Can an Arkansas school district donate a former school building to a city or nonprofit when it may still be tied to bond debt?

Plain-English summary

Senator Stephanie Flowers asked whether a school district could donate a former middle school campus to Keep Redfield Middle School, a nonprofit group, or to the City of Redfield. She also asked whether bond debt traceable to the property would prevent a donation.

The AG answered that a donation was possible, subject to important statutory and constitutional limits. Act 318 of 2013 broadened A.C.A. § 6-21-108 to permit donations of surplus property to cities and nonprofits, among other recipients. The statute's permission did not settle the constitutional question. The AG said a reviewing court might examine whether the donation actually benefited the district's students, while giving substantial deference to the school board's judgment. He doubted that a district could simply give away surplus property without first considering a more advantageous alternative, such as selling it for revenue.

The AG did not decide whether the proposed Redfield gift would pass that test. The recipient's intended use was unclear, and the opinion did not establish whether the property was surplus or marketable. Avoiding maintenance costs on unmarketable surplus property might provide the necessary student benefit, but the court would have to consider the facts.

On the bond question, the AG said neither the Arkansas Constitution nor the cited statutes independently bar donation of property securing bonded debt. Whether the bond instruments restrict a particular donation is a contract question for someone familiar with their terms. The third question, conditional on a categorical bar from debt, was therefore moot.

What this means for you

School boards considering a gift

The opinion says to examine whether the property is truly surplus, whether a sale or another use would benefit students more, and what benefit the proposed donation would bring to district pupils. A court would review the facts and give the board substantial deference. The AG did not assign district counsel a special power to approve the gift.

Cities and nonprofits receiving school property

Being an authorized recipient under Act 318 does not itself resolve the constitutional issue. The opinion says the recipient's intended use may matter when a court asks whether the gift benefits district students. It also identifies a possible Ark. Const. art. 12, § 5 question for gifts to nonprofits, without resolving that question.

Districts with outstanding bonds

Read the bond instruments. The AG said any debt-related restriction would depend on their contract terms; the opinion did not decide whether the Redfield property could be donated under its particular bond documents.

Currency note

This opinion was issued in 2014. Verify current statutes, bond terms, and later decisions before applying it to a new transfer.

Common questions

Did Act 318 make every school property donation lawful?
No. The AG said some applications of the amended statute might be unconstitutional if the gift did not benefit the district's students.

Did the AG approve the Redfield donation?
No. The opinion lacked the facts needed to decide whether that property was surplus, whether a better alternative existed, and how the recipient would use it.

Can avoiding maintenance costs count as a student benefit?
The AG said avoiding established future costs by donating unmarketable surplus property would presumably pass the constitutional test because the savings benefit pupils. He questioned giving property away without considering a sale or another more advantageous use.

Does bond debt automatically bar a donation?
No. The AG said the constitution and statutes did not independently foreclose donating property securing debt. Restrictions, if any, would come from the bond instruments.

Background and statutory framework

Act 318 of 2013 amended A.C.A. § 6-21-108 to broaden eligible recipients and permissible uses of donated school property. The AG saw tension between that broader statutory text and the constitutional requirement that district resources serve the education of district pupils. He said a court might scrutinize the practical student benefit while deferring substantially to the board's educational judgment. He also raised, without deciding, whether Ark. Const. art. 12, § 5 could affect a gift to a nonprofit. The opinion cites no named judicial decision or burden of proof for a challenger.

Citations

• Act 318 of 2013 and A.C.A. § 6-21-108 (donation authority discussed by the AG)
• Ark. Const. art. 14, § 3 (school funds used for school purposes)
• Ark. Const. art. 12, § 5 (possible issue for gifts to nonprofits)

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Original opinion text

Opinion No. 2013-116
January 28, 2014
STATE OF ARKANSAS
THE ATTORNEY GENERAL
DUSTIN McDANIEL
The Honorable Stephanie Flowers
State Senator
104 Main Street, Suite C
Pine Bluff, Arkansas 71601
Dear Senator Flowers:

I am writing in response to your request for my opinion on the following questions:

1. Can a school district donate real property according to state and federal guidelines and laws?
2. If it is determined that any portion of outstanding bond money is owed that is traced to that property, can the district donate the property?
3. If the answer to question two is "no," and it is possible to donate under question one, what would the district be required to do in order to donate the property?

