The Ohio Constitution’s protection against retroactive laws does not apply to local governments, the Ohio Supreme Court ruled today. The decision rejected a claim by Toledo, Dayton, and Cleveland public school districts that the state unfairly withheld school funding a decade ago based on disputed student enrollment.

A majority of the Supreme Court ruled the “retroactivity clause,” Article II, Section 28 of the Ohio Constitution, applies to individuals and private corporations, and not to political subdivisions created to carry out the state’s governmental functions. The opinion, authored by Justice Sharon L. Kennedy, permitted the General Assembly to retroactively adjust local school funding and recoup overpayments to school districts by making reductions in future school funding allocations.

In separate concurring and dissenting opinions, three justices maintain the clause does protect local governments.

School Head Counts Disputed
State funding for Ohio public schools is determined by the School Foundation Program, which is R.C. Chapter 3317, and administered by the Ohio Department of Education (ODE). One component in calculating a school district’s funding is the district’s average daily membership (ADM). For fiscal year 2005, a district’s ADM consisted of the number of students actually receiving educational services from the district plus the total number of students entitled to attend the district but educated elsewhere, including at community schools, also known as charter schools.

In 2005, school districts certified the ADM with a one-time October student count. Enrollment changes occurring outside of the October count did not increase or decrease state funding, except for one exception that increased funding to account for students found to be attending community schools that were not included in the October count.

Community school funding was not determined by the one-time October count, but rather was based on a monthly report the schools submitted to ODE, called the Community School Average Daily Membership (CSADM). Based on the CSADM, a deduction was made to a school district’s state funding to pay the community schools in the district for educating students.

During fiscal year 2005, the department noticed the number of community school students reported in the October counts by Toledo, Dayton and Cleveland, were higher than those in the CSADMs. Believing the CSADMs to be more accurate, ODE alleged the October counts were too high for those three districts and recalculated their school funding for the year.

The recalculation, which ranged from 561 students in Toledo to 688 in Dayton, led the department to conclude the districts were overpaid for fiscal year 2005. ODE recouped the overpayments by deducting school-foundation funding for the rest of fiscal year 2005 and for fiscal years 2006 and 2007, which resulted in total reductions of $3.6 million to Toledo, $2.5 million to Dayton, and $1.9 million to Cleveland.

Cincinnati School District also received a reduction and challenged it in a 2007 lawsuit against ODE, arguing state law mandated payments based on the October count and without factoring in the CSADM. As the litigation was pending, the General Assembly amended state law allowing the department to adjust ADM-based funding if an error was discovered. In a 2009 state budget bill, the legislature added a provision to immunize the department from any legal claim brought by a school district for reducing school-foundation funding for fiscal years 2005 through 2007. Cincinnati settled its lawsuit against the state and is not part of this litigation.

In 2011, Toledo, Dayton, and Cleveland initiated lawsuits that sought to order ODE to return the funds it subtracted from the districts between 2005 and 2007. The cases were consolidated in Franklin County Common Pleas Court, where ODE argued by the change in state law, it was immune from liability. The trial court ruled the elimination of potential liability through the budget bill provision was unconstitutionally retroactive.

The Tenth District Court of Appeals affirmed the trial court’s decision, