Untitled Texas Attorney General Opinion ( 2017 )

KEN PAXTON
ATTORNEY GENERAL OF TEXAS
July 14, 2017
The Honorable John Zerwas, M.D. Opinion No. KP-0154
Chair, Committee on Appropriations
Texas House of Representatives Re: Whether an independent school district
Post Office Box 2910 must hold a tax ratification election pursuant to
Austin, Texas 78768-2910 Tax Code section 26.08 m specific
circumstances (RQ-0159-KP)
Dear Representative Zerwas:
You ask whether an independent school district must hold a tax ratification election
pursuant to Tax Code section 26.08 in specific circumstances. 1 As background, you explain that
Fort Bend Independent School District ("Fort Bend ISD") "proposes to lower its overall
ad valorem tax rate by 2 cents per $100. of valuation," and to achieve that result, it intends to
"reduce its debt service rate by 4 cents per $100 valuation while raising its maintenance and
operations rate by 2 cents per $100 of valuation. " 2 Request Letter at 1. You question whether a
tax ratification election is required in this scenario. Id.
A. School district taxing authority
Answering your question first requires an understanding of the taxing authority the
Legislature granted to independent school districts. The Education Code authorizes independent·
school districts to levy two distinct ad valorem taxes: (1) debt service taxes; and (2) maintenance
and operations taxes. See TEX. EDUC. CODE§§ 45.001-.006. Before a district can levy either tax,
a majority of the qualified voters of the district must separately approve the authority to issue
bonds and levy a debt service tax, and th~ authority to levy a maintenance and operations tax. Id.
§ 45.003(a).
1
Letter from Honorable John Zerwas, Chair, House Comm. on Appropriations, to Honorable Ken Paxton,
Tex. Att'y Gen. at I (Apr. 20, 2017), https://www.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs
("Request Letter").
2
Currently, Fort Bend ISD has a $1.34 per $100 valuation total tax rate that consists ofa $1.04 per $100
valuation maintenance and operations tax rate and a $0.30 per $100 valuation debt service rate. See
http://www.fortbendisd.com/cms/lib09/TXO I 9l7858/Centricity/domain/96/bud%202016-2017/Adopted%202016%
20Tax% 20Rate .pdf.
The Honorable John Zerwas, M.D. - Page 2 (KP-0154)
With regard to debt service taxes, voters may approve a district's issuance of bonds for the
construction, acquisition, and equipment of s.chool buildings, the acquisition of property, and the
purchase of new school buses. Id. § 45.00l(a)(l). When voters approve the issuance of bonds,
they also authorize the district to levy and collect ad valorem taxes at a rate sufficient to pay the
principal and interest-the debt service-on those bonds. Id. § 45 .003(b ). When a district submits
a proposition to voters to authorize the issuance of bonds, it must include the question whether
voters approve a limited or unlimited debt service tax rate. Id.§ 45.003(b)(l)-(2). If voters in a
district approve an unlimited debt service tax rate, the district may not thereafter submit a bond
proposal with a limited debt service tax rate. Id. § 45.003(c). 3
In addition to debt service taxes, districts may levy and collect ad valorem taxes "for the
further maintenance of public schools in the district," which are commonly referred to as
maintenance and operations taxes. Id. § 45.002. A proposition submitted to the voters to authorize
the maintenance and operations tax "must include the question" whether the district may levy a
tax rate "at a rate not to exceed the rate stated in the proposition."4 Id. § 45.003(d). Education
Code subsection 45.003(d) generally caps the maintenance and operations tax rate "per $100 of
taxable value adopted by the district [to] the rate equal to the sum of $0.17 and the product of the
state compression percentage, as determined under Section 42.2516, multiplied by $1.50. " 5 Id.;
but see id. § 45.003(f) (providing a different calculation for districts that in 2005 levied a
maintenance and operations tax rate that exceeded $1.50). The State compression percentage for
the 2017-18 fiscal year is 66.67 percent. 6 Thus, most school districts, including Fort Bend ISD,
have a maintenance and operations tax rate cap of$1.17 per $100 of taxable value. 7 While districts
may adopt a maintenance and operations rate up to $1.17, depending on what the districts' voters
approved in past years, districts may be required to conduct a tax ratification election when
adopting a rate below this rate cap. Id.§ 45.003(e) (explaining that a maintenance and operations
tax rate that exceeds the statutory cap "is void").
