amount that may be raised by the tax), and certain details about any general obligation debt that the school board may choose to authorize in connection with the Education SPLOST.
The election superintendent must issue a call for an election on the Education SPLOST to be conducted on a date and in the manner prescribed by general law for special elections (see our “Overview of Georgia Referendum Requirements” for further details). The date and purpose of the election must be legally published in the four weeks proceeding the date of the election. If a majority of the votes cast are in favor the Education SPLOST will be imposed, and if not, a Education SPLOST may not be submitted for another referendum for approximately one year.
What Goes on the Ballot
The referendum ballot language is to include the same information required to be included in the resolution imposing the Education SPLOST (described above), and if general obligation debt is to be issued repayable from the Education SPLOST, the ballot must also include the following:
“If the imposition of the tax is approved by the voters, such vote shall also constitute approval of the issuance of general obligation debt of [the school district] in the principal amount of $________ for the above purpose.”
The ballot question must be carefully drawn to comply with all legal requirements as applied to the particular situation, and an attorney should be consulted.
The ballot is to describe the specific capital outlay projects to be funded. The degree of specificity required is not stated, but Unofficial Opinion of the Attorney General of Georgia No. U90-18 (1990) dealing with the similar county special purpose local option sales tax concludes:
“There is no necessity that the description of the purpose or purposes for the tax be in exacting detail. Rather, . . . the description and the purposes must be only so specific as to place the electorate on fair notice of the projects to which the tax will be devoted.”
The opinion suggests that a brief statement such as “judicial facility” or “recreational facility to be constructed within the City of Canton” is sufficient. In the case Dickey v. Storey, 262 Ga. 452 (1992), also dealing with county SPLOST, the referendum question described “recreational facilities and multi-purpose governmental facilities.” The Georgia Supreme Court apparently approved of this description.
Amount of Education SPLOST to be Raised
The Education SPLOST will end early at the end of any quarter at which the tax commissioner believes the maximum amount for all authorized purposes will be collected. The tax will be imposed until the total dollar amount authorized to be raised is reached or the longest time period stated in the resolution imposing the Education SPLOST (up to five years) elapses, whichever occurs sooner. The tax will remain in effect for the full period if the maximum amount authorized to be raised is set higher than what can be collected during that period. This method is popular and will permit the largest amount to be raised by the tax.
Excess Proceeds of Education SPLOST
If Education SPLOST receipts are in excess of the cost of the projects stated in the ballot question, or if the project is infeasible and cannot be modified to be made feasible, the Education SPLOST may produce excess proceeds. Excess proceeds must be used to reduce school system indebtedness. If there is no such indebtedness, excess amounts are to be used to reduce ad valorem taxes.
Education SPLOST can fund capital outlay projects for educational purposes. A “capital outlay project” is a major, permanent or long-lived improvement such as land, buildings and other structures and major items of equipment and vehicles, such as would be properly chargeable to a capital asset account as distinguished from current expenditures and ordinary maintenance, according to Official Opinion of the Attorney General of Georgia No. 97-7 (1997). As a result Education SPLOST may be used for building projects for educational purposes (whether by acquisition, construction or renovation), and also for school buses and equipment with an extended useful life and serving educational purposes. No express definition of “educational purposes” is provided, but building projects would not appear to be limited to school buildings.
Imposition of Education SPLOST for Debt Reduction
The retirement of previously incurred general obligation debt of the school system may also be described on the ballot as a purpose for the imposition of Education SPLOST, but only if that debt was incurred with respect to capital outlay projects for educational purposes. The debt must be general obligation debt, not lease-purchase obligations or COPs, and it must have been incurred “previously,” presumably prior to the resolution calling for the imposition of the Education SPLOST.
Specification of and Changes to Projects
As already discussed, the initial action of the school board to impose Education SPLOST and the ballot question can describe the purposes of the tax in somewhat general terms. Questions arise concerning how much latitude the board of education has subsequently to actually apply the tax.
