Can the Hamilton County Commission withhold PILOT (payment in lieu of taxes) funds intended for schools rather than passing them straight through to the Hamilton County School Board?

Subject

Opinion No. 11-19, Hamilton County Commission Withholding PILOT Funds from Hamilton County School Board, February 28, 2011

Plain-English summary

A PILOT (Payment In Lieu Of Taxes) agreement is the standard economic-development tool by which a county exempts a business from ad valorem property tax in exchange for a contractually-fixed payment, typically calculated as the taxes that would otherwise be assessed. In Hamilton County, a particular PILOT agreement directed the payments to the County Trustee, who would deposit them in the County general fund for the "educational use and benefit of the County."

In past practice, the County Trustee paid those funds directly to the Hamilton County School Board on receipt, and the Board used them as it saw fit. A proposed Commission resolution would change that: the Commission would retain the funds in a separate capital improvement, maintenance, real-property-acquisition, construction, and identified-special-needs account for the school system, rather than passing them through to the Board for general use.

The state representative for the Chattanooga area asked the AG whether the Commission could legally do that. The AG said yes:

1. Commission has budgetary discretion. When the School Board proposes a budget, the Commission's role is to consider and either approve or reject it; the Commission cannot make line-item changes that intrude on Board discretion. But the AG was informed that the current Board-proposed, Commission-approved school budget did not include the disputed PILOT funds. The funds had been treated as additional funds over and above the budget. So withholding them does not contradict the Commission's budgetary duties.

2. PILOT payments are not "school revenues" under Tenn. Code Ann. § 49-3-315. That statute requires county trustees to apportion "school funds for current operation and maintenance purposes collected by any county . . . received from the state, county and other political subdivisions, if any" among the LEAs (local education agencies) on the basis of WFTEADA (weighted full-time equivalent average daily attendance). The AG read the statute strictly. "In lieu of" payments, by definition, are something other than taxes. Black's Law Dictionary defines "in lieu of" as "instead of," "in place of," or "in substitution of." The funds are not tax revenues, even though they are calculated to equal the foregone tax. They also are not "school revenues" received from the state, county, or political subdivisions; they are payments from a private business.

3. Case law supports the narrow reading. Oak Ridge City Schools v. Anderson County, 677 S.W.2d 468 (Tenn. Ct. App. 1984), addressed a city school system's claim to a pro rata share of PILOT funds the county received from the Tennessee Valley Authority. The trial court (affirmed on appeal) held that because TVA is a federal entity, its PILOT funds were not "received from the state, county [or a] political subdivision" and thus § 49-3-315 did not compel apportionment. The Court of Appeals relied on Conger v. Madison County, 581 S.W.2d 632 (Tenn. 1979), which had read the predecessor statute narrowly. See also Crider v. County of Henry, 295 S.W.3d 269 (Tenn. Ct. App. 2009).

4. The PILOT agreement's own structure points to county discretion. The agreement here provides that the company pays the County Trustee, and the Trustee deposits the funds in the County general fund for educational use. That structure puts the funds in county hands subject to county allocation choices, not in a school-fund pipeline that bypasses the Commission.

The bottom line: even though the PILOT funds are intended for education and calculated to mirror property taxes, the Commission retains discretion over how to apply them, and the proposed resolution directing them into a capital improvement account is legally permissible.

Currency note

This opinion was issued in 2011. 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.

Common questions

Why aren't PILOT payments treated as school taxes?

Because they are not taxes. The PILOT agreement structure is contractual: the business agrees to make a payment to the county, calculated by reference to what taxes would have been, in exchange for an ad valorem tax exemption. The legal character of the payment is contractual, not statutory taxation. § 49-3-315's apportionment rule applies to school funds collected as taxes by the county; PILOT payments fall outside that statutory channel.

What about the agreement's "educational use" language?

The PILOT agreement at issue characterized the funds as for the "educational use and benefit of the County" and even called them "educational funds." The AG concluded that label does not, on its own, compel direct payment to the School Board. The agreement also provided that the funds go to the County Trustee and then to the County general fund. Once in the general fund, they are subject to the Commission's appropriation power, just like any other county money.

Could the County Commission spend the PILOT funds on something completely unrelated to schools?

The AG opinion focuses on the dispute between the Commission and the Board over how to apportion education-designated funds. The PILOT agreement's "educational use" language likely constrains the Commission contractually to education-related spending. But it does not specify which education uses, so the Commission has discretion to direct the funds to capital improvements rather than to the Board's general operations.

Does the Commission's budget-approval power normally let it override Board priorities?

No. The AG cited multiple prior opinions (06-118, 04-098, 99-100) for the proposition that when a School Board proposes a budget, the Commission's role is to consider and accept or reject the budget, not to make line-item changes. The Commission cannot reach into the Board's appropriations and redirect specific items. But the disputed PILOT funds here had not been part of the Board's proposed budget, so the Commission's decision not to forward them is not an intrusion on Board discretion.