School districts may use the proceeds of each tax only for the purposes authorized. See id.
§§ 45.001(a)(2), .002. Districts may use revenue from the debt service tax to pay the principal and
interest on outstanding bonds. Id.§ 45.001(a)(2); see also id. § 44.004(c)(5)(A)(ii)(b) (explaining
that the debt service tax rate is the rate that would "provide the amount required to service the
3
8efore this office will approve the issuance of bonds under section 45.001, a district must demonstrate its
ability to pay the principal of and interest on the proposed bonds and all previously issued bonds since September 1,
1992, from a tax rate not to exceed $0.50 per $100 of valuation. TEX. EDUC. CODE§ 45.003 l(a).
4
To the extent that a specific district's voters capped the maintenance and operations taxes at the rate
previously voted upon, the district would have no authority to increase the maintenance and operations tax rate absent
fm1her voter approval.
5
Section 42.2516 defines the "state compression percentage" as "the percentage of a school district's adopted·
maintenance and operations tax rate for the 2005 ·tax year that serves as the basis for state funding." TEX. EDUC. CODE
§ 42.25 l 6(a). The state compression percentage is established for a specific school year either by appropriation or, if
not by appropriation, by the Commissioner of Education. Id.
6
See General Appropriations Act, 85th Leg., R.S., S.B. 1, art. III-6 (2017).
7
Districts that levied a maintenance and operations tax for the 2005 tax,year at a rate greater than $1.50 per
$100 of taxable value use a different formula to calculate their maintenance and operations tax rate cap. See TEX.
EDUC. CODE § 45.003(t).
The Honorable John Zerwas, M.D. - Page 3 (KP-0154)
district's debt"). They may use revenue from the maintenance and operations tax to fund the
district's current maintenance and operating expenses. Id. § 45.002. Districts do not have
authority to increase the maintenance and operations tax rate to create a surplus to pay debt service
with maintenance and operations tax revenue. See TEX. TAX CODE § 26.012(16) (defining
"maintenance and operations" as "any lawful purpose other than debt service for which a taxing
unit may spend property tax revenues" (emphasis added)).
B. Adoption of tax rates and calculation of the rollback rate
With a school district's taxing authority in mind, we tum to the process the Legislature
established for a district to adopt its annual tax rates. For each fiscal year, the governing board of
a district must adopt a budget and propose corresponding tax rates. See TEX. EDUC. CODE
§ 44.004(a)-(b). The debt service tax rate and the maintenance and operations tax rate "must be
approved separately" by the governing board of the district. TEX. TAX CODE § 26.05(a). Section
26.08 of the Tax Code establishes circumstances under which a district must conduct a tax
ratification election after adopting those rates:
(a) If the governing body of a school district adopts a tax rate that
exceeds the district's rollback tax rate, the registered voters of the
district at an election held for that purpose must determine whether
to approve the adopted tax rate ....
(b) ... At the election, the ballots shall be prepared to permit voting
for or against the proposition: "Approving the ad valorem tax rate
of$_ per $100 valuation in (name of school district) for the
current year, a rate that is$_ higher per $100 valuation than the
school district rollback tax rate, for the purpose of (description of
purpose of increase)." ....