This became an issue in a case involving county SPLOST, Dickey v. Storey, cited above. Here the county commission adopted a committee report calling for a softball complex and a downtown riverfront governmental office and civic center and at the same time called for a SPLOST referendum on the projects. Only subsequently the commission selected a specific downtown riverfront site and had plans drawn and presented. The referendum was then held, describing the facilities simply as “recreational facilities and multi-purpose governmental facilities.” The approved tax began to be collected and portions were expended for a part of the work on both the softball and downtown complex projects. Accounting for these expenditures was made in certain SPLOST budget and account reports as required by the SPLOST statute. Subsequently, after new elections, the board of commissioners attempted to purchase and develop a different site for the softball facilities and to reduce the size of the civic center and move it away from the governmental offices to a site outside of the downtown. The Supreme Court held that
“the board abused its discretion in deciding, without the benefit of any plans or studies, [to make the changes on the civic center] after spending 19% of the budget for the entire project when the evidence does not support the board’s opinion that the civic center cannot be safely and suitably built on the original site.”
The board did not abuse its discretion in purchasing additional property for a softball complex, on the evidence presented; the board could change plans and put recreation at two sites and remain consistent with the approved referendum. The county was ordered to proceed with the projects as the voters understood them at the time of the referendum and as further delineated in the budget and account reports made with respect to the initial expenditures of tax proceeds. Generally, the county was required to complete the projects
“unless circumstances arise which dictate that projects which initially seem to be feasible are no longer so. In this regard the governing authority has discretion to make adjustments in the plans for these projects, but may not abandon the projects altogether.”
This case suggests that the details of a project need not be fully delineated when presented to the voters, and that the project can be changed in a manner not inconsistent with the voter referendum, but that a project cannot be more fundamentally changed or abandoned unless in fact the project planned is infeasible. In the case of partial infeasibility, the project can be adjusted, but not abandoned. Further, the case suggests that a project may be further delineated after the referendum by the expenditure of tax funds, and a showing of infeasibility may be required to change this delineation. The reasoning of this SPLOST case appears to apply to Education SPLOST as well.
Use of and Accounting For Education SPLOST Funds
Education SPLOST funds can only be used for the purposes specified in the referendum and should be held in a dedicated account, not commingled with other funds prior to expenditure. Careful records should be kept, including a schedule for each project, the estimated total amount of the Education SPLOST to be used for that project, the amount expended in prior years, the amount expended in the current year, and the estimated percentage of completion. Generally, when the Education SPLOST is imposed by joint resolution, the county school district and the independent school districts will share the receipts according to the ratio of the student enrollment in each school district (or portion thereof in the county) bears to the total student enrollment in all school districts in the county (based on enrollments for the last year prior to the Education SPLOST referendum). This method can be varied by local law, but not after the tax is imposed.
Financing Education SPLOST Projects
General Obligation Debt
School district general obligation debt repayable from Education SPLOST can be authorized in the Education SPLOST referendum by adding ballot language as described above. Where the board of education wants to authorize such debt, the resolution imposing the tax must specify the principal amount of the debt to be issued, the purpose for which the debt is to be issued, the maximum interest rates which the debt is to bear, and the amount of principal to be paid in each year during the life of the debt. Such debt can be issued as notes or bonds in accordance with the usual procedures (see our separate “Overview of Governmental Financing”).
The authorization and issuance of general obligation debt is the most straight-forward and flexible method for financing projects prior to the actual receipt of sufficient taxes, allowing projects to be commenced shortly after the passage of the referendum. The debt will receive the full credit rating of the school district and can be applied to any or all of the projects specified. Nevertheless, the debt authorization sometimes is not included on the ballot question and this financing method is not used. Apparently this is the result of concerns on the part of school officials, well-founded or not, that voters may be less likely to approve Education SPLOST if “debt” is referred to on the ballot question. Voters could cast negative votes even though the debt is to be paid solely from the tax that they otherwise would authorize. Although the debt authorization has been used very successfully, this concern, together with the restriction that a defeated Education SPLOST cannot be reconsidered for one year, can discourage the use of this approach.
