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La Feria ISD

Recapture reinterpretation lawsuit update

This is a bit in the weeds, so bear with me.

Houston ISD likely will keep an additional tens of millions of dollars more in property tax revenues each year following a widely expected Texas appeals court decision Friday.

Judges from the state’s 3rd District Court of Appeals ruled against two small school districts and a nonprofit that sued the Texas Education Agency over its re-interpretation of statutes related to “recapture,” the state’s method of redistributing tax revenues from property-wealthy districts to property-poor districts. The ruling means that property-wealthy districts, such as HISD, will face lower “recapture” payments back to the state moving forward.

HISD officials projected the ruling would result in the district keeping an additional $51 million in 2018-19. District leaders expected the Texas Education Agency to win the lawsuit, so the already factored the $51 million in revenue into the current budget. As a result, the district will not see a windfall that can be spent on additional costs.

The plaintiffs alleged the Texas Education Agency improperly re-interpreted state law to include optional property tax homestead exemptions into “recapture” calculations for districts with wealthy property tax bases relative to their student enrollment totals.

A district court judge granted a temporary injunction in favor of the plaintiffs. However, the appellate court found the plaintiffs could not prove they were harmed by the re-interpretation because it did not cause a shortfall in the state’s Foundation School Program, the fund through which state money is distributed to school districts.

See here and here for the background. Back when we were all arguing about HISD making recapture payments to the state, HISD successfully managed to get the TEA to interpret the law over how such payments are calculated to take into account the Local Option Homestead Exemption (LOHE) that some districts like HISD offer. Taking the LOHE into account, which the TEA had not previously done, causes the recapture formula to produce a smaller bill for districts like HISD that use it. That’s where that $51 million figure comes from. A couple of smaller school districts, along with MALDEF, filed suit over this reinterpretation on the grounds that it would cost them money, which was in conflict with the Foundation School Program. The Third Court of Appeals has ruled that the smaller districts could not prove that they were harmed, so the TEA rule as now interpreted was upheld, which in turn saves HISD some money. Makes sense? Of course, if the Lege follows through on its latest plan to reform school finance, any or all of this could change in ways we don’t yet know. But for now, this is where we stand.

MALDEF gets injunction in recapture lawsuit

From their website:

Please attribute the following statement on a Texas court ruling ordering state education officials to cease bypassing existing school funding rules to Marisa Bono, Southwest regional counsel of MALDEF (Mexican American Legal Defense and Educational Fund):

“MALDEF is pleased that the District Court saw through efforts by the Texas Education Agency to circumvent school funding rules. The court was abundantly clear in its finding that efforts to relieve wealthier school districts of their responsibilities to poorer districts under ‘recapture’ amounted to ‘an inadequate, improper, and invalid attempt at a rule amendment.’ As MALDEF argued, and the court found, state education officials failed to comply with the mandatory requirement that any changes in funding rules must include a fiscal impact statement – TEA’s own witness confirmed that this rule change will cost public schools $88 million a year. We call on the Texas legislature to take immediate and binding steps to bar the TEA from doing this again.”

Read the injunction order here.

Read the jurisdiction order here.

See here for the background. I started writing this before there was any reporting on it, just a bit of chatter on Facebook that led me to Google and the MALDEF statement. Now here is the Chron story.

Just weeks after voters approved a $77.5 million payment to the state in so-called “recapture” fees, the Houston school district could be stuck with another $60 million in fees after a judge’s ruling that the state improperly slashed wealthy districts’ bills.

The ruling, by state District Judge Darlene Byrne in Travis County, temporarily halts an agreement by the Texas Education Agency that allowed the Houston Independent School District and other property-rich districts to reduce the amount of “equalization” payments required to fund public education.

The ruling throws HISD’s recapture bill back into question and could affect more than a dozen other property wealthy districts across the state, though no official list has been released.

“We understand the financial situation even wealthy school districts are in, which is why we’re pushing for school finance reform in the Legislature,” said Marisa Bono, southwest regional council for the Mexican American Legal Defense and Educational Fund, a civil rights organization that filed the suit.

“But the solution is not to give wealthy districts a tax break on the backs of property poor districts.”

[…]

The deal was cut in February, when TEA said it would give districts such as HISD credit for half of their local homestead exemptions, along with adjustments for student enrollment and property values, to cut the districts’ recapture bills.

The changes were outlined in a Feb. 1 memo penned by TEA Chief School Finance Officer Leo Lopez that were later incorporated into TEA’s recapture manual.

TEA officials at the time concluded the would result in “no fiscal implications to state or local government, including local school districts.”

But attorneys for the property-poor districts argued the state would lose $88 million in funding, causing significant financial loss to local governments.

