Can a Texas school district's illegal homestead exemption repeal change its state funding?

Plain-English summary

The Commissioner of Education asked the AG how to run one piece of the school finance formula after a 2015 change in the property tax law. In 2015 the Legislature raised the state homestead exemption and added Tax Code subsection 11.13(n-1), which froze local option homestead exemptions (LOHEs) at their 2014 level: a school district, city, or county that had a LOHE for 2014 may not reduce or repeal it. A prior AG opinion, KP-0072 (2016), had already concluded that subsection 11.13(n-1) bars a district from cutting or repealing its 2014 LOHE and is not unconstitutionally retroactive.

The wrinkle is the additional state aid for tax reduction, or ASATR, under Education Code section 42.2516. The ASATR is a "hold harmless" payment: when the Legislature compressed local maintenance and operations tax rates after the Texas Supreme Court found the old school property tax unconstitutional, the state agreed to make up the difference so districts kept their target funding levels. The ASATR calculation depends on a district's local revenue, and subsection 42.2516(f-1) tells the commissioner to adjust that local revenue figure if a district eliminates or reduces a local homestead exemption. The problem: some districts repealed or reduced their LOHE in 2015 even though 11.13(n-1) forbade it, and the commissioner wanted to know whether his formula still has to treat those repeals as real.

The AG reconciled the two statutes by reading them together. Subsection 42.2516(f-1) triggers an adjustment only "if" a district eliminates or reduces a 11.13(n) exemption. But a 2015 repeal or reduction is flatly prohibited by 11.13(n-1), so a forbidden act cannot serve as the condition that triggers the adjustment. Reading it the other way would erase the meaning of 11.13(n-1) and, worse, would reward a district that broke the law by handing it extra state aid beyond the hold-harmless level the Legislature meant to preserve, while stripping the tax relief the Legislature meant to protect for that district's taxpayers. The AG concluded the commissioner should not use or recognize a district's LOHE repeal or reduction made in violation of 11.13(n-1) when computing the ASATR.

Currency note

This opinion was issued in 2017. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. (The opinion itself noted the ASATR was expected to be eliminated in 2017.)

What the opinion meant for those who asked

The Commissioner of Education (as the opinion described it): The opinion answered the reconciliation question directly: the commissioner should not use or recognize a school district's LOHE repeal or reduction made in violation of Tax Code subsection 11.13(n-1) when performing the ASATR calculation under Education Code subsection 42.2516(f-1).

School districts that cut or repealed a LOHE in 2015 (as the opinion described them): The opinion explained that such a repeal or reduction was prohibited by 11.13(n-1), so it cannot trigger a funding adjustment, and a district could not gain extra state aid above its hold-harmless level by taking an action the statute forbade.

Taxpayers in those districts (as the opinion described them): The opinion described 11.13(n-1) as a hold-harmless provision meant to protect the local tax relief for a district's taxpayers, and its reading preserves that intended benefit rather than letting a prohibited repeal undo it.

Common questions

Can a Texas school district repeal its local homestead exemption?
Not if it had one for the 2014 tax year. The opinion (and the earlier KP-0072) read Tax Code subsection 11.13(n-1) to bar a district from reducing or repealing a 2014 local option homestead exemption.

Does an illegal repeal still change the district's state funding?
No, under this opinion. The AG concluded the commissioner should not recognize a prohibited LOHE repeal or reduction in the ASATR calculation, so it does not raise the district's state aid.

What is the ASATR?
The opinion described it as "additional state aid for tax reduction," a hold-harmless payment that made up the difference after the Legislature compressed local maintenance and operations tax rates, so districts kept their target revenue per student.

Why not just follow the formula's words about reducing an exemption?
The opinion explained that the formula triggers an adjustment only "if" a district reduces or eliminates the exemption, and because the law forbids that action in 2015, a forbidden act cannot be the triggering condition without nullifying 11.13(n-1).

Background and statutory framework

In 2015 the Legislature raised the state homestead exemption and added Tax Code subsection 11.13(n-1), freezing a 2014 local option homestead exemption (adopted under subsection 11.13(n)) so a school district, municipality, or county may not reduce or repeal it (Tex. Tax Code §§ 11.13(n), 11.13(n-1)). Opinion KP-0072 (2016) had construed 11.13(n-1) to prohibit cutting or repealing a 2014 LOHE and found it not unconstitutionally retroactive. The additional state aid for tax reduction is governed by Education Code section 42.2516, which directs the commissioner to adjust a district's local revenue from maintenance and operations tax collections, including when the district, for 2010 or later, adopts or eliminates a section 11.13(n) exemption or adopts one at a lesser percentage than 2009 (Tex. Educ. Code §§ 42.2516, 42.2516(b)-(f-1)(1)-(2), 42.2516(f-1), 42.2516(f-1)(1)-(2)). The commissioner's rules must measure the effect of such actions on state revenue and adjust state aid by a substantially equivalent amount (Tex. Educ. Code §§ 42.2516(f-2)(1), 42.2516(f-2)(2)). "Shall" imposes a duty (Tex. Gov't Code § 311.016(2)). The opinion noted the ASATR was expected to be eliminated in 2017 (Tex. Educ. Code § 42.2516(c-1)).