You report that these questions relate to the proposed donation of a former middle school campus "to either the 501c3 group Keep Redfield Middle School or possibly to the City of Redfield." Based upon this report, I assume that the school district has determined that this property is "surplus" inasmuch as it is not currently serving the educational interests of the district's pupils.

RESPONSE

In my opinion, the answer to your first question is "yes," subject to certain significant constitutional and statutory restrictions. In summary, I question that a school district could simply give away surplus property without first determining that no more advantageous use of the property exists, even if that "use" is simply to realize financial benefits in the form of sales revenues. Assuming the property is reasonably deemed surplus and, possibly, unmarketable, a donation of the property pursuant to A.C.A. § 6-21-108, as recently amended, might withstand scrutiny as constitutional. Recent legislation purports to grant relatively broad, although not unrestricted, donative authority to school districts, including the power to donate realty to nonprofit corporations and cities. This legislation might be read as authorizing donations that exclusively serve interests other than those of the district's pupils. Notwithstanding this fact, in my opinion, a reviewing court might well review any donation of district property to ensure that the gift, in accordance with constitutional mandates, indeed serves the educational interests of the district's students. In conducting any such review, a court would nevertheless accord substantial deference to the district board's discretion in determining what will benefit the district.

With respect to your second and third questions, only a finder of fact acquainted with all the attendant circumstances, including the terms of pertinent bond instruments, could determine whether a school district is precluded from donating property due to the existence of a bonded indebtedness that might be "traced to" the property. In my opinion, these questions implicate only contract law, which in no way qualifies the principles of constitutional law addressed in my response to your first question. Neither the Arkansas Constitution nor the Arkansas Code forecloses the donation of property that secures a bonded indebtedness.

Question 1: Can a school district donate real property according to state and federal guidelines and laws?

In my opinion, although the answer to this question as phrased is "yes," both the Arkansas Constitution and the Arkansas Code restrict the circumstances under which a school district may donate its property. The permissibility of a school district's donating property is not addressed directly by federal law.

Circumscribing any inquiry regarding a disposition of school district assets is the constitutional mandate that school district resources invariably be devoted to benefiting K-12 district students. In this regard, the Arkansas Constitution directs that "the State shall ever maintain a general, suitable and efficient system of free public schools" and that taxes levied for maintenance and operation of the schools will be used exclusively for that purpose. Also bearing on any such inquiry are the various statutory directives discussed below, including the mandate restricting a school board's actions to ones "necessary and lawful for the conduct of efficient free public schools in the district."

This office has opined on various occasions that a school district would in all likelihood be deemed barred, whether by statute or by constitutional directive, from simply donating property under circumstances not designed to benefit the students of the school district. The statutory provisions in effect today, however, are not the same as those in effect on the previous occasions this office has opined on this issue. I will accordingly review below the current pertinent statutes, discussing in the process their application in light of controlling constitutional principles.

School-district donations as addressed by Act 318 of 2013: In Act 318 of 2013, the General Assembly expressly authorized school districts to donate real property under specified circumstances. Section 3 of Act 318, dealing generally with the power of school districts to donate real property, amended A.C.A. § 6-21-108 in ways that clearly broaden the range of authorized donees, the range of intended beneficiaries, and the range of permissible uses. Pursuant to this amendment, a district may now donate its surplus real property to counties and cities, among other previously designated donees such as "a not-for-profit organization." The amendment further authorizes donations that merely "serve a beneficial educational service" for the district's "citizens," as distinct from the "pupils" designated prior to the amendment. A broadening of authorized "beneficial educational services" is further reflected in the amended subsection's catalog of "limited purposes" to which donated property might be put.

Application: Your constituents' underlying concern is apparently whether, pursuant to this statutory broadening, a district might donate a former middle school campus either to a nonprofit corporation or to the municipality in which the realty is located. It is unclear to what purpose either of these proposed recipients would put the donated property.

Subsection (b)(1), which deals with donation of surplus properties, conditions donations both with respect to recipients and authorized uses of the property. It is questionable, in my estimation, that all of those potential uses might be deemed to benefit the district's students, as Article 14, § 3 of the constitution requires. As previously noted, for instance, the catalog of permitted uses would not foreclose, say, a recipient city from using the property for purposes other than K-12 public education. A finder of fact might consequently conduct an intensive inquiry into how a recipient intended to use the donation contemplated in your question.

