Chapter 14
Financing Public Schools
by Kara A. Millonzi
The importance of public education was recognized in North Carolina’s first constitution in 1776. Specifically, Article XLI, Section 41 provided that “a school or schools shall be established by the legislature, for the convenient instruction of youth, with such salaries to the masters, paid by the public, as may enable them to instruct at low prices; and, all useful learning shall be duly encouraged and promoted in one or more universities.” The constitution thus required the General Assembly to establish schools staffed by teachers paid from public funds. The legislature took its first step toward carrying out that mandate in 1825 when it created the Literary Fund as a source of revenue for public schools. Public schools began to function as a statewide system in 1839.
The contours and scope of that public education system have evolved over time. The current state constitution provides that North Carolinians “have a right to the privilege of education, and it is the duty of the State to guard and maintain that right.” It further commands the General Assembly to provide “for a general and uniform system of free public schools, which shall be maintained at least nine months in every year, and wherein equal opportunities shall be provided for all students.”
The North Carolina Supreme Court has interpreted these provisions to guarantee “every child of this state an opportunity to receive a sound basic education in our public schools.” This interpretation has arisen out of a long-running funding dispute, commonly referred to as the Leandro litigation. The case began in the mid-1990s as a fight over funding disparities among counties but has since evolved into an argument about what it means to provide each child with the opportunity for an adequate, or “sound basic,” education.
Whether or not the state of North Carolina is meeting its responsibility to ensure that every student is given an opportunity to receive a sound basic education is the subject of ongoing judicial interpretation and legislative debate. The current public school system is the product of a patchwork of efforts by the state to adapt to changing economics, demographics, and policy prerogatives. It involves an intricate division of policy and funding responsibilities among state and local entities. Each entity plays an integral part in carrying out the constitutional mandate to provide a public education.
This chapter analyzes the current funding framework for public elementary and secondary schools, focusing first on the state’s and counties’ funding responsibilities and funding sources. It then details the local budgeting process, briefly discussing additional powers of a county board that enable it to play an increasing role in shaping local education policy. Finally, it summarizes the current funding scheme for charter schools.
Funding Framework
Funding public schools is a responsibility of both state and county governments. (The federal government also provides limited funding for certain targeted programs). In 1839, the first year that North Carolina’s public schools began to function as a statewide system, the General Assembly made $40 available to each school district that raised $20 locally. That was the legislature’s first stab at dividing the fiscal burden of public education between the state and local governments. The struggle to find a proper division while ensuring fairness in the financial burden, equity in educational opportunities, and quality in education has continued for the ensuing 184 years.
In the early to mid-1930s, largely as a reaction to the fiscal chaos of the Great Depression—a significant number of local governments had defaulted on debt and were in rough financial shape—the state adopted the current fiscal framework of centralizing policy making and funding responsibility for public education at the state level. It enacted the School Machinery Act, which made the state responsible for paying all current expenses necessary to finance a minimum six-month school term, leaving the counties responsible for constructing and maintaining school buildings.
The basic structure of school finance has not changed since the 1930s. The state continues to be responsible for the majority of current expenses necessary to maintain the minimum nine-month term, while counties are responsible for financing construction and the maintenance of school facilities. In this respect, North Carolina’s approach to financing its public schools differs from that of most other states, where the basic financial backing for public schools comes from local rather than state revenues. In North Carolina, state income and sales taxes, rather than local property taxes, constitute the primary revenue sources for financing schools. In 2018, however, the General Assembly authorized municipalities to fund public schools that are within their territorial boundaries or that serve municipal residents. Over time, this could cause a significant shift of funding responsibility from the state to local governments.
It is also the case, though, that there has been a blending of funding responsibilities over time. The state often appropriates funds for school construction, and counties increasingly must provide funds for current expenses. In fact, the county share of funding has increased significantly in recent years.
State Funding
State Funding Responsibilities
The state allocates its funding to the public school system in a few different ways. The majority of funds are used to cover the operational expenses of each local school administrative unit. The General Assembly, however, typically provides some funds each year to fund school facility projects.
Operational Expenses
The state appropriates its operational funding for schools in its annual budget. North Carolina differs from most other states in that it does not distribute money for the general education program on the basis of a local unit’s financial ability to operate schools. The bulk of state funding for public education is essentially a flat grant to a school system based on the number of students enrolled and the general costs of operation. The primary unit of allocation is average daily membership (ADM). The ADM for each school month is calculated by dividing the number of non-violating membership days by the number of days in a school month, rounded to the nearest whole number. ADMs are calculated for each grade level and then added together to determine the school’s ADM. Finally, each school’s ADM in the school administrative unit is added together to determine the school unit’s ADM.
State appropriations typically are allocated among counties and school units through three different methods—position allotments, dollar allotments, and categorical allotments.
Position Allotments
The largest component of the state budget for schools is teacher salaries. In FY 2020–21, for example, 94.8 percent of state expenditures supported salaries and benefits. The majority of this appropriation is reflected in position allotments. Each year the state appropriates funds to pay teachers, instructional personnel, and school administrators. Salaries are funded on a position basis—the state allots a certain number of teachers and support personnel to each school unit based on grade-level ADMs. The current teacher-student ratios for kindergarten through grade three are as follows:
For each position allotment, the state pays the costs to fund a particular person in a particular teaching position, based on the State Salary Schedule. That allows a school unit to hire experienced teachers or instructional support personnel based on the unit’s needs without being limited to a specific dollar total. A school unit also has some flexibility to use the allocated funds to cover other expenditures.
Dollar Allotments
Each school unit also receives a per-ADM dollar allotment that can be used to fund textbooks, supplies, materials, and some personnel, such as teacher assistants and central office administration positions. For example, in FY 2020–21, the state allocated $30.12 per ADM for classroom materials/instructional supplies/equipment and $32.26 per ADM for textbooks. A school unit may use dollar allotments to cover certain other expenditures.
Categorical Allotments
The General Assembly has targeted some state appropriations to aid smaller and lower-wealth counties and to assist school units that serve student populations with unique needs. These moneys are not allocated on a straight ADM basis. Instead, they are disbursed according to detailed formulas set forth in the state’s annual budget. Common categorical allotments are children with disabilities, academically gifted children, at-risk children, low-wealth counties, and small school systems. Some of these allocation formulas factor in a county’s appropriation to a school unit. For example, the low-wealth formula is based in part on the county’s wealth and whether the county’s appropriation to the school unit meets a certain minimum-effort threshold. Furthermore, the low-wealth funds may not be used to supplant county appropriations.
The state also provides funds to local school units to replace buses according to a statutory replacement schedule.
Capital Expenditures
Counties have been responsible for financing school construction since the state’s public school system was established. Over the years, however, the state has offered direct and indirect assistance for construction costs—through state general obligation bonds, local sales and use tax authority, and direct appropriations of corporate income tax and state lottery proceeds.