What about Oak Ridge and the federal TVA case?

In Oak Ridge City Schools v. Anderson County, the TVA PILOT funds were held not subject to apportionment under § 49-3-315 because TVA is a federal entity, not a state, county, or political subdivision. The Hamilton County PILOT is from a private business, but the same reasoning applies: the source is not within the statute's apportionment trigger. The court of appeals built on Conger v. Madison County, 581 S.W.2d 632 (Tenn. 1979), which interpreted the predecessor statute the same way.

Could a different PILOT agreement work differently?

Possibly. The AG's analysis turned on the structure of this particular agreement, which directed funds to the County Trustee and County general fund. A PILOT agreement that more clearly designated the funds for direct payment to the School Board might be enforceable on those contractual terms. The agreement language matters.

Background and statutory framework

Tenn. Code Ann. § 49-3-315 governs how a county trustee apportions "school funds for current operation and maintenance purposes collected by any county" among the LEAs in the county. The statute provides (in pertinent part):

(a) For each LEA there shall be levied for current operation and maintenance not more than one (1) school tax for all grades included in the LEA. Each LEA shall place in one (1) separate school fund all school revenues for current school operation purposes received from the state, county and other political subdivisions, if any. . . . All school funds for current operation and maintenance purposes collected by any county . . . shall be apportioned by the county trustee among the LEAs in the county on the basis of the WFTEADA maintained by each, during the current school year. . . .

"WFTEADA" (weighted full-time equivalent average daily attendance) is defined in Tenn. Code Ann. § 49-3-302(18).

The case law applying § 49-3-315 (and its predecessor) to PILOT funds:

• Conger v. Madison County, 581 S.W.2d 632 (Tenn. 1979): read predecessor Tenn. Code Ann. § 49-614 to require apportionment only when funds were received by the county "from the state, county and other political subdivision[s]."
• Oak Ridge City Schools v. Anderson County, 677 S.W.2d 468 (Tenn. Ct. App. 1984): held TVA PILOT funds were not subject to apportionment under § 49-3-315 because the TVA is a federal entity, not a state, county, or political subdivision.
• Crider v. County of Henry, 295 S.W.3d 269 (Tenn. Ct. App. 2009): extended the same principle.

The AG's prior budget-allocation opinions:

• Op. Tenn. Att'y Gen. 06-118 (July 27, 2006), 04-098 (June 24, 2004), and 99-100 (May 4, 1999) explain that the Commission's role on a school budget is to consider and accept or reject the proposed budget, not to make line-item changes within it.

Putting these pieces together: the Commission's decision to retain PILOT funds in a separate capital-improvement account is not a line-item change to the Board's budget (because the PILOT funds were not part of the Board's proposed budget); it is not a violation of § 49-3-315 (because PILOT funds are not tax revenue or "school funds" received from the state, county, or political subdivisions); and it does not contradict the PILOT agreement (which directs funds to the County Trustee and then the County general fund for educational use). The Commission may therefore segregate the funds for the capital, maintenance, real-property-acquisition, construction, and special-needs purposes the proposed resolution identifies.

Citations

• Tenn. Code Ann. § 49-3-315 (apportionment of school funds)
• Tenn. Code Ann. § 49-3-302(18) (WFTEADA definition)
• Oak Ridge City Schools v. Anderson County, 677 S.W.2d 468 (Tenn. Ct. App. 1984)
• Conger v. Madison County, 581 S.W.2d 632 (Tenn. 1979)
• Crider v. County of Henry, 295 S.W.3d 269 (Tenn. Ct. App. 2009)
• Op. Tenn. Att'y Gen. 06-118 (July 27, 2006)
• Op. Tenn. Att'y Gen. 04-098 (June 24, 2004)
• Op. Tenn. Att'y Gen. 99-100 (May 4, 1999)
• Black's Law Dictionary 708 (5th ed. 1979)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-019.pdf

Original opinion text

Hamilton County Commission Withholding PILOT Funds from Hamilton County School Board

QUESTION

Can the Hamilton County Commission legally withhold from the Hamilton County School Board PILOT funds intended for schools?

OPINION

In this instance, the disputed PILOT funds are not required to be paid directly to the Hamilton County School Board when they are received and may be retained by the Hamilton County Commission.

ANALYSIS

This question concerns a dispute between the Hamilton County Commission ("the Commission") and the Hamilton County School Board ("the Board") regarding certain funds received by the County pursuant to a PILOT ("Payment In Lieu Of Taxes") agreement.