The AG applied plain-meaning, whole-statute construction (City of Houston v. Bates, 406 S.W.3d 539, 543-44 (Tex. 2013); CHCA Women's Hosp. L.P. v. Lidji, 403 S.W.3d 228, 232 (Tex. 2013)), declining a reading that would render 11.13(n-1) meaningless (Crosstex Energy Servs. L.P. v. Pro Plus, Inc., 430 S.W.3d 384, 390 (Tex. 2014)), and noting that "if" connotes a condition (Hohenberg Bros. Co. v. Gibbons & Co., 537 S.W.2d 1, 3 (Tex. 1976)). It read the two codes together as parts of one school-finance scheme (Ochsner v. Ochsner, 2016 WL 3537255, at **3-5 (Tex. 2016); Valdez v. Hollenbeck, 465 S.W.3d 217, 226-29 (Tex. 2015)). It traced the ASATR to the Legislature's response to the Supreme Court's 2005 ruling that the school property tax was unconstitutional and the resulting rate compression and hold-harmless funding (Neeley v. West Orange-Cove Consol. Indep. Sch. Dist., 176 S.W.3d 746, 797-99 (Tex. 2005); Morath v. Tex. Taxpayer & Student Fairness Coal., 490 S.W.3d 826, 836-38 (Tex. 2016)), and noted the two kinds of district ad valorem taxes (Tex. Educ. Code §§ 45.001(a)(2), .002). It described 11.13(n-1) as a parallel hold-harmless provision protecting the state's increased exemption, concluding that recognizing a prohibited repeal would confer an undeserved benefit beyond the intended funding level.

Citations

Statutes:

• Tex. Tax Code §§ 11.13(n), 11.13(n-1)
• Tex. Educ. Code §§ 42.2516, 42.2516(b)-(f-1)(1)-(2), 42.2516(f-1), 42.2516(f-1)(1)-(2), 42.2516(f-2)(1), 42.2516(f-2)(2), 42.2516(c-1), 45.001(a)(2), .002
• Tex. Gov't Code § 311.016(2)

Cases:

• City of Houston v. Bates, 406 S.W.3d 539 (Tex. 2013)
• CHCA Women's Hosp. L.P. v. Lidji, 403 S.W.3d 228 (Tex. 2013)
• Crosstex Energy Servs. L.P. v. Pro Plus, Inc., 430 S.W.3d 384 (Tex. 2014)
• Hohenberg Bros. Co. v. Gibbons & Co., 537 S.W.2d 1 (Tex. 1976)
• Ochsner v. Ochsner, 2016 WL 3537255 (Tex. 2016)
• Valdez v. Hollenbeck, 465 S.W.3d 217 (Tex. 2015)
• Neeley v. West Orange-Cove Consol. Indep. Sch. Dist., 176 S.W.3d 746 (Tex. 2005)
• Morath v. Tex. Taxpayer & Student Fairness Coal., 490 S.W.3d 826 (Tex. 2016)

Other authority:

• Tex. Att'y Gen. Op. No. KP-0072 (2016)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0144
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2017/kp0144.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

April 24, 2017

Mr. Michael Morath Opinion No. KP-0144
Commissioner of Education
Texas Education Agency Re: Whether the computation of state
1701 North Congress Avenue funding for school districts receiving
Austin, Texas 78701-1494 additional state aid for tax reduction must
include local option homestead exemptions
that were determined to be authorized in
Attorney General Opinion KP-0072 (2016)
(RQ-0137-KP)

Dear Mr. Morath:

    You ask about your exercise of the duties of the Commissioner of Education as they relate to computing state funding for school districts. [1] You tell us your questions arise, in part, because of the recent issuance of Attorney General Opinion KP-0072. See Request Letter at 2.