State Bonds
In the past, the state has issued numerous bonds to finance construction grants to local school boards. In recent years, however, the state has chosen other forms of funding assistance for school construction. The last state bond for public-school construction was in 1996.
Local Sales and Use Tax Authority
The state also has provided alternative relief for financing school construction. In 1983, it authorized counties to levy a one-half-cent sales and use tax with a specified percentage of the resulting revenue earmarked for school capital outlay, including retirement of existing school indebtedness (30 percent of the proceeds are currently so earmarked). In 1986, the legislature authorized counties to levy another one-half-cent tax, this time with 60 percent of the revenue earmarked for school capital outlay expenses. Because traditionally sales and use taxes have been a state revenue source, these local sales taxes may reasonably be viewed as a form of state revenue-sharing for school construction. All counties levy both taxes. Counties may hold the moneys generated from the earmarked portion of the taxes in a capital reserve fund for future projects; any interest earned must be earmarked for school capital outlays. Counties also are free to allocate the unrestricted portion of their local sales and use taxes proceeds to fund public-school capital and operating expenses. In 2007, counties received authority to levy an additional quarter-cent tax, subject to voter approval. The proceeds of the tax can be used for any county expenditure item, including public schools. Beginning in July 2016, certain counties began receiving additional sales and use tax revenues, pursuant to G.S. 105-524. This revenue results from a redistribution of a portion of the proceeds generated from county sales and use taxes. A county may use this additional revenue to fund public-school capital and operating expenses, community colleges, or economic development.
State School Construction Funds
In 1987, the legislature enacted the School Facilities Act, which created the Critical School Facility Needs Fund (CSFNF) and the Public School Building Capital Fund (PSBCF).
The CSFNF, funded by corporate income tax proceeds, aided counties and school units with the most pressing needs in relation to their resources, as determined by the CSFNF Commission. Moneys were distributed to high-need counties from 1988 through 1994, at which time the fund was abolished.
The PSBCF was established to provide aid to all counties for school construction projects. It too was originally funded by a portion of the state’s corporate income tax proceeds, which were allocated among the 100 counties on the basis of ADM. A county and its local school administrative unit(s) could jointly apply to the Department of Public Instruction to use the county’s allocation for capital outlay and technology projects. A county was required to match moneys allocated for capital outlay projects on the basis of $1 of local funds for every $3 of state funds.
Beginning in 2005, the legislature also allocated a portion (roughly 40 percent) of the state’s lottery proceeds to the PSBCF. These funds could be used to fund capital outlay projects for school buildings and were allocated among the counties according to a detailed statutory formula. No local match was required.
In 2013, the General Assembly repealed the statutory distributions of both corporate income tax proceeds and lottery proceeds to the PSBCF. New appropriations to the PSBCF will be subject to yearly state budget appropriations. According to G.S. 115C-546.2(d), if funds are appropriated to the PSBCF from the state lottery, those moneys must be allocated for school construction projects based on ADM. A county and its local school administrative unit(s) jointly apply to the Department of Public Instruction for a distribution of the moneys “to fund school construction projects and to retire indebtedness incurred for school construction projects.” No county matching funds are required. For FY 2021–22 and 2022–23, the legislature appropriated $100 million to the fund. It has appropriated this same amount for many years.
In 2017, the General Assembly established a second public-school capital fund, known as the Needs-Based Public School Capital Fund (NBPSCF). It appropriated to the fund $145,252,612 in FY 2021–22 and $208,252,612 in FY 2022–23. This fund is used to award grants to eligible counties to assist with critical public-school building capital needs. An eligible county is a county with an adjusted market value of taxable real property of less than forty billion dollars ($40,000,000,000).
The Superintendent of Public Instruction must award grants according to the following priorities: (1) counties designated as development tier one areas, (2) counties with greater need and less ability to generate sales tax and property tax revenue, (3) counties with a high debt-to-tax revenue ratio, (4) the extent to which a project will address critical deficiencies in adequately serving the current and future student population, (5) projects with new construction or complete renovation of existing facilities, (6) projects that will consolidate two or more schools into one new facility, and (7) counties that have not received a grant from this fund in the previous three years. The grant funds are subject to a county match based on adjusted market value of taxable real property, as specified by statutory formula.
There are some significant restrictions in the NBPSCF grant program. First, the grant moneys may only be used for the “construction of new school buildings and additions, repairs, and renovations.” They may not be used to reimburse a county for past projects or to make debt-service payments on past projects. The moneys also may not be used “for real property acquisition or for capital improvements to administrative buildings.” They may be used to enter into certain capital leases for school facilities, though. There are maximum grant amounts based on school purpose. In FY 2022-23, these amounts are up to $30 million for elementary schools, up to $40 million for middle schools and combination elementary and middle schools, and up to $50 million for high schools. Finally, there are detailed grant agreement requirements, specified in G.S. 115C-546.12.
In 2021, the General Assembly established the Public School Repair and Renovation Fund. It appropriated $30 million to the fund in FY 2021–22 and $50 million in FY 2022–23. The funds are distributed equally among the 100 counties and used by counties “for enlargement, improvement, expansion, repair, or renovation of classroom facilities at public school buildings within local school administrative units located in [a] county.” The funds may not be used for the retirement of indebtedness.
State Funding Sources
The primary funding source for public schools is the state income tax. There are a handful of other revenue sources, though, including state lottery proceeds, fines and forfeitures proceeds, state sales and use tax proceeds, and pass-through federal and private grants.
Local Funding
Another significant difference between North Carolina’s funding scheme for public education and that in other states is that local boards of education do not have authority to levy taxes to support schools. Instead, this authority resides with county governments. Counties use property taxes and local sales and use taxes to fund most school capital needs and a growing percentage of operational needs as well. As of July 1, 2018, municipalities are authorized to supplement state and county funding. A few other local revenue sources are available to support public schools.
County Funding
County Funding Responsibilities
Although the state bears primary responsibility for establishing a public school system, the North Carolina Constitution authorizes the General Assembly to “assign to units of local government such responsibility for the financial support of the free public schools as it may deem appropriate.” It further provides that the “governing boards of units of local government with financial responsibility for public education may use local revenues to add to or supplement any public school or post-secondary school program.”
The legislature has not been entirely clear in delineating the public-school funding duties of the state from those of county governments. Significant confusion about the contours of a county’s obligation for public schools has resulted, forcing counties and local school boards to turn to the courts for guidance.
G.S. 115C-408 specifies that “it is the policy of the State of North Carolina to provide from State revenue sources the instructional expenses for current operations of the public school system as defined in the standard course of study. It is the policy of the State of North Carolina that the facilities requirements for a public education system will be met by county governments.” On its face, this statute articulates a clear demarcation of funding responsibility between the state and county governments. The statute, by its terms, is merely aspirational, however. It does not actually assign any specific funding responsibilities. Neither does it reflect funding realities.
