TN Opinion No. 11-68 September 15, 2011

If sales tax revenue falls short of estimates, does a Tennessee county still have to fully fund its schools at the budgeted level?

Short answer: Yes. A Tennessee county operating under the County Budgeting Law of 1957 must fully fund its school system as budgeted, at least to the level of estimated maintenance of effort, from non-sales-tax revenue sources if sales tax revenue falls short for the fiscal year. The local share of the Basic Education Program (BEP) and the Maintenance of Effort Rule both require local revenue to equal or exceed prior-year actual revenue (excluding capital outlay and debt service, adjusted for ADM).

Disclaimer: This is an official Tennessee Attorney General opinion. AG opinions are persuasive authority but not binding precedent. This summary is for informational purposes only and is not legal advice. Consult a licensed Tennessee attorney for advice on your specific situation.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official AG opinion. The original opinion (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

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Subject

Opinion No. 11-68, County Budgeting Law of 1957 and Funding of Schools, September 15, 2011

Plain-English summary

Representative Judd Matheny asked a real-world question that county budget officers in 2011 faced regularly. Tennessee counties operating under the County Budgeting Law of 1957 build their annual budgets in part on estimated sales tax revenues. If those estimates prove too optimistic and actual sales tax collections come up short during the fiscal year, is the county on the hook to still fully fund its school system as originally budgeted, using other revenue sources?

The AG said yes. Two doctrines combine to lock the county in.

The local share of the BEP. Tenn. Code Ann. § 49-3-356 requires every local government to appropriate funds sufficient to fund its local share of the Basic Education Program, the state's K-12 funding formula. The State provides 75% of classroom-component funding and 50% of nonclassroom-component funding, but the local government must put up its share. The statute even contains an enforcement teeth: "No LEA shall commence to the fall term until its share of the BEP has been included in the budget approved by the local legislative body."

The Maintenance of Effort (MOE) Rule. Tennessee has a long-standing anti-supplanting rule: local governments cannot use state funds to displace local school funding. State Board of Education Rule 0520-1-2-.13 puts it plainly: "Revenue derived from local sources must equal or exceed prior year actual revenues, excluding capital outlay and debt service, and adjusted for decline in average daily membership (ADM)." Tenn. Code Ann. §§ 49-2-203(a)(10)(A)(ii) and 49-3-314(c)(1) backstop the rule statutorily.

Together, those mean the county budget for schools is a floor, not a ceiling. The county committed to a level of effort at budget adoption. If sales tax revenue (or any other source) falls short, the county has to find the money from somewhere else (general fund, reserves, property tax adjustments, etc.) to deliver at least the prior-year MOE level and the local BEP share. The Tennessee Supreme Court reinforced this principle in State ex rel. Board of Education of the Memphis City Schools v. City of Memphis, 329 S.W.3d 465, 473-474 (Tenn. 2010), which held the Memphis-Shelby County school funding case turned on the MOE rule.

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.

Tennessee replaced the Basic Education Program with the Tennessee Investment in Student Achievement (TISA) formula in 2022, effective for the 2023-24 school year. The local-share and maintenance-of-effort principles continue to apply under TISA, but the specific statutory citations and funding mechanics have changed. Anyone analyzing a current county school funding obligation should look at the current statutes (Tenn. Code Ann. §§ 49-3-101 et seq. and successor provisions) rather than rely on the 2011 framework.

Background and statutory framework

The BEP framework. The Education Improvement Act of 1992 created the BEP, codified at Tenn. Code Ann. §§ 49-3-307; 49-3-354; 49-3-356. The State funds 75 percent of classroom-component costs and 50 percent of nonclassroom-component costs. Local governments must fund the remainder. The BEP equalizes funding by adjusting state contributions based on local fiscal capacity.

Local share statute. Tenn. Code Ann. § 49-3-356 (emphasis added by the AG): "The state shall provide seventy-five percent (75%) of the funds generated by the Tennessee BEP formula in the classroom components and fifty percent (50%) in the nonclassroom components as defined by the small state board. Every local government shall appropriate funds sufficient to fund local share of the BEP. No LEA shall commence to the fall term until its share of the BEP has been included in the budget approved by the local legislative body."

Anti-supplanting / MOE. Tenn. Code Ann. §§ 49-2-203(a)(10)(A)(ii) and 49-3-314(c)(1) prohibit local governments from using state funds to supplant local effort. State Board Rule 0520-1-2-.13(3)(a)&(b) (2009) operationalizes the MOE rule: local revenue must equal or exceed prior year actual revenues, excluding capital outlay and debt service, adjusted for ADM decline.

Judicial application. State ex rel. Board of Education of the Memphis City Schools v. City of Memphis, 329 S.W.3d 465, 473-474 (Tenn. 2010), applied the MOE framework to require sustained local funding effort.

Common questions

What if the county simply doesn't have the money?