A board of education may borrow against Education SPLOST receipts, without including a debt authorization in the voter referendum, but only if the borrowing is to be repaid in the same calendar year that it is borrowed and if certain other requirements are satisfied. See Official Opinion of the Attorney General of Georgia No. 97-30 (1997). Any such loans cannot be renewed across calendar years. However, in each calendar years Education SPLOST receipts can be anticipated and borrowed against.
Four constitutional requirements for such loans must be complied with: (1) the aggregate of the board’s temporary borrowings for that year must not exceed 75% of total gross income from taxes (excluding gasoline tax allocation and State Board of Education funds) collected in the previous year; (2) all such borrowings must be payable on or before December 31st of the calendar year when made; (3) no additional borrowings can take place until unpaid loans from prior years are paid; and (4) the total of such borrowings for a year cannot exceed the anticipated total revenue for the year.
Lease-Purchase and COPs
An alternative approach to financing Education SPLOST projects without debt authorization in the referendum is through a lease-purchase or certificates of participation (“COPs”). Generally, lease-purchase financing allows a school board to acquire property by paying over its full term an annually renewable contract for the use and acquisition of the property. The contract must not bind the school board for a period in excess of a calendar year, but may provide for automatic renewal year to year unless positive action is taken to cancel. A third party acquires and provides the property to the school board in return for payments of principal and interest, usually over the term of the Education SPLOST. The school board will make annual appropriations for the payments, but should it fail to do so, or should it determine to cancel the arrangement, the school board would lose the property and all payments that it made or committed through that year. Of course, it is anticipated that the school board will make all payments for the full term from the Education SPLOST and acquire unconditional title when the final payment is made. COPs are simply a specialized subset of lease-purchase contracts sold as securities resembling bonds. A full description of lease-purchase financing and COPs is beyond the scope of this Overview, and we refer you to our separate “Overview of Lease-Purchase Financing and COPs”.
Lease-purchase obligations are not general obligation debt of the school district, and the use of lease-purchase financing need not have been referred to, or even contemplated at the time of, the proceedings to impose the Education SPLOST. Education SPLOST receipts can be used to make payments on such financing because the payments are for the acquisition of the capital outlay project.
There are restrictions on the use of lease-purchase financing that may make it unsuitable for some Education SPLOST projects. Because of additional risks in lease-purchase financing, lenders may charge more for it and may only make it available for projects providing essential services. For example recreational and cultural facilities, although educational, may not be perceived as “essential” and could have difficulty in obtaining this type of financing. Importantly, lease-purchase and COPs financing generally cannot be used on buildings partially funded by the State Board of Education. Also, although Education SPLOST can be applied to facility improvements and enhancements, lease-purchase arrangements generally are suitable only for discrete facilities to be 100% financed. For example, Education SPLOST can be authorized for renovations to a school building, but such renovations alone generally cannot be leased. Similarly, Education SPLOST can be used to build a school building on land then owned by the school board, but a obstacle is encountered in trying to finance a building but not the land through lease-purchase. All of these obstacles can be overcome in some cases, and bond counsel should be consulted.
Education SPLOST is an important and attractive tool for funding educational projects. It can be combined with general obligation debt, temporary borrowing, lease-purchase financing and certificates of participation to leverage its power and build projects for use sooner. This relatively painless funding device often proves popular with voters and boards of education alike.
However, the Education SPLOST statute contains traps for the unwary and careful consideration and consultation with attorneys is advisable early in the process of considering Education SPLOST funding and financing. This Overview touches on the more important issues, but space does not permit fuller consideration. Additional information is available from the writer.
© Copyright 2008 — James P. Monacell, Smith, Gambrell & Russell, LLP. Copies may be made and distributed so long as the content is not altered and the authorship is not obscured.