Specified Funding Requirements
A handful of statutory provisions assign funding responsibility to counties for specific expenditure items. These statutes assign to counties responsibility for funding most capital outlay expenditures, including school facilities, furniture, and apparatus; buildings for bus and vehicle storage; library, science, and classroom equipment; water supply and sanitary facilities; and maintenance and repair of school buildings. In addition, the statutes explicitly assign to counties responsibility for funding some operational expenditures—specifically, school maintenance and repairs, instructional supplies and reference books, school property insurance, and fire inspections.
If the funding framework ended there, it might not be such a knotty issue. A county would be required to fund the public-school capital and operational expense items explicitly delegated to it by statute. And, a county could choose to supplement its required appropriations in any given year, within the discretion of its governing board. The state would be required to fund any other expenditure necessary to enable a local school administrative unit to provide each student with the “opportunity to receive a sound basic education” (considering, of course, money the local school administrative unit receives from other sources, such as the federal government).
Additional Funding Requirements
The funding framework does not end there, however. The statute that sets forth the uniform budget standard for public schools also requires that a local school administrative unit maintain at least three funds to account for budgeted moneys. The statute identifies the types and sources of funds that must be appropriated to each fund. One of the funds, the Capital Outlay Fund, includes appropriations from, among other sources, “revenues made available for capital outlay purposes by the State Board of Education and the board of county commissioners.”
Another fund, the local current expense fund, must “include appropriations sufficient, when added to appropriations from [the State], for the current operating expense of the public school system in conformity with the educational goals and policies of the State and the local board of education, within the financial resources and consistent with the fiscal policies of the board of county commissioners.” It further indicates that the appropriations must be funded by, among other revenue sources, “moneys made available to the local school administrative unit by the board of county commissioners.” Thus, despite the “policy” statements in G.S. 115C-408, the state provides some funding for capital expenses and counties are required to provide some funding for operational expenses. But the uniform budget statute still leaves ambiguity as to what the state is responsible for and what is left to counties.
To further complicate the analysis, G.S. 115C-431(a) authorizes a local board of education to initiate a dispute-resolution process with the county if the local board of education determines that in any given year “the amount of money appropriated to the local current expense fund, or the capital outlay fund, or both, by the board of county commissioners is not sufficient to support a system of free public schools. . . . ” The North Carolina Supreme Court has interpreted G.S. 115C-431 to “itself assign to the local government responsibility for funding ‘a system of free public schools’. . . . ” In 2018, the legislature altered the dispute-resolution statute. With the changes, it is clear that a county is responsible for funding certain operational and capital expenses each year. (The dispute-resolution process is discussed in detail below.) In any given year a county may be required to fund operational and capital expenditure items in addition to those explicitly specified by the statutory provisions listed above.
County Funding Sources
County Appropriations of Unrestricted Revenue
A county may appropriate any unrestricted county revenue to fund the capital and operating expenses of its school unit(s). At least to some extent, a county’s governing board has discretion in determining the amount of unrestricted revenue to appropriate to support its schools. A school unit, however, may challenge a county’s appropriations if it believes that the amount allocated for either capital or operating expenditures (or both), when combined with moneys made available to it through other sources, is not sufficient to provide each student with an opportunity to receive a sound basic education that year. As discussed below, a county board may exercise some control over how the appropriated funds are spent by the local school unit(s).
County Appropriations of Earmarked Local Sales and Use Tax Proceeds
As discussed above, a portion of a county’s local sales and use tax revenue is earmarked for certain public-school expenditures. A county has discretion to determine how much of these earmarked funds to appropriate each year and for what capital projects. A county board may appropriate all the available funds each fiscal year, or it may place the money into a capital reserve fund for future expenditure. This allows a county to save moneys over several years to finance large capital outlays for its school unit(s). As with county appropriations of other general fund revenues, a county board may exercise some control over how its local school unit(s) expends these funds.
A county may seek permission from the Local Government Commission (LGC) to use part or all of the earmarked local sales and use tax proceeds for any lawful purpose if the county demonstrates that it can satisfy all of the capital outlay needs of its school unit(s) from other sources. In order to apply to the LGC for an exemption from the statutory earmarks on the G.S. Chapter 105, Articles 40 and 42 tax proceeds, a board of county commissioners must adopt a resolution and then submit it to the LGC. The resolution must indicate that the county can provide for its public-school capital needs without restricting the use of part or the entire designated amount. The LGC must consider both the school unit’s capital needs and those of the county generally in making its decision. The LGC must issue a written decision detailing its findings and specifying what percentage, if any, of the earmarked proceeds may be used by the county for any lawful purpose.
Municipal Funding
A municipality is authorized to make appropriations to “supplement funding for elementary and secondary public education” that benefit the residents of the municipality. In some respects, this funding authority is broader than that afforded to county governments. It comes with some limitations, though.
Public Schools
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. Public school is defined to include a local school administrative unit (traditional public school); a laboratory school, authorized by G.S. Chapter 116, Article 29A; a charter school, authorized by G.S. Chapter 115C, Article 14A; and a regional school, authorized by G.S. Chapter 115C, Article 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. In addition to funding general capital and 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 to make payments on loans made to public schools for facilities, equipment, or operations. 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.
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 from that of county governments. As discussed above, 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. In addition, 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. . . . ” These categories 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 moneys. This 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 derived from property tax collections on levies from prior fiscal years, even if those amounts are collected after July 1, 2018.
Impact on State and County Funding
G.S. 160A-700 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.
With respect to counties, as detailed above, a board of county commissioners is 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 G.S. 160A-700 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 revenue appropriated by the municipality to that school unit, subject of course to the minimum funding formula triggered by the dispute resolution process discussed below.
Note also 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.
Other Local Funding Sources
In addition to appropriations from a county’s general fund, a local school unit also may receive revenue derived from locally collected penalties and fines and a voted supplemental school tax.
Local Fines and Penalties
Under Article IX, Section 7 of the North Carolina Constitution, “the clear proceeds of all penalties and forfeitures and of all fines collected in the several counties for any breach of the penal laws of the state, shall belong to and remain in the several counties, and shall be faithfully appropriated and used exclusively for maintaining free public schools.” Several locally collected fines and penalties are subject to this constitutional mandate. If a county collects penalties or fines that are subject to this constitutional requirement, it must remit the clear proceeds (gross proceeds minus up to 10 percent in collection costs) to the local school unit(s) within the county within ten days after the end of the month in which the money was collected.
A county does not include these funds in its appropriations to the school unit(s), and the county board of commissioners has no control over their expenditure. The board, however, may consider the amount of fine, penalty, and forfeiture revenue received by a local school unit when determining the county’s annual appropriations.
Dedicated Property Tax Revenue
There are two methods by which a county may legally dedicate property tax proceeds for public-school purposes—dedicated county general tax and voted supplemental tax.
Dedicated County General Tax
The first method is by obtaining voter approval to dedicate a portion of the general property tax for public-school purposes. If the referendum is successful, the board of county commissioners decide each year whether or not to levy the dedicated property tax rate, along with the county’s general rate. If it levied the portion of the property tax dedicated to schools, it can then use the proceeds from that tax to either supplement or supplant its appropriations to the school unit(s) from other sources for capital and/or operating expenses.