(n) For purposes of this section, the rollback tax rate of a school
district whose maintenance and operations tax rate for the 2005 tax
year was $1.50 or less per $100 of taxable value is:
(2) for the 2007 and subsequent tax years, the lesser of the
following:
(A) the sum of the following:
(i) the rate per $100 of taxable value that is equal to
the product of the state compression percentage
... for the current year and $1.50;
(ii) the rate of $0.04 per $100 of taxable value;
The Honorable John Zerwas, M.D. - Page 4 (KP-0154)
(iii) the rate that is equal to the sum of the differences
for the 2006 and each subsequent tax year
between the adopted tax rate of the district for that
year if the rate was approved at an election under
this section and the rollback tax rate of the district
for that year; and
(iv) the district's current debt rate; or
(B) the sum of the following:
(i) the effective maintenance and operations tax rate
of the district as computed under Subsection (i) or
(k), as applicable;
(ii) the rate per $100 of taxable value that is equal to
the product of the state compression percentage
... for the current year and $0.06; and
(iii) the district's current debt rate.
Id. § 26.08(a), (b), (n)(2). In essence, if a district adopts a total tax rate greater than the rollback
tax rate, it must conduct a tax ratification election. Id.
A district calculates its total ad valorem tax rate for purposes of section 26.08 by adding
two components: (1) the tax rate required to service the district's debt, and (2) the tax rate needed
to fund maintenance and operations expenditures for the next year. 8 TEX. EDUC. CODE
§ 44.004(c)(5)(A)(ii)(b); TEX. TAX CODE§ 26.05(a)(2). Based on your description, it appears Fort
Bend ISD is considering a debt service tax rate of $0.26 and a maintenance and operations tax rate
of $1.06 for a total tax rate of $1.32. Request Letter at 1.
Subsection 26.08(n) defines "rollback rate" for purposes of determining when a district
must conduct a tax ratification election. TEX. TAX CODE § 26.08(n). That provision requires the
sum of two separate components-a maintenance and operations tax rate and debt service tax rate.
Id. The maintenance and operations component of the rollback rate is the lesser of: (A) the sum
of the product of the state compression percentage (66.67%) and $1.50, four cents, and any
additional cents authorized at prior rollback elections; or (B) the sum of the effective maintenance
and operations rate and the product of the state compression percentage (66.67%) and six cents.
8Tax Code subsection 26.05(a)(l) refers to Education Code section 44.004(c)(5)(A)(ii)(b) to establish how a·
district calculates its debt service tax rate. TEX. TAX CODE § 26.05(a)(l ). That section provides that the debt service
rate, also referred to as the "Interest & Sinking Fund," is the tax rate that would "impose taxes in an amount that, when
added to state funds to be distributed to the district under Chapter 46 and any excess taxes collected to service the
district's debt during the preceding year but not used for that purpose during that year, would provide the amount
required to service the district's debt." TEX. EDUC. CODE§ 44.004(c)(5)(A)(ii)(b).
The Honorable John Zerwas, M.D. - Page 5 (KP-0154)
Id. § 26.08(n)(2). Fort Bend ISD did not raise its maintenance and operations tax rate after the
Legislature compressed those rates in 2006. 9 Thus, its maintenance and operations component of
the rollback rate under the calculation in (A) is $1.04. 10
Districts add their "current debt rate" to this maintenance and operations tax rate
component to determine the total rollback rate. Id. § 26.08(n)(2)(A)(iv). Important to answering
your question, under the Tax Code the debt service component of the rollback rate does not reflect
the debt service tax rate of the preceding year. Instead, the "debt service portion of the rollback
tax rate is the rate necessary to pay the taxing unit's debt payments in the coming year." 11 Any
increase in the district's adopted debt service rate will thereby increase both the debt service
component of the rollback rate and the total rollback tax rate, and will not, by itself, trigger a
rollback election. Thus, the rollback tax rate effectively measures only the maintenance and
operations component of the tax rate. Only a district's increase in the maintenance and operations
tax rate will require a tax ratification election under section 26.08, and the rollback calculation
incorporates a maximum limit on that maintenance and operations tax rate component.
This office addressed the same issue in Attorney General Opinion GA-0775. See·Tex.
