Enhanced Scrutiny of Special Taxing Districts
By Charles Cole and Todd Osterloh
Threads of skepticism towards government are woven throughout the fabric of American legal history. Ever since colonists revolted against an overbearing English government and the principle of taxation without representation, Americans have raised questions as to the propriety of governmental action. This governmental distrust has led to a number of progressive federal laws, such as the Pendleton Act and the Freedom of Information Act, which have ultimately strengthened public perception of the federal government.
Locally, Kentucky citizens have shared this American suspicion of public institutions, and recently have begun to question the operation and oversight of Kentucky special taxing districts. In January 2012, citizens in Campbell and Kenton counties filed actions against the public libraries in their respective counties, questioning the correct procedure for increasing a library’s property tax rates through which the library funds its operations.
Library Funding Litigation
Both the Campbell County Public Library and the Kenton County Public Library were created pursuant to KRS 173.710 to 173.800, which provides for the formation of public libraries as taxing districts. When they were created, the libraries’ ad valorem tax rates were set and, pursuant to KRS 173.790, could only be changed based on a petition of 51 percent of the qualified voters voting at the last general election in each county in the district.
In 1979, after both the Campbell and Kenton county libraries were established, the General Assembly enacted House Bill 44, which was designed to reduce “the impact of inflation on property taxes, both state and local, without reducing necessary governmental services.” This Act was codified in KRS Chapter 132 and set a compensating tax rate to be used by taxing districts. After this 1979 enactment, the Campbell and Kenton county libraries adjusted their ad valorem tax rates in accordance with this law.
In the litigation filed in 2012, citizens challenged the libraries’ prior adjustments of ad valorem tax rates under House Bill 44. They maintain that libraries created prior to 1984 can only adjust their ad valorem tax rates with a petition signed by voters as described in KRS 173.790. In 1984, the General Assembly amended various statutes pertaining to taxing districts, including those related to public libraries. The 1984 enactment of House Bill 36 unified the formation of taxing districts, but it also authorized a method for increasing a taxing district’s ad valorem tax rates, not to exceed 0.2 percent of the assessed valuation of the property in the district, through the petition process.
The defendant libraries claim that the 1979 House Bill 44 was comprehensive and mandated that all taxing districts, including public libraries, set their ad valorem taxes based on the compensating tax rate. Throughout the years, the libraries had been receiving repetitive, consistent advice from the Department of Libraries and Archives that the libraries must set their ad valorem taxes based on the compensating tax rate. They further maintain that the 1984 enactment of House Bill 36 was merely designed to unify the method of creating taxing districts and should have no impact on the powers of taxing districts existing prior to 1984.
Both the Campbell Circuit Court and the Kenton Circuit Court determined that the two libraries improperly adjusted their ad valorem tax rates by not following the mandates of KRS 173.790. 6 The courts found that House Bill 44 was not in conflict with KRS 173.790 and did not repeal the statute. The courts further determined that the amendment to KRS 173.790 in House Bill 36, which explicitly distinguished library districts created before July 13, 1984, supported a finding that the Campbell and Kenton county libraries — and all other libraries created before that date — were bound to follow the tax amendment procedures set forth in KRS 173.790.
These two decisions have been appealed to the Court of Appeals. At least two other actions have been filed in other circuit courts on related issues but will likely wait for an appellate decision in the northern Kentucky cases before proceeding.
The Kentucky Court of Appeals will likely have to wrestle with the differences in how a library can amend its tax rate based depending on when the library was created, as highlighted in the Kenton Circuit Court order. In discussing the 1984 enactment of House Bill 36, the Kenton Circuit Court stated, “The statutes were otherwise left intact as applied to already existing public libraries and the procedures to be followed to increase or decrease the special ad valorem tax rate remained the same, with one type of library having two permissive methods of changing the rate and the other type of library, such as Kenton County, one mandatory method.” These differing methods, if upheld, highlight a microcosm that is indicative of statutes for many special districts in Kentucky.
Auditor’s Ghost Government Report
In 2012, Kentucky’s Auditor of Public Accounts undertook an examination of the status of special districts in the Commonwealth, and found that the statutory scheme for special districts was a “muddled morass of more than 50 chapters of law and more than 1,000 individual statutes.” As explained in the auditor’s report:
Special districts were originally authorized in the 1800s, with new or revised types of special districts being statutorily authorized at different times over many decades. As new types of special districts were authorized, those statutes were, in most cases, simply added to existing statutes, resulting in the complex, confusing, sometimes contradictory and vague patchwork of statutes that we have today.
Ultimately, the auditor identified the “most persistent problem” he encountered in studying special districts as “the confusion associated with trying to reconcile and understand the various statutes that apply to each type of special district.”11 He accordingly called for comprehensive statutory reform.
In addition to the auditor’s calls for statutory reform, concerns have been recently raised over special taxing districts in the Commonwealth for violating the basic proscription against taxation without representation.12
Taxing districts are overseen by unelected officials, who are only indirectly accountable to the public through the elected officials who appoint the governing members of the taxing districts. Although the Kentucky General Assembly has not enacted legislation to change the method of choosing these officials, it heeded these concerns (as well as those of the auditor) and enacted House Bill 1 in 2013 in order to provide greater oversight, transparency, and accountability for special districts.
Originally published in the Kentucky Bar Association Bench & Bar magazine, March 2014.