Voted Supplemental Tax
The second method requires a joint effort between the local board of education and the board of county commissioners. It is the closest thing to a local school board having its own taxing authority. The local board of education may petition the county commissioners to hold a voter referendum to authorize a voted supplemental school tax. If the county commissioners receive a valid petition, the county must hold the referendum. The petition must state the maximum authorized supplemental tax rate, up to $0.50 per $100 valuation for school units having a population of less than 100,000 and $0.60 per $100 valuation for all other school units. If a supplemental tax is approved by the voters, a local board of education may request that the county levy a tax each year up to the maximum rate approved by the voters. The county decides whether or not to levy the tax and at what rate (the rate is capped at the level requested by the local board of education).
The county does not have any control over how the supplemental tax proceeds are spent by the school unit. That decision rests with the local school board, subject only to the terms of the ballot measure under which the tax was approved. The board of county commissioners, however, may consider the availability of the supplemental tax revenue when determining the county’s annual appropriations.
County/School Budgeting Process
Each year, a county engages in a detailed budgetary process to estimate revenues and make appropriations for the forthcoming fiscal year. The county must include its appropriations to its local school unit(s) for capital outlay and current expenses in its annual budget ordinance. The Local Government Budget and Fiscal Control Act, as supplemented by the School Budget and Fiscal Control Act, prescribes the procedural and substantive requirements for adopting the county’s budget ordinance and appropriating money to its local school unit(s). The budgeting process is fairly straightforward and can be broken down into the following ten steps:
- Step 1: County Board of Commissioners and Local School Board(s) Communicate on an Ongoing Basis.
- Step 2: School Superintendent Submits Proposed Budget.
- Step 3: Local School Board Considers Superintendent’s Budget.
- Step 4: Local School Board Submits Budget Request to County Board.
- Step 5: County Board Makes Appropriations to Local School Unit(s).
- Step 6: Local School Board Initiates Dispute-Resolution Process (optional).
- Step 7: Local School Board Adopts School Budget Resolution.
- Step 8: Local School Board Amends School Budget Resolution (optional).
- Step 9: County Board Monitors Local School Unit’s Expenditures of County Appropriations (optional).
- Step 10: County Board Reduces Appropriations to Local School Unit(s) during Fiscal Year (very limited authority).
Each step is analyzed more thoroughly below.
Step 1: County Board of Commissioners and Local School Board(s) Communicate on an Ongoing Basis
A county board of commissioners and a school board must work together to ensure that each board’s statutory requirements are met. The board of county commissioners and local board(s) of education should engage in ongoing communications during the fiscal year. Leading up to the budget process, they should communicate about the fiscal needs of the local school administrative unit and the fiscal resources of the county. Doing so will prevent surprises to either board at budget time and will help make the budgeting process work more efficiently and effectively.
Some county boards and local school boards agree to adopt multi-year financing formulas for operational expenses, indexed to such things as enrollment growth, percentages of low-wealth or special needs students, or state funding averages. These funding agreements are not legally enforceable, but they can serve as a useful tool for financial planning.
Step 2: School Superintendent Submits Proposed Budget
By May 1, the public-school superintendent must submit a budget and budget message to the local board of education (superintendent’s budget). A local school board may direct the superintendent to follow certain specified guidelines and processes in preparing the proposed budget. A copy of the superintendent’s budget must be filed in the superintendent’s office and made available for public inspection. The superintendent may, but is not required to, publish notice that the superintendent’s budget has been submitted to the local board of education.
The local board of education may hold a public hearing on the superintendent’s budget, but it is not required to do so. With or without public input or support, the school board is free to make any changes to the proposed budget before submitting it to the county for consideration.
Step 4: Local School Board Submits Budget Request to County Board
By May 15, the local board of education must submit its entire proposed budget (not just its request for county funding) to the board of county commissioners. The county’s budget officer must present the local board of education’s requests to the county board, even if the budget officer’s proposed county budget recommends different funding levels for the school unit.
The local board of education also must submit to the board of county commissioners a written summary of “the academic performance of the schools in the local school administrative unit, including the school performance grades of each school, any schools identified as low-performing or continually low-performing, and efforts by the local board of education to improve those identified schools’ performance.” The county commissioners may require that the local board of education present this information at a public meeting.
The board of county commissioners may request further information from the local school administrative unit about its proposed budget request. In fact, the county board has broad authority to obtain from the local board of education “all books, records, audit reports, and other information bearing on the financial operation of the local school administrative unit.” It also may specify the format in which the financial information must be presented.
In addition, a county board of commissioners can (and often does) invite the school unit’s superintendent or the local school board to present the school’s budget proposal at a county board meeting or during the public hearing on the county’s budget. This affords the county board an opportunity to ask questions about certain expenditure items and to obtain further clarification on a local school board’s policy goals and needs.
Step 5: County Board Makes Appropriations to Local School Unit(s)
The board of county commissioners makes its appropriations for capital and operating expenditures to the local school administrative unit(s) in the county’s annual budget ordinance.
Budgeting Factors
In making its appropriation decisions, the county board of commissioners must carefully consider the local school board’s funding request. The county is required to make appropriations for operating expenditures that, when combined with revenues to the school unit from all other sources, are sufficient to allow the school to meet its constitutional mandate to provide each student with the opportunity to receive a sound basic education. (Other revenues available to a school unit for operating expenses include supplemental taxes levied by or on behalf of the school unit; state money disbursed directly to the school unit; moneys made available to the local school unit by the board of county commissioners; moneys accruing to the local school unit from fines, penalties, and forfeitures pursuant to Article IX, Section 7 of the N.C. Constitution; and any other moneys made available or accruing to the local school unit for the current operating expenses of the school system). Of course a county board of commissioners also has to balance the needs of the school unit with the needs of all other county departments, particularly those that provide state-mandated services, such as public health, social services, and elections. Recognizing this, G.S. 115C-426 requires that a county board consider its fiscal resources and financial policies when making school appropriation decisions.
A county also is required to appropriate sufficient funds to meet a school unit’s capital needs for the fiscal year. The state makes some funds available to a county and its local school unit(s) to help with school construction, but most of this need must be met by county resources. A school unit’s capital needs vary from year to year. It may be helpful for a county board of commissioners to engage its local school board(s) in the county’s capital planning process or capital improvement program (CIP).
Fund Balance
Questions often arise at budget time about the propriety of a local school unit maintaining a fund balance. Most state funds to school units revert at the end of a fiscal year if not spent. Thus, a school unit’s fund balance is comprised primarily of county appropriations from previous years. There is no prohibition against a school unit maintaining a fund balance. School units, however, do not need a fund balance to meet cash flow needs to the same extent that counties and municipalities do. And, unlike for counties and municipalities, the state’s Local Government Commission does not prescribe a minimum fund balance level for local school units. A county board of commissioners may not force a school board to expend its fund balance for capital or operating expenditures. And a school unit is not authorized to return all or a portion of its fund balance to the county. A county board, however, will likely consider the amount of fund balance available to the school unit when making its yearly county appropriations for operating expenses.