Att'y Gen. Op. No. GA-0775 (2010) at 4-8. 12 As we then recognized, "subsection 26.08(a)
incorporates not only the sum of the two separate tax components, but also the limits on those
calculated components in the absence of a rollback election." Id. at 6. "Giving effect to subsection
26.08(n) and its separate tax rate calculations, as incorporated in subsection 26.08(a), necessarily
means that the adopted rate and its maintenance and operations tax rate component cannot exceed
the rollback rate and its maximum maintenance and operations tax rate component." Id.
With regard to Fort Bend ISD, it appears the district is considering a debt service tax rate
of $0.26. Ifit adopts that rate and adds that to the $1.04 maintenance and operations component
rate, Fort Bend ISD will have a $1.30 rollback tax rate. Thus, Fort Bend ISD's adopted tax rate of
$1.32 would exceed its rollback rate of $1.30, and the plain language of section 26.08 therefore
requires the district to conduct a tax ratification election if it adopts the rates as proposed. 13 Of
course, it is within the power of the Legislature to modify section 26.08 to factor in the debt service
tax rate of the preceding year.
9
See http://www.fmtbendisd.com/cms/lib09/TXO 1917858/Centricity/Domain/96/Tax Rate History.pdf.
tosee id.
11
GLENN HEGAR, TEXAS COMPTROLLER OF PUBLIC ACCOUNTS, TRUTH-IN-TAXATION: ROLLBACK TAX
RATES, https:// comptro II er. texas.gov/taxes/property-tax/truth-in-taxation/ro Ilback-tax-rates. php.
12
The requestor of GA-0775 did not specifically ask about a circumstance where a district lowered the debt
service rate to the extent that the overall tax rate also decreased. See Tex. Att'y Gen. RQ-0839-GA (2009) at 1-2.
(Letter from Honorable Rob Eissler, Chair, House Comm. on Pub. Educ., to Honorable Greg Abbott, Tex. Att'y Gen.
(Nov. 6, 2009)), https://www.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs. However, he did ask
whether a district could increase the maintenance and operations rate while decreasing the debt service rate and thereby
avoid triggering a rollback election. Id.
13
Although we do not have information regarding Fort Bend ISD's effective tax rate for purposes of
calculating the subsection (B) component, that component would apply only if the effective maintenance and
operations rate was less than $1.04. Under such circumstances, a tax ratification election would still be triggered
because the proposed tax rate of $1.32 would exceed the sum of $1.04 (or less) at $0.26.
The Honorable John Zerwas, M.D. - Page 6 (KP-0154)
C. Statutory ballot language
You suggest that the statutory ballot language required for a tax ratification election would
mislead Fort Bend ISD voters. Request Letter at 3. Subsection 26.08(b) requires the following
ballot language:
Approving the ad valorem tax rate of $_ per $100 valuation in
(name of school district) for the current year, a rate that is $_
higher per $100 valuation than the school district rollback tax rate,
for the purpose of (description of purpose of increase).
TEX. TAX CODE§ 26.08(b). You submit that in using this ballot language with Fort Bend ISD's
proposed overall tax rate, the district would be required to "insert a negative number when
describing the difference between the adopted ad valorem rate and the rollback rate," requiring
submission of something similar to the following:
Approving the ad valorem tax rate of $1.32 per $100 valuation in
Fort Bend Independent School District for the current year, a rate
that is $ -2 cents higher per $100 valuation than the school district
rollback rate ....
Request Letter at 3. However, such proposed language calculates the district's rollback rate using
the preceding year's debt service tax rate ($0.30) rather than the "current debt rate" ($0.26),
contrary to the plain language establishing how to calculate the rollback tax rate. TEX. TAX CODE
§ 26.08(n)(2)(A)(iv). Calculating the rollback tax rate using the current debt rate, as required by
section 26.08, results in ballot language requiring the voters to adopt "a rate that is $0.02 higher
per $100 valuation than the school district rollback rate." Id.