The opinion is categorical that the obligation exists; it does not address the practical insolvency question. In practice, counties facing a shortfall would have to draw on reserves, redirect funds from other line items, raise property taxes, or seek emergency state assistance. The opinion's point is that the legal obligation is firm. Sales tax shortfalls are not an excuse.

Is there a cure if the budget was adopted in good faith based on revenue estimates?

No. The MOE rule is not waived by good-faith error in revenue estimation. A county that consistently underfunds its schools risks state intervention and, ultimately, court action by the LEA.

What's the "prior year actual revenues" baseline?

State Board Rule 0520-1-2-.13 calls it "[r]evenue derived from local sources … excluding capital outlay and debt service, and adjusted for decline in average daily membership (ADM)." So the baseline is the prior fiscal year's actual school-related local revenue, with two carve-outs (capital and debt) and one adjustment (declining enrollment).

What happens if the county refuses to fund the local share?

The statute says no LEA can commence fall term without budgeted local share. Practical enforcement involves the State Department of Education, the Comptroller, and ultimately the courts. The Memphis-Shelby case is the major reported example.

Does this opinion apply to municipal school systems?

The opinion's logic and statutory citations are general enough to cover any local government (county or city) funding a Tennessee LEA. The MOE rule applies to municipal school systems as well, on the same anti-supplanting basis.

Citations

Tenn. Code Ann. § 49-2-203(a)(10)(A)(ii)
Tenn. Code Ann. § 49-3-307
Tenn. Code Ann. § 49-3-314(c)(1)
Tenn. Code Ann. § 49-3-354
Tenn. Code Ann. § 49-3-356
Tenn. Comp. R. & Regs. 0520-01-02-.13
State ex rel. Board of Education of the Memphis City Schools v. City of Memphis, 329 S.W.3d 465 (Tenn. 2010)

Source

Landing page: https://www.tn.gov/attorneygeneral/opinions.html
Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-068.pdf

Original opinion text

September 15, 2011
Opinion No. 11-68
County Budgeting Law of 1957 and Funding of Schools

QUESTION

The annual budget in a county operating under the County Budgeting Law of 1957 is based, in part, on estimated sales tax revenue. If there is a shortfall in the actual sales tax revenues the county receives for the fiscal year, is the county financially responsible for providing full funding of the county school system as budgeted, at least to the level of the estimated maintenance of effort, from revenue sources other than sales tax revenues?

OPINION

Yes.

ANALYSIS

Public school education in Tennessee is funded through the Basic Education Program (BEP), which was created by The Education Improvement Act of 1992. Funding is derived from two primary sources, the State of Tennessee and local governments. The BEP sought to equalize educational opportunities throughout the State by adjusting the level of the State's overall funding of a local school system by the local government's funding capacity. See Tenn. Code Ann. §§ 49-3-307; 49-3-354; and 49-3-356. In other words, if a local government's funding capacity is limited, the State will make a greater overall percentage contribution to that particular school system than it would if the local school system had a greater capacity to fund itself. The level of funding is formulated by the Department of Education and the Department of Finance and Administration. See Tenn. Code Ann. § 49-3-354.

Pursuant to this statutory scheme, local governments are required to raise sufficient revenue to fund their local share. The linchpin statutory provision governing this funding responsibility for K-12 local education agencies (LEA) is Tennessee Code Annotated § 49-3-356, which states in pertinent part:

The state shall provide seventy-five percent (75%) of the funds generated by the Tennessee BEP formula in the classroom components and fifty percent (50%) in the nonclassroom components as defined by the small state board. Every local government shall appropriate funds sufficient to fund local share of the BEP. No LEA shall commence to the fall term until its share of the BEP has been included in the budget approved by the local legislative body.

Tenn. Code Ann. § 49-3-356 (emphasis added).

Additionally, local governments cannot use state funds to supplant local funds; local governments are required by the statutory funding scheme to maintain their effort of local support. See Tenn. Code Ann. §§ 49-2-203(a)(10)(A)(ii) and 49-3-314(c)(1); see also State ex rel. Board of Education of the Memphis City Schools v. City of Memphis, 329 S.W.3d 465, 473-474 (Tenn. 2010). This anti-supplanting mechanism is called the "Maintenance of Effort Rule", which is succinctly stated in State Board of Education Rule 0520-1-2-.13: "Revenue derived from local sources must equal or exceed prior year actual revenues, excluding capital outlay and debt service, and adjusted for decline in average daily membership (ADM)." See Tenn. Comp. R. & Regs. 0520-01-02-.13(3)(a)&(b)(2009); see also Tenn. Code Ann. §§ 49-2-203(a)(10)(A)(ii) and 49-3-314(c)(1).

Accordingly, pursuant to these statutory provisions and rules, a local governing body must maintain its level of funding effort.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

MELISSA ANN BRODHAG
Assistant Attorney General

Requested by:
The Honorable Judd Matheny
State Representative
15 Legislative Plaza
Nashville, TN 37243