County Authority to Direct School Unit Expenditures
Allocating Local Current Expense Appropriations
Generally, appropriations for operating expenses are made to the local current expense fund. A board of county commissioners may appropriate a lump sum to the local current expense fund to support operating expenses. If a county appropriates moneys to the local current expense fund with no further direction, the local board of education has full discretion over the expenditure of these moneys.
A county is authorized, however, to allocate part or all of its appropriation for operating expenses within the local current expense fund by purpose or function, as defined in the uniform budget format. The uniform budget format (now the uniform chart of accounts) defines “purpose code” to include the activities or actions that are performed to accomplish the objectives of the school unit. Function codes are first-level subdivisions of purpose codes and represent the greatest level of specificity to which a county may allocate funds for operating expenses. County appropriations may be allocated to the following purpose and function codes.
A board of county commissioners may request that a local board of education refrain from using county appropriations for certain items of expenditure within a purpose or function code. However, it may not legally restrict these expenditures at the line-item level. Furthermore, if a county board allocates its appropriations according to a purpose or function code, the local school board may modify up to 25 percent of an allocation for operating expenses. The county board may reduce the local school board’s discretion to modify allocations if it so specifies in the county budget ordinance, but not to less than 10 percent.
Allocating Capital Outlay Appropriations
According to the uniform budget format (now the uniform chart of accounts), there are three categories of expenditures to which a county may appropriate capital funds to its public school(s). A county may appropriate moneys for Category I expenditures for a specific capital project or projects. Moneys appropriated for Categories II and III expenditures, however, are allocated to the entire category, not to individual expenditure items.
The following list details the authorized capital outlay expenditures in each category.
If the board of county commissioners allocates part or all of its capital appropriations by project, the local school board must obtain approval from the county for any changes in the allocation for specific Category I expenditures—acquisitions of real property for school purposes and acquisitions, construction, reconstruction, enlargement, renovations, or replacement of buildings and other structures. However, a local board of education has full discretion to reallocate funds within categories II and III.
Apportionment of County Funds among Multiple School Units
If a county supports more than one local school unit, county appropriations to the local current expense funds of the local school administrative units (to support operating expenses) must be apportioned according to the average daily membership (ADM) of each unit. There is an exception for appropriations funded by voted supplemental taxes levied less than countywide. This occurs when a county has more than one local school administrative unit. These funds do not need to be apportioned equally among local school administrative units.
This uniform apportionment requirement does not apply to capital funds. A county may allocate unequal amounts of capital funding to different school units within a fiscal year. Furthermore, under certain circumstances a county may appropriate moneys to special funds for particular programs at one local school administrative unit without appropriating an equivalent amount to other units. The local school administrative unit must budget and account for these moneys in a fund other than the local current expense fund.
Interim Budget
The Local Government Budget and Fiscal Control Act requires that adoption of the budget ordinance take place by July 1. However, sometimes county boards of commissioners are unable or unwilling to adopt a budget ordinance by this date. In such cases, a county board must adopt an interim budget that appropriates money to cover necessary expenses for county departments and the local school unit(s) until the budget ordinance is adopted. In an extreme situation, the state’s Local Government Commission is authorized to assume the financial duties of a county board and to adopt the budget ordinance. If the county’s budget is delayed beyond July 1, a local school board also must adopt an interim budget resolution to pay salaries and the “usual ordinary expenses” of the school unit.
Step 6: Local School Board Initiates Dispute-Resolution Process (optional)
If the local school board “determines that the amount of money appropriated to the local current expense fund [for operating expenses], or the capital outlay fund, or both, . . . is not sufficient to support a system of free public schools,” it may initiate a dispute-resolution process with the board of county commissioners to challenge the appropriation (dispute-resolution process). For many years, the dispute-resolution process had three stages—joint meeting of the two governing boards, mediation, and litigation. As of July 1, 2018, the General Assembly replaced the litigation stage with a mandated funding formula for operating expense–funding disputes. Litigation will continue as the third stage for capital funding disputes.
Stages of Dispute-Resolution Process
As stated above, there are three stages in the dispute-resolution process—joint meeting of the two governing boards, mediation, and default funding formula (for operating expense disputes) or litigation (for capital outlay disputes).
Joint Meeting of Boards
To trigger the dispute-resolution process, a local school board must so notify the county board of commissioners within seven days of the adoption of the county budget ordinance. The boards then are required to meet and make a good-faith effort to try to resolve their differences. A mediator presides over the meeting and acts as a neutral facilitator.
If the joint meeting is not successful, the boards proceed to official mediation. Unless the two boards agree otherwise, the participants in the mediation are the chairs, attorneys, and finance officers of each board; the school superintendent; and the county manager. The compensation and expenses of the mediator are shared equally by the local school administrative unit and the county. The mediation is conducted in private, and statements and conduct are not discoverable in any subsequent litigation. The mediation must end by August 1, unless both boards agree otherwise. If the mediation continues beyond August 1, the county must appropriate to the local current expense fund a sum equal to its appropriation for the previous fiscal year.
If mediation ultimately fails, what happens next depends on whether operational funding levels, capital funding levels, or both are in dispute. If the dispute at least partially involves operational funding amounts, to be appropriated to the school unit’s local current expense fund, then a failed mediation triggers a default funding formula. The funding formula is the final determination of the appropriation amount for operating expenses for that fiscal year. Neither the local board of education nor the board of county commissioners may file any legal action challenging the determination.
The funding formula differs depending on whether or not the funding formula had been triggered in the prior fiscal year.
If the statutory funding formula was not triggered in the prior two fiscal years, the county’s appropriation to a local school unit’s local current expense fund derives from the following four-step formula:
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Start with the amount of county appropriations allocated to the local current expense fund in the prior fiscal year that was actually expended by the local school unit or transferred to a charter school, innovative school, regional school, or laboratory school. In other words, begin the calculation with the amount of county appropriations actually spent for the year immediately preceding the budget year. Note that because county appropriations are comingled with other local revenue sources in the local current expense fund, it will be incumbent on the local school board to separately track the expenditure of county appropriations.
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Divide the amount from step 1 by the sum of the average daily membership (ADM) of the local school administrative unit from the prior year plus the share of the ADM of any innovative, charter, regional, or laboratory school whose students reside in the local school administrative unit from the prior year. This number represents the per-student allocation.
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Multiply the amount from step 2, rounded to the nearest penny, by the sum of 1 plus the twelve-month percent change in the second quarter Employment Cost Index for elementary and secondary school workers as reported by the Federal Bureau of Labor Statistics. Unfortunately, G.S. 115C-431 does not precisely designate the data required to make this calculation. It is unclear if the reference is to the Employment Cost Index for total compensation for elementary and secondary school workers or the Employment Cost Index for wages and salaries for elementary and secondary school workers. (Note that second-quarter data are released on July 31.) G.S. 115C-431 also does not indicate whether seasonally adjusted or non-seasonally adjusted data should be used. It will be up to the local school board and board of county commissioners to determine which set of data to use in the calculation.