You also suggest that in adopting the proposed tax rates, Fort Bend ISD may lower its
overall ad valorem tax rate from the previous year, and you question whether the district's
expenditure on an election voting on a lower overall rate results in an absurdity. Request Letter at
3. While it may seem unusual to require Fort Bend ISD to hold an election when it lowers its debt
service tax rate beyond the amount by which it raises its maintenance and operations tax rate, it
does not amount to an absurd application of the law. See Combs v. Health Care Servs. Corp., 401
S.W.3d 623, 630 (Tex. 2013) (A "mere oddity does not equal an absurdity."). To the contrary, it
ensures that a district does not raise the maintenance and operations tax rate beyond the
maintenance and operations rollback rate without voter approval. If Fort Bend ISD has concerns
about possible voter confusion, it may communicate with voters regarding the purpose and effect
of a specific ballot measure, so long as the district does not advocate for or against the measure.
See TEX. ELEC. CODE § 255.003(b). Thus, Fort Bend ISD could communicate to its voters that
although it adopted an increased maintenance and operations tax rate for the coming year, because
the district reduced the debt service tax rate, the overall tax rate will be lower than the preceding
year.
After this office issued GA-0775 in 2010, the Legislature· had multiple opportunities to
revise section 26.08 to overrule the conclusion reached in that opinion, but it has not done so.
The Honorable John Zerwas, M.D. - Page 7 (KP-0154)
Consistent with this office's prior opinion, we reaffirm that the Legislature crafted laws that require
a district that increases its adopted maintenance and operations tax rate above the maximum
maintenance and operations tax rate component of the rollback tax rate to do so only by voter
approval through a tax ratification election. 14 •
14The Comptroller and the Texas Education Agency likewise advise school districts that increasing the
maintenance and operations rate above the maximum maintenance and operations tax rate component of the rollback
rate requires a tax ratification election. See GLENN HEGAR, TEXAS COMPTROLLER OF PUBLIC ACCOUNTS, TRUTH-IN-.
TAXATION: ROLLBACK TAX RA TES, https://coinptroller.texas.gov/taxes/property-tax/truth-in-taxation/rollback-tax-
rates.php, (''For school districts, the [maintenance and operations] po_rtion of the rollback tax rate allows school
districts to add four cents ($0.04) to the lesser of the current year's compressed operating tax rate or the effective
[maintenance and operations] rate to generate operating funds. School districts will get to add any additional cents
approved by voters at a 2006 or subsequent rollback election to the compressed operating rate."); TEX. Eouc. AGENCY,
SCHOOL FINANCE TOPICS: TAX RATE HISTORY, http://tea.texas.gov/Finance_and_Grants/State_Funding/Manuals/
School_Finance_Topics_-_One_Page_Descriptions/ ("To tax at a rate higher than $1.04, a school district's voters
must ratify a higher tax rate.").
The Honorable John Zerwas, M.D. - Page 8 (KP-Q154)
SUMMARY
Subsection 26.08(a) of the Tax Code requires the registered
voters of an independent school district to approve an adopted tax
rate if the governing body of the district adopts a tax rate that
exceeds the district's rollback tax rate. The rollback rate calculation,
defined in subsection 26.08(n), includes a maximum maintenance
and operations tax rate component and a current debt service tax rate
component. The debt service component of the rollback rate does
not reflect the debt service tax rate of the preceding year but of the
current year. As a result, the rollback tax rate effectively measures
only the maintenance and operations component of the tax rate.
An independent school district may not increase a
maintenance and operations tax rate above the maximum
maintenance and operations tax rate component calculated for
purposes of the rollback tax rate without voter approval through a
tax ratification election.
Very truly yours,
KEN PAXTON
Attorney General of Texas
JEFFREY C. MATEER
First Assistant Attorney General
BRANTLEY STARR
Deputy First Assistant Attorney General
VIRGINIA K. HOELSCHER
Chair, Opinion Committee