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. 38.8 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.
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). Public school is defined to include a local school administrative unit (traditional public school), an innovative school, authorized by G.S. 115C, Art. 7A, a laboratory school, authorized by G.S. 116, Art. 29A, a charter school, authorized by G.S. 115C, Art. 14A; and a regional school, authorized by G.S. 115C, Art. 16, Part 10. Unlike a county government, a municipality may make appropriations directly to any of these public schools
Appropriations Within and Outside Municipality
A municipality’s appropriation authority is further delineated by location of the public-school unit. For schools located within municipal limits, municipal appropriations may be made as a lump sum to each school or on a per pupil basis. G.S. 160A-690(b)(1). In addition to funding general capital (including construction, repair, maintenance, additions, and upgrades), operating expenses, and special programs, municipal appropriations may also be used to enter into operational and financing leases for real property or mobile classroom units, and may be used to make payments on loans made to public schools for facilities, equipment, or operations. (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 of school buildings and school facilities); and Sec. 5.3(e2) of S.L. 2018-3 (Needs-Based Public School Capital Fund grant-funded capital leases for school facilities)). And all such contracts or leases must include a statement that they do not constitute an indebtedness or obligation of the municipality.) Municipal appropriations may not be used, however, to obtain “any other interest in real property or mobile classroom units.” Thus, municipal funds may not be used to purchase land, school facilities, or mobile classrooms.
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. G.S. 160A-690(b)(2).
There is no requirement that a municipality provide equal funding to all of the schools that serve its residents. A municipal board may choose to fund only the schools within municipal territorial boundaries, or it may choose to fund only a category of schools, such as only charter schools, or it may choose to only fund a single school unit.
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 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 attended by a student who would otherwise be served by the traditional public school.
Municipal Funding Directives
A municipality may “direct or restrict the use of funds appropriated for specific purposes, functions, projects, programs, or objects….” G.S. 160A-690(a). 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 by purpose and function, and capital outlay appropriations by project of category.
Municipal appropriations to a traditional public school will not be allocated to the local current expense fund. Instead, the local school board will set up a separate fund to budget and account for these monies. That means that, unlike county appropriations, municipal appropriations for operating expenses to public schools will not be shared with charters or other public schools.
Municipal Funding Sources
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.
Impact on State and County Funding
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 methods. See Sect. 7.23D(f) of S.L. 2017-57 and Sec. 7.10 of S.L. 2018-5. It is possible that a new funding method will cause state appropriations to decrease (or increase) based on 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, 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.”), 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.
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 average daily membership. 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.