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Multiply the per-student allocation in step 3, rounded to the nearest penny, by the sum of the ADM of the local school administrative unit for the budget year in dispute plus the share of the ADM of any innovative, charter, regional, or laboratory school whose students reside in the local school administrative unit for the budget year in dispute. (It is not clear what number should be used to determine the total number of students for the budget year in dispute. At the point in time that the statutory formula is likely to be triggered, a local school unit will only have its estimated ADM for the year.)
The figure resulting from step 4, rounded to the nearest penny, is the statutorily mandated local current expense appropriation for the budget year.
If the statutory funding formula is triggered a second year in a row, the formula is altered to increase the inflationary factor. The formula then becomes a five-step process.
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Start with the amount of county appropriations allocated to the local current expense fund in the prior fiscal year that was actually expended by the local school unit or transferred to a charter school, innovative school, regional school, or laboratory school. In other words, begin the calculation with the amount of county appropriations that were actually spent for the year immediately preceding the budget year.
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Divide the amount from step 1 by the sum of the ADM of the local school administrative unit from the prior year plus the share of the ADM of any innovative, charter, regional, or laboratory school whose students reside in the local school administrative unit from the prior year. This number represents the per-student allocation.
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Increase by 3 percent the twelve-month percent change in the second quarter Employment Cost Index for elementary and secondary school workers as reported by the Federal Bureau of Labor Statistics. This provision, again, leaves a great deal of ambiguity. As stated above, it is unclear if the reference is to the Employment Cost Index for total compensation for elementary and secondary school workers or the Employment Cost Index for wages and salaries for elementary and secondary school workers. (Note that second-quarter data are released on July 31.) G.S. 115C-431 also does not indicate whether seasonally adjusted or non-seasonally adjusted data should be used. It will be up to the local school board and board of county commissioners to determine which set of data to use in the calculation. Finally, it is not clear how to interpret the mandate to increase the percentage change by 3 percent. It could mean that you add 3 percent to the percent change. It could also mean that you multiply the percent change by 3 percent. I think the legislature most likely intended the former interpretation. For example, if the twelve-month percent change is 2.38 percent, you add 3 percent to that for a total of 5.38 percent or 0.05.
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Multiply the amount from step 2, rounded to the nearest penny, by the amount in step 3, rounded to the nearest penny.
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Multiply the per-student allocation in step 4 by the sum of the ADM of the local school administrative unit for the budget year in dispute plus the share of the ADM of any innovative, charter, regional, or laboratory school whose students reside in the local school administrative unit for the budget year in dispute.
The figure resulting from step 5, rounded to the nearest penny, is the statutorily mandated local current expense appropriation for the budget year.
Litigation for Capital Funding Dispute
If the dispute, or part of the dispute, involves capital funding amounts, the local board of education may file an action in superior court related to the capital funding only. The action must be filed within five days of the failed mediation. Either side may demand a jury trial. The judge or jury must determine the “amount of money legally necessary from the board of county commissioners to provide the local school administrative units with buildings suitably equipped, as required by G.S. 115C-521.” G.S. 115C-521 specifies that a local school board must provide adequate school buildings “equipped with suitable school furniture and apparatus.”
In Union County Board of Education v. Union County Board of Commissioners, the court of appeals held that the amount “legally necessary” is the amount needed to enable the local school board to fulfill its constitutional duty to provide every child with the opportunity for a sound basic education. The court also clarified that a judge or jury is limited to considering the needs of the school unit, and resources available to the school unit and the county, in the fiscal year in which the dispute arose.
In making this determination, a judge or jury must consider
If the school board succeeds in the litigation, the court will order the board of county commissioners to appropriate a specific amount to the local school administrative unit and, if necessary, to levy property taxes to cover the amount of the appropriation. Any payment by the county may not be considered or used to deny or reduce appropriations to a local school administrative unit in subsequent fiscal years.
Either board may appeal the superior court’s judgment in writing within ten days after the entry of the judgment. Final judgments at the conclusion of the appellate process are legally binding on both boards.
Although G.S. 115C-431 directs the trial court to take up the matter as soon as possible, it is silent as to the timing of appellate review. In practice, the appellate review process often takes a year or more to complete. Thus, even if a judge or jury determines that a local school board needs additional funds from a county to meet its constitutional and statutory educational responsibilities for a particular school year, the school unit may not receive those additional funds that school year.
Step 7: Local School Board Adopts School Budget Resolution
If the local board of education does not formally dispute the county’s budget appropriations, or upon successful resolution of any dispute, the local board of education adopts a budget resolution. The budget resolution reflects the county’s appropriations for capital and operating expenses as well as those from the state and federal governments. It also incorporates revenues from other local sources. G.S. 115C-432 imposes several requirements and limitations on a school unit’s budget. Among other things, the school unit’s budget must conform to the county’s budget allocations. The budget resolution must be entered into the minutes of the local board of education. Within five days of adoption of the budget, copies are to be filed with the public-school superintendent, school finance officer, and county finance officer.
Step 8: Local School Board Amends School Budget Resolution (optional)
A local school board is free to amend its budget resolution any time after its adoption. The budget resolution must continue to meet the requirements specified in G.S. 115C-432, and if the county board of commissioners has allocated funds by purpose or function code, the school board must continue to honor those designations except as allowed by statute.
Prohibition against Capital Outlay Fund Transfers
Occasionally during a fiscal year a local school board will want to move moneys from its capital outlay fund to its current expense fund, or vice versa, in order to cover unexpected expenditures. A local school board is prohibited, however, from transferring money between these two funds, except under limited circumstances. A transfer may occur if all of the following conditions are met: (1) the funds are needed to cover emergency expenditures that were both “unforeseen and unforeseeable” when the school budget resolution was adopted, (2) the local board of education receives approval from the county board of commissioners, and (3) the local board of education follows certain procedural requirements.
A local board of education may initiate a transfer between its capital outlay and current expense funds by adopting a resolution that states (1) the amount of the proposed transfer, (2) the nature of the emergency, (3) why the emergency was unforeseen and could not have been foreseen, (4) what objects of expenditure will be added or increased, and (5) what objects of expenditure will be reduced or eliminated.
The local board of education must send copies of the resolution to the board of county commissioners and any other local school administrative units in the county. The county board must allow any other local boards of education to comment on the proposed transfer. The county board must then approve or deny the request within thirty days. The county board must notify the requesting local board of education and any other local boards of education in the county of its decision. If the county board does not act within the thirty-day period, its approval is presumed, unless the local board of education that submitted the request explicitly agrees to an extension of the deadline.