     Opinion KP-0072 examined the effect of 2015 legislation in which the Legislature increased the state homestead exemption from $15,000 to $25,000. Tex. Att'y Gen. Op. No. KP-0072 (2016) at 1-6. In that legislation, the Legislature also added Tax Code subsection 11.13(n-1) providing that the "governing body of a school district, municipality, or county that adopted a [local option homestead exemption, or "LOHE"] under Subsection (n) for the 2014 tax year may not reduce the amount of or repeal the exemption." TEX. TAX CODE § 11.13(n-1); see also id. § 11.13(n) (authorizing the governing body of a taxing unit to provide an additional homestead exemption). Opinion KP-0072 concluded that Tax Code subsection 11.13(n-1) "prohibits a school district ... from repealing or reducing the local option homestead exemption from the amount that was adopted for the 2014 tax year," recognizing that the Legislature froze local homestead exemptions at their 2014 level. Tex. Att'y Gen. Op. No. KP-0072 (2016) at 5 (concluding that subsection 11.13(n-1) is not unconstitutionally retroactive). [2] Your questions arise because the subsection 11.13(n-1) prohibition against a LOHE reduction or repeal impacts your calculation of the additional state aid for tax reduction ("ASATR"). See TEX. EDUC. CODE § 42.2516. The ASATR calculation involves the determination of a district's local revenue, which increases when a district repeals its LOHE. See id. § 42.2516(b)-(f-1)(1)-(2).

     Currently, section 42.2516 of the Education Code provides for payment of the ASATR. [3] See generally id. § 42.2516. Within the greater context of determining the amount of state and local revenue to which a school district may be entitled under the complex school financing formula, the ASATR requires the education commissioner to make adjustments to "a school district's local revenue derived from maintenance and operations tax collections." Id. § 42.2516(f-1). Relevant here, subsection 42.2516(f-1) provides that

            [t]he commissioner shall, in accordance with rules adopted by the commissioner, adjust the amount of a school district's local revenue derived from maintenance and operations tax collections, as calculated for purposes of determining the amount of state revenue to which the district is entitled under this section, if the district, for the 2010 tax year or a subsequent tax year:

                     (1) adopts an exemption under Section 11.13(n), Tax Code, that was not in effect for the 2009 tax year, or eliminates an exemption under Section 11.13(n), Tax Code, that was in effect for the 2009 tax year;

                     (2) adopts an exemption under Section 11.13(n), Tax Code, at a ... lesser percentage than the percentage in effect for the district for the 2009 tax year; ....

Id. § 42.2516(f-1)(1)-(2); see also TEX. GOV'T CODE § 311.016(2) ("'Shall' imposes a duty."). The commissioner's rules must require the commissioner to determine, along with chapter 41, the effect of "a school district's action described by Subsection (f-1)(1), (2), (3), or (4) on the total state revenue to which the district would be entitled or the cost to the district of purchasing sufficient attendance credits to reduce the district's wealth per student to the equalized wealth level." TEX. EDUC. CODE § 42.2516(f-2)(1). The commissioner's rules must also "require an increase or reduction in the amount of state revenue to which a school district is entitled ... that is substantially equivalent to any change in the total state revenue or the cost of purchasing attendance credits." Id. § 42.2516(f-2)(2). Your ultimate question is how to reconcile subsection 42.2516(f-1) of the Education Code and subsection 11.13(n-1) of the Tax Code as you make the ASATR calculation for those districts that repealed their LOHE in 2015.

    In considering the interaction between Education Code subsection 42.2516(f-1) and Tax Code subsection 11.13(n-1), we follow the rules of statutory construction utilized by the courts. The primary objective in such a task is to give effect to the Legislature's intent as ascertained from the plain meaning of the words used in the statute. See City of Houston v. Bates, 406 S.W.3d 539, 543-44 (Tex. 2013). Courts "analyze [the] language in context, considering the specific sections at issue as well as the statute as a whole." CHCA Women's Hosp. L.P. v. Lidji, 403 S.W.3d 228, 232 (Tex. 2013). To give effect to every word and phrase, a court will not interpret a statute "in a manner that renders any part of the statute meaningless or superfluous." Crosstex Energy Servs. L.P. v. Pro Plus, Inc., 430 S.W.3d 384, 390 (Tex. 2014).

    The plain language of Education Code subsections 42.2516(f-1)(1) and (2) triggers the commissioner's duty to make an adjustment only "if the district ... eliminates an exemption under Section 11.13(n)" or adopts an exemption at a lesser percentage. TEX. EDUC. CODE § 42.2516(f-1)(1)-(2) (emphasis added); see also Hohenberg Bros. Co. v. Gibbons & Co., 537 S.W.2d 1, 3 (Tex. 1976) (recognizing that the word "if" connotes a condition). Yet the language of Tax Code subsection 11.13(n-1) expressly prohibits a repeal or reduction of a LOHE in 2015. As any reduction or repeal of a LOHE in 2015 is prohibited by statute, a district's repeal or reduction of its LOHE cannot serve as the condition that triggers the application of Education Code subsection 42.2516(f-1). To construe otherwise would needlessly negate the meaning of Tax Code subsection 11.13(n-1) within the school finance scheme. See Crosstex Energy Servs., 430 S.W.3d at 390.