Subsection (b)(1) further does not appear to require a district contemplating a donation to conduct any preliminary inquiry into whether the property might not alternatively be sold and thereby benefit the district at least to the extent of generating income. The Code generally authorizes the "[b]uying, selling, renting, and leasing" of realty by a school district, presumably subject to a school board's broad discretion to pursue the educational interests of its students. The Code further authorizes a consolidated district to sell surplus realty at fair market value, apparently to any buyer for any purpose. Significantly, there appears to be no case law even challenging selling such property to any buyer for any purpose, so long as the proceeds are properly used to advance the education of district pupils.

In terms of constitutional propriety, it is difficult to distinguish between selling surplus property to anyone for any reason in order to realize revenues for education, a practice that is statutorily sanctioned and that does not appear to have triggered any constitutional challenge, and donating at least unmarketable surplus property in order to avoid an ongoing drain of school-district revenues. At least with respect to unmarketable surplus property, then, subsection (b)(1)'s authorization of donations to a limited range of donees might well pass constitutional muster.

Specifically with respect to the circumstances giving rise to your request, I suspect but do not know that the former Redfield Middle School is indeed surplus property. Even assuming that this property is "surplus," however, the underlying constitutional question remains whether saving a district the expense of maintaining such property would in itself warrant giving it away without further inquiry regarding such alternatives as selling it to realize income for the district or donating it subject to the condition that the district directly benefit from the donation. I question, in other words, that a district could simply give surplus property away without conditions without first determining that no more advantageous alternative exists.

Notwithstanding what might appear to be a categorical authorization to make donations to nonprofit corporations and cities under subsection (b)(1), a reviewing court, even displaying due deference to district board authority, might consequently feel compelled to consider the factual circumstances in order to determine whether a donation indeed benefits the district's students. Although subsection (b)(1) arguably authorizes donating property for a use that benefits the district in no way whatsoever, I question that a court would approve any such disposition as complying with constitutional imperatives.

With respect to donations in general, what is problematic in the statute as amended is that, except in its caption, it fails to require as the sine qua non of any donation that it provide the district's students an educational benefit. On the contrary, each of the subsections discussed above authorizes gifts to such entities as counties, cities and nonprofit corporations without any triggering need to dispose of the property, even though it is deemed surplus, and without requiring that the gift benefit district pupils by advancing an adequate K-12 education. It follows from the foregoing that I consider the statute as amended potentially unconstitutional in certain applications, possibly including the donation contemplated in your request.

Again, in order to pass constitutional muster, in my opinion, any donation of school-district property must have the practical effect of providing educational benefits to the district's public-school pupils. Avoiding established future costs by donating surplus property, at least when sale thereof is infeasible, would presumably pass this constitutional test inasmuch as the savings would benefit the district's pupils. Act 318, however, does not authorize donations solely to avoid financial distress that might threaten the public education of district pupils; rather, it further sanctions such donations as a means of pursuing other ends. To this extent, its application in particular instances might invite constitutional objection.

Specifically with respect to the possible donation of this property to a nonprofit corporation, I should further note the possible application of Ark. Const. art. 12, § 5, which provides that no county, city, town or other municipal corporation shall obtain or appropriate money for, or loan its credit to, any corporation, association, institution or individual. Although the Arkansas Supreme Court has long ago applied this constitutional provision to a school district, this office has more recently opined that a school district does not fall under this constitutional provision, not being a "county, city, town or other municipal corporation." In the event this provision indeed applies, it would appear to call into question the propriety of a school district donating property to a nonprofit corporation.

Question 2: If it is determined that any portion of outstanding bond money is owed that is traced to that property, can the district donate the property?

This question is materially indistinguishable from one answered in the attached Opinion 2012-060, to which I continue to subscribe. As I indicated in my previous opinion, the effect of a bonded indebtedness on the donation of district property "is purely a matter of contract law." Possible restrictions on donations, if any, would presumably be contained in the bond instruments, whose terms could only be reviewed in each instance by counsel fully acquainted with all the attendant circumstances. Neither the constitution nor the pertinent statutes discussed above independently foreclose the donation of property that secures a bonded indebtedness.

Question 3: This question is moot in light of my response to your previous question. Only a finder of fact acquainted with all attendant circumstances, including the terms of any bond instruments, could determine whether a donation is allowed if, as you phrase it, "outstanding bond money is owed that is traced to that property."

Assistant Attorney General Jack Druff prepared the foregoing opinion, which I hereby approve.

Sincerely,
DUSTIN McDANIEL
Attorney General
DM/JHD:cyh