Step 9: County Board Monitors Local School Unit’s Expenditures of County Appropriations (optional)
The board of county commissioners has broad discretion to request information from the local school board relating to the expenditure of school funds. Pursuant to the annual budget process, the county board is authorized to inspect “all books, records, audit reports, and other information bearing on the financial operation of the local school administrative unit.” The county board also may request, in writing, that the school finance officer make periodic reports about the financial condition of the local school administrative unit.
In addition, the board of county commissioners automatically receives a copy of the annual audit report for the local school administrative unit.
Finally, the county board and the local board of education are authorized and encouraged to “conduct periodic joint meetings during each fiscal year” to discuss the implementation of the current public-school budget and assess future capital and operating needs.
Step 10: County Board Reduces Appropriations to Local School Unit(s) during Fiscal Year (optional)
A county may reduce its appropriations to a local school unit only under limited circumstances. The board of county commissioners may not reduce its appropriations for capital outlay or operating expenses after it adopts the county budget ordinance unless (1) the local board of education consents to the reduction or (2) it is pursuant to a general reduction in county expenditures due to prevailing economic conditions. If the board of county commissioners reduces its appropriations to its school unit(s) pursuant to a general reduction in county expenditures, it must hold a public meeting and afford the local school board an opportunity to present information on the impact of the reduction and then take a public vote (that is, a vote in an open session of a public meeting) on the decision to reduce the appropriations.
Additional County Authority and Responsibilities
Although a board of county commissioners does not officially set education policy, it nonetheless influences policy through the local budgeting process. A county board also plays a role in administering public schools and shaping policy by performing a few additional statutory functions—approving certain school board contracts, conducting special school elections, approving the amount the school board proposes to spend to purchase a school site, mandating the merger of all school units in the county, setting local school board members’ compensation and expense allowances, issuing bonds for school construction, and, by agreement with the local board of education, constructing school facilities.
Approving Certain Local School Board Contracts
A local school board must obtain consent from the county board of commissioners before entering into several different types of contracts. The county board’s approval typically commits the county to providing sufficient funds to meet the local school board’s obligations under the contracts.
Continuing Contracts for Capital Outlay
School administrative units may enter into continuing contracts for multi-year capital improvement projects or outlays, even when the school unit’s budget resolution for the current year does not include an appropriation for the entire obligation incurred. Three conditions for these continuing contracts must be met: (1) the budget resolution must include an appropriation authorizing the current fiscal year’s portion of the obligation, (2) an unencumbered balance of that appropriation for the current fiscal year must be sufficient to cover the unit’s current fiscal year obligations under the contract, and (3) the board of county commissioners must approve the contract by a resolution binding the board to appropriate sufficient funds to pay the amounts falling due under the contract in future fiscal years. The requirement for county board approval does not apply to multi-year contracts for operating expenses.
Installment Finance Contracts
Under G.S. 115C-528, local boards of education may use installment finance contracts to fund the acquisition of certain kinds of equipment: automobiles and school buses; mobile classroom units; food service equipment; photocopiers; and computers and computer hardware, software, and related support services. The contract term may not exceed the useful life of the property being acquired. A school unit seeking to acquire covered equipment must give the seller a security interest in the property being financed under the installment contract. The school board must obtain the county board of commissioners’ approval of an installment finance contract if the contract term is at least three years and the total amount financed under the contract is at least $250,000 or an amount equal to three times the local school system’s annual state allocation for classroom materials and equipment, whichever is less. Even if a contract does not require county board approval, a school board must submit information concerning these contracts as part of the annual budget it submits to the county board.
Guaranteed Energy-Savings Contracts
G.S. 115C-47(28a) authorizes local school boards to use guaranteed energy-savings contracts to purchase an energy conservation measure—such as a facility alteration or personnel training related to a facility’s operation—that reduces energy consumption or operating costs. These contracts for the evaluation, recommendation, or implementation of energy conservation measures in school facilities are paid for over time, and energy savings are guaranteed to exceed costs. Local boards of education may finance energy conservation measures by using installment finance agreements under G.S. 160A-20. Such agreements are subject to county approval. A county board of commissioners must certify to the North Carolina Department of State Treasurer that the payments under a guaranteed energy-savings contract are not expected to require any additional appropriations to the local school board or cause an increase in taxes. A county board also must indicate that it does not intend to reduce appropriations to the local school unit based on a reduction in energy costs in a manner that would inhibit the ability of the local school board to make payments under the contract. A county, however, is not legally obligated to appropriate funds to cover contract amounts due or to make payments directly under the contract.
Operational Leases
G.S. 115C-530 authorizes local boards of education to enter into operational leases of real or personal property for use as school buildings or facilities. Leases for terms of three years or longer, including optional renewal periods, must be approved by the board of county commissioners. Approval obligates the commissioners to appropriate sufficient funds to meet the payments due in each year of the lease; the school board’s budget resolution must include an appropriation for the current fiscal year’s portion of the obligation as well as an unencumbered balance sufficient to pay the obligation.
Also, under G.S. 115C-530, school boards may make improvements to leased property. Contracts for repair and renovation must be approved by the board of county commissioners if they (1) are subject to the competitive bidding requirement in G.S. 143-129(a) (the current threshold for which is $500,000) and (2) do not otherwise constitute continuing contracts for capital outlay.
Conducting Special School Elections
Under G.S. 115C-501, special school elections may be held to vote on proposals to
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authorize a local supplemental tax,
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increase the supplemental tax rate in an area that already has a supplemental tax of less than the maximum rate set by statute,
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enlarge a city administrative unit by consolidating areas of a county unit into the city school unit,
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supplement and equalize educational advantages by levying a special tax in an area of a county administrative unit enclosed within one common boundary line,
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abolish a supplemental school tax,
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authorize the county to issue school bonds,
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provide a supplemental tax on a countywide basis pursuant to merger of all administrative units within a county,
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annex or consolidate school areas from contiguous counties and provide a supplemental school tax in such annexed or consolidated areas, or
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vote school bonds and taxes in certain merged school administrative units.
Involvement by the board of county commissioners begins when it receives a petition from a county or city school board requesting a special school election. The petition, which must be approved by the school board, need not originate with the school board itself. It can be submitted also by a majority of qualified voters who have resided for the preceding year in an area adjacent to a city administrative unit; these voters may petition the county board of education for an election on the question of annexing their area to the city unit. For other types of special elections, 25 percent of the qualified voters in a school area may initiate a petition and submit it to the board of education. The school board must consider the petition and decide whether or not to approve it.
If a petition is approved by the school board, it is submitted to the county commissioners; G.S. 115C-506 requires the commissioners “to call an election and fix the date for the same.” In Board of Education of Yancey County v. Board of Commissioners of Yancey County, the North Carolina Supreme Court held that, if a petition for an election on authorizing a special supplemental tax is properly presented, the duty of the board of commissioners is ministerial and not discretionary; it is obliged to call the election. This rule likely applies to the other kinds of special elections listed above. The school board may withdraw a petition at any time before the election is called. All school elections, whether for county or city school administrative units, are held and conducted by the appropriate county board of elections.