In a ruling released late Friday, Byrne concluded that the reprieve granted by TEA was “inadequate, improper and invalid,” and that the TEA manual did not contain an accurate financial note describing the fiscal impact of the changes.

She granted a temporary injunction to halt the recapture calculations until the case can go to trial Aug. 11.

Unless the state works out another way to grant HISD and the other districts a reprieve, the district could be forced to pay $137 million. The adjustments for enrollment and property values were allowed to stand, said Bono, the MALDEF lawyer.

So there you have it. It’s very frustrating, especially with the Senate undermining efforts to address the problem. I don’t know what happens next, but I hope HISD and the TEA can work something out that will be accepted by the judge and the plaintiffs.

MALDEF files suit over change to recapture

This is a twist.

Texas education officials illegally changed how property taxes are calculated in wealthy school districts, with the effect of substantially reducing the funds available for schools in poorer districts, a lawsuit filed Thursday charged.

The change would cost the state’s poorer schools districts and their students approximately $440 million per year or $880 million for the two-year funding cycle, according to the lawsuit filed by MALDEF (Mexican American Legal Defense and Educational Fund) and the law firms Gray & Becker, P.C. and Ray & Wood, on behalf of Le Feria and Joaquin Independent School Districts.

The La Feria Independent School District in Cameron County and the Joaquin Independent School District in Shelby County want the court to permanently block the newly amended rule adopted February 1, calling it invalid and unenforceable.

“Breaking the rules to once again benefit property-wealthy districts to the detriment of our property-poor districts is not the fix we need for our broken public school system,” said Marisa Bono, MALDEF Southwest regional counsel. “We look forward to vindicating in court our clients’ efforts to ensure fair funding for all students.”

Texas’ system of “recapture” requires wealthier school districts with more valuable property to send some of their tax funds to the state to help fund poorer districts. Those funds are then administered through the Foundation School Program.

The recapture formula assesses the contributions of wealthier districts based on the full value of each property. But those districts may provide two types of tax deductions to residents. The first is a mandated $25,000 homestead exemption. The second deduction allows districts the option of granting an additional homeowners exemption of up to 20 percent of a home’s value, known as a local optional homestead exemption (“LOHE”).

State law allows some wealthy districts to reduce their contributions to recapture and the Foundation School Program by recognizing the LOHE-reduced property values. However, state law provided clear conditions to ensure that poor districts aren’t underfunded. Those conditions required that either state lawmakers appropriate more funding, or that there be a surplus in the Foundation School Program. Until recently, the Texas Education Agency (TEA) interpreted the law to apply only when those conditions were met.

But in February, state education officials issued a statement changing its longstanding rule. Lawyers for the two plaintiff school districts argue that education officials illegally bypassed the existing rule, allowing certain wealthy districts with LOHE’s to reduce their contribution to recapture, without appropriating funds to fill the gap.

“The Education Code provides that the mission of the public education system of this state is to ensure that all Texas children have access to a quality education,” said Richard Gray of Gray & Becker, P.C. “The recent actions of the Commissioner work squarely against that mission and will result in funding flowing only to students in certain property-wealthy districts of TEA’s choosing while at the same time cutting funding to other districts. It is estimated that the recent actions of the Commissioner could cost close to one billion dollars for the 2018-2019 school year and that cost will only increase in future years.”

Under the new rule, La Feria ISD will lose over $225,000 per year, or $1,435 per classroom a year. Joaquin ISD will lose over $48,000 per year, or $1,548 per classroom. These financial losses are reflective of the financial loss that many property-poor school districts throughout the state will incur as a result of the new rule.

The lawsuit comes as state lawmakers debate how Texas will finance public education for the more than 5 million students currently enrolled in schools across the state. The Texas Supreme Court ruled in May last year that while the state’s school finance system met “minimal constitutional requirements,” it needed comprehensive reform.

Read the lawsuit here.

This would of course affect HISD, though MALDEF did not mention them by name in that release. KUHF has the only news coverage of this I’ve seen so far.

HISD is not a party in the lawsuit, but said in a statement that it believes the commissioner’s decision was legal and will monitor the case and “is prepared to intervene if necessary to protect the interests of our students and taxpayers.”

At the very least, this puts a bit of uncertainty into the May 6 recapture re-vote, which the HISD Board is trying to sell to voters. One possible way to satisfy the conditions MALDEF is suing over is for the Lege to make up the difference to the school districts that are affected by the re-interpretation of the recapture rules. Rep. Dan Huberty’s HB21 might be able to do this, in an amended form if need be. I don’t know how likely that is to happen, but it’s a possibility. There are a lot of ways this can go, so we’ll have to wait to see what the defendants, the Lege, and the courts do.