A PILOT agreement, in this instance, is an agreement between Hamilton County and a local business whereby, for purposes of encouraging the business to locate in the community and to assist the business with financing, the business is made exempt from ad valorem property taxes. The agreement provides, however, that the business will make payments in lieu of taxes to the County in an amount equal to the taxes that would otherwise be paid to the County and that these funds are intended for education. It appears that in previous years these funds, when received by the County Trustee, have been paid directly to the Board for use as the Board saw fit. Pursuant to a proposed resolution before the County Commission, however, the Commission would retain these funds in a separate capital improvement fund for the School System. The proposed resolution before the Commission states that the funds

shall be tendered by said Trustee to the County general fund to be segregated and designated exclusively for the capital improvement, maintenance, acquisition of real property, construction, and identified special needs of Hamilton County Schools.

It is our understanding that the current school budget, which was previously proposed by the Board and approved by the Commission, does not include the funds at issue here. Rather, these funds have previously been paid by the County to the Board as additional funds over and above the Board's budget. The proposed resolution quoted above therefore proposes a change in the way the PILOT funds will be handled by the County.

As we have discussed in a number of previous opinion letters,¹ when a School Board proposes a budget to a County Commission, it is the duty of the Commission to consider the budget and either approve or reject it. It is outside the scope of the Commission's powers to make internal changes to the budget, such as line item changes, which fall within the province of the Board. Here, the budget proposed by the Board to the Commission was approved, and we are informed that the budget included none of the funds in dispute here. Therefore, the Commission's withholding of the disputed funds would not be contrary to its budgetary duties.

One argument against the legality of withholding the funds could be based upon Tenn. Code Ann. § 49-3-315 (2009), which deals with the distribution of county funds to school districts. That section states, in pertinent part:

(a) For each LEA there shall be levied for current operation and maintenance not more than one (1) school tax for all grades included in the LEA. Each LEA shall place in one (1) separate school fund all school revenues for current school operation purposes received from the state, county and other political subdivisions, if any. . . . All school funds for current operation and maintenance purposes collected by any county . . . shall be apportioned by the county trustee among the LEAs in the county on the basis of the WFTEADA² maintained by each, during the current school year. . . .

(emphasis added).

Based upon this provision, it may be argued that the PILOT funds are intended to be school revenues. The PILOT agreement at issue provides that the "in lieu" funds will be paid to the County Trustee, who will disburse the funds to the County general fund for the "educational use and benefit of the County." And the funds are in the same amount as the school taxes that would have been assessed and paid, but for the PILOT agreement. Thus, the argument would be that the funds should be treated as "school funds" under Tenn. Code Ann. § 49-3-315 and paid to the Board.

Nevertheless, the funds at issue are clearly not tax revenues. The funds are defined in the PILOT agreement as payments "in lieu of" taxes. Black's Law Dictionary defines "in lieu of" as "instead of," "in place of," or "in substitution of."³ This indicates that the payments are something other than taxes, regardless of how they are calculated or how they are intended to be used. Nor are the payments "school revenues" that have been received from "the state, county and other political subdivisions . . ." as described in Tenn. Code Ann. § 49-3-315. That section therefore does not compel the payment of the PILOT funds to the Board.

This conclusion is further supported by Tennessee case law. In Oak Ridge City Schools v. Anderson County, 677 S.W.2d 468 (Tenn. Ct. App. 1984), a city school system sued the county seeking a declaratory judgment that the county was required to pay the city school system its pro rata share of funds received from the Tennessee Valley Authority (TVA) pursuant to a PILOT agreement between TVA and the County. Rejecting an argument premised upon Tenn. Code Ann. § 49-3-315 (1983), the trial court found that because the TVA is a federal entity, the PILOT funds received by the county were not "received from the state, county [or a] political subdivision." Oak Ridge, 677 S.W.2d at 469. On appeal, the Tennessee Court of Appeals affirmed this holding, relying upon the reasoning of the Tennessee Supreme Court in Conger v. Madison County, 581 S.W.2d 632 (Tenn. 1979). In that case, the Court held that Tenn. Code Ann. § 49-614 (Supp. 1978) (now § 49-3-315) required the apportionment of funds only when the funds were received by the county "from the state, county and other political subdivision . . . ." Oak Ridge, at 470-71.⁴

Consequently, regardless of the similarity of the PILOT funds to school taxes, they are clearly not school taxes. Nor does the characterization of the funds in the PILOT agreement as "educational funds" or "school funds" compel their payment directly to the Board. This is particularly true where the same agreement provides that the funds will be paid by the company to the County Trustee, and that the County Trustee will pay the funds to the general funds of the County, and "deposited into an account for the educational use and benefit of the County." Accordingly, the PILOT funds in dispute here are not required to be paid directly to the Board and may be retained by the Commission.

ROBERT E. COOPER, JR.
Attorney General and Reporter

GORDON W. SMITH
Associate Solicitor General

KEVIN STEILING
Deputy Attorney General

Requested by:
The Honorable JoAnne H. Favors
State Representative
35 Legislative Plaza
Nashville, TN 37243