If an election is held on any of these issues and the proposition is rejected, under G.S. 115C-502 another election on the same issue in the same area may not be called for at least six months. An election on whether to abolish a local tax district may not be held any sooner than one year after the election establishing the district or after an election on the issue of dismantling the local tax district. If a local tax district is in debt or has unmet obligations, no election may be held on the issue of abolishing that tax district.
Approving Expenditures for School Sites
A school board may not execute a contract to purchase a site or to make any expenditure for a property without the board of county commissioners’ approval “as to the amount to be spent for the site.” The requirement applies whether the county has made a blanket capital outlay appropriation or has allocated moneys for this particular project. In 1975, in Painter v. Wake County Board of Education, the state supreme court considered an earlier version of this statutory provision; its ruling indicates that this approval requirement applies only when the school board is using funds from the county.
If the two boards disagree over a site-purchase matter, they may, under G.S. 115C-426(f), settle the dispute through the judicial procedure used to resolve budgetary disputes (found in G.S. 115C-431). If they do so, the issue to be determined is the amount to be spent for the site, not its location. The school board has sole authority to choose school sites; if the court finds the amount it proposes to spend reasonable, the school board will most likely prevail.
Initiating Merger of School Units within a County
As discussed above, some counties have more than one local school administrative unit. The propriety of having multiple school administrative units within one county is the subject of much study and debate among county and school officials. The number of school administrative units has decreased substantially over time. The General Assembly merged several of the school units through local acts. Some mergers, however, came about at the behest of county governments in which the administrative units are located. The General Assembly has authorized a board of county commissioners to initiate a merger by adopting a merger plan for all school units in the county. In subsequent years, the county must provide the merged school unit local funding based on average daily membership at a level at least equivalent to the highest level received by any school unit in the county during the five fiscal years preceding the merger. The boards of education do not participate in preparing the plan and need not agree to it. And a merger plan developed by a board of county commissioners cannot be made subject to voter approval. The merger plan, however, must be approved by the State Board of Education or enacted by local act of the General Assembly.
There are two other statutorily authorized ways to merge school units without legislative action. A city school board may force a merger by dissolving itself. In that case the State Board of Education must adopt a merger plan. Plans developed in this way cannot be subject to voter approval. Boards of education and boards of county commissioners do not participate in preparing such a plan and need not agree to it. Alternatively, the school systems themselves may bring about the merger. The merging units adopt a written plan of merger, which becomes effective if the board of county commissioners and the State Board of Education approve it. The plan may make the merger contingent on approval of the voters in the affected areas.
Setting Local School Board Members’ Compensation
A county board of commissioners is authorized to fix the compensation and expense allowances paid to members of the local board of education. The county board must follow the procedures set forth in G.S. 153A-92. “Funds for the per diem, subsistence, and mileage” for all local school board meetings are appropriated to the local current expense fund.
Constructing School Facilities
A county board of commissioners bears primary funding responsibility for public-school infrastructure and facilities. However, state law assigns to each local school board the duty to provide adequate school facilities. G.S. 115C-521(c) also directs that the “building of all new school buildings and the repairing of all old school buildings shall be under the control and direction of, and by contract with, the board of education for which the building and repairing is done.” And all school buildings must be located on a site that is “owned in fee simple” by the local school board.
For some capital projects, a county appropriates money to the local school unit and school personnel perform the work or contract with private entities to complete the work. A county board has no legal authority to require that a school board hire a particular contractor or otherwise proceed under a particular process (such as design-build or capital lease). A county and a school board may prefer to have the county contract for and oversee school construction and repair projects. In this case, the county and the school board must enter into a carefully crafted interlocal agreement in which the local board assigns its contracting rights to the county but retains ultimate oversight authority. Furthermore, if a county issues installment finance debt to fund a school construction project, the county may need to obtain temporary ownership of the school property for the life of the loan. Again, a carefully drafted interlocal agreement should allow the county to perform the construction or repair work while not running afoul of statutory provisions.
Funding Charter Schools
In 1996, as part of its educational reform efforts, the General Assembly authorized the establishment of charter schools, public schools that operate under a charter from the State Board of Education but are free from many of the restrictions that affect other public schools.
Any child who is eligible to attend public school in North Carolina is eligible to attend a charter school. A student is not limited to charter schools located within his or her school district or even his or her county. A charter school may set an enrollment cap but may not limit admission to students on the basis of intellectual ability, scholastic or athletic achievement, disability, race, creed, gender, national origin, religion, or ancestry. A charter school may not charge tuition or fees, except for those also charged by the local school administrative unit in which the charter school is located. Although a statewide cap was originally set for 100 charter schools, in 2011 the legislature removed the limit. In 1997–1998, 34 charter schools began operation; by 2015, 193 were in operation or approved to begin operations.
State Funding
For every child who attends a charter school, the State Board of Education must allocate to that charter school an amount equal to the average per-pupil allocation for average daily membership from the local school administrative unit allotments in which the charter school is located (with the exception of allotments for children with disabilities and children with limited English proficiency). This means that state funding for operational expenses follows the student to the charter school.
State funding may be used for a charter school’s operational expenses. It also may be used to enter into operational and financing leases for real property or mobile units utilized as classroom facilities. A charter school may not use state funds to purchase any interest in real property or mobile classroom units, however.
County Funding
Under current law, a county is not required and, in fact, is not statutorily authorized, to directly fund charter schools for either capital or operating expenses. A county does, however, indirectly fund some operating expenses for charter schools. For each student within a local school administrative unit who attends a charter school, the administrative unit must transfer to the charter school an amount equal to the administrative unit’s per-pupil local current expense appropriation for the fiscal year. The local current expense appropriation includes direct appropriations by the county for operating expenses; revenues from local fines, penalties, and forfeitures; state moneys disbursed directly to the local school administrative unit; and the proceeds of supplemental taxes levied by or on behalf of the local school administrative unit. It does not include fund balance. It also does not include moneys that are properly accounted for in funds other than the local current expense fund, such as moneys resulting from reimbursements, fees for actual costs, tuition, sales tax revenues distributed using the ad valorem method pursuant to G.S. 105-472(b)(2), sales tax refunds, gifts and grants restricted as to use, trust funds, federal appropriations made directly to local school administrative units, and funds received for pre-kindergarten programs.
A county may, however, donate surplus, obsolete, or unused personal property to a charter school.
Municipal Funding
As detailed above, municipalities are authorized to directly fund operational and certain capital costs of charter schools.
Conclusion
The North Carolina Constitution guarantees each child in this state an opportunity for a sound basic education. Responsibility for setting educational policy and standards rests largely with the state legislature, state board of education, and local board of education. The state also funds the majority of the public school system’s operating expenses. Counties have traditionally been responsible for funding school facilities. Over time, however, county boards of commissioners have assumed an increasing role in funding operational expenses for school units and, thereby, in influencing educational policy. And municipalities now have a role in school funding. Time will tell what impact this new funding scheme will have on the overall funding structure.