    The context of the two statutes considered within the whole of the school financing system bolsters this conclusion. Though located in different codes, they are both necessary to the calculation of a district's local revenue for school finance purposes and should be considered together. Cf. Ochsner v. Ochsner, 2016 WL 3537255, at **3-5 (Tex. 2016) (considering child support arrearage question within statutory context of several Family Code chapters to "look to the statutory scheme as a whole in order to establish the meaning of the arrearage provision, not to snippets taken in isolation"); Valdez v. Hollenbeck, 465 S.W.3d 217, 226-29 (Tex. 2015) (considering statute of limitations question in probate matter within "the comprehensive statutory scheme governing the probate process"). The delivery of the ASATR is a result of the Texas Supreme Court's 2005 determination that the school property tax was unconstitutional and the Legislature's response of reducing property tax rates across the State. Neeley v. West Orange-Cove Consol. Indep. Sch. Dist., 176 S.W.3d 746, 797-99 (Tex. 2005). The Legislature established a compressed maintenance and operations tax [4] rate, which decreased each school district's rate by a specific percent. See Morath v. Tex. Taxpayer & Student Fairness Coal., 490 S.W.3d 826, 836-37 (Tex. 2016) (describing legislative changes to the maintenance and operations tax rate). But the Legislature maintained a district's level of funding with a "hold harmless" provision, the ASATR, to provide additional state revenue to a district so that it would receive the same amount of money (per weighted student) that it had received in the target school year. See HOUSE WAYS & MEANS COMM., BILL ANALYSIS, Tex. Comm. Substitute H.B. 1, 79th Leg., 3d C.S. (2006) at 1 ("This additional state aid for tax reduction from the results of property tax rate compression ensures that each district receives at least the amount of revenue per student that the district would have received during the 2006-2007 school year if property tax rates had not been compressed[.]"); see also Morath, 490 S.W.3d at 838 (describing the alternative "target revenue" system as "based on certain hold harmless rules and [applicable] if the target revenue amount exceeds the amount the district receives" under the "on formula" funding system, and noting that the "State makes up the difference with [ASATR]"). Similarly, in Tax Code subsection 11.13(n-1), the Legislature adopted another "hold harmless" provision designed to preserve the $10,000 increased property tax exemption provided by the State without offset by a local taxing entity. See SENATE RESEARCH CENTER, BILL ANALYSIS, Tex. S.B. 1, 84th Leg., R.S. (2015) at 1 ("Any local taxing units that currently offer the optional homestead exemption must maintain the current exemptions offered for 10 years."). Taken together, it is evident that the Legislature intended to make school districts whole as to the compressed maintenance and operations tax rate at specific funding levels but also to grant and protect tax relief to the taxpayers in each district. To construe Education Code subsection 42.2516(f-1) to require the commissioner to make an adjustment based upon a district's prohibited LOHE reduction or repeal would negate the Legislature's intended benefit to a district's taxpayers and would instead confer an undeserved benefit on a district that violated Tax Code subsection 11.13(n-1) beyond the hold harmless funding level that the Legislature intended to preserve for the district.

   Accordingly, you should not use or recognize a school district's LOHE repeal or reduction made in violation of Tax Code subsection 11.13(n-1) for the ASATR calculation under Education Code subsection 42.2516(f-1).

                                   SUMMARY

                   The computation of state funding for school districts receiving additional state aid for tax reduction must not include local option homestead exemption repeals or reductions that Tax Code subsection 11.13(n-1) prohibits.

                                          Very truly yours,

                                          KEN PAXTON
                                          Attorney General of Texas

JEFFREY C. MATEER
First Assistant Attorney General

BRANTLEY STARR
Deputy First Assistant Attorney General

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

CHARLOTTE M. HARPER
Assistant Attorney General, Opinion Committee

[1] See Letter from Mr. Michael Morath, Comm'r of Educ., Tex. Educ. Agency, to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (Oct. 26, 2016), https://www.texasattorneygeneral.gov/opinion/requests-for-opinion-rqs ("Request Letter").

[2] Since the issuance of Opinion KP-0072, several school districts repealing or reducing their LOHE in 2015 contrary to section 11.13(n-1) have been sued for tax refunds in various Texas courts by local taxpayers. See, e.g., Plaintiff's Orig. Pet. and Application for Temp. Injunction, Martin v. White Deer Indep. Sch. Dist., No. 11807 (100th Jud. Dist. Ct., Carson Cty., Tex. filed Sept. 15, 2015) (on file with the Op. Comm.).

[3] The ASATR is expected to be eliminated in 2017. See TEX. EDUC. CODE § 42.2516(c-1). Several bills in the 2017 Legislative Session provide for an extension to the ASATR. See, e.g., Tex. H.B. 308, 85th Leg., R.S. (2017), Tex. H.B. 527, 85th Leg., R.S. (2017).

[4] School districts may collect two discrete annual ad valorem taxes: one to pay debt service on bonds issued for school buildings and other related purposes, and one for the further maintenance of public schools in the district. See TEX. EDUC. CODE §§ 45.001(a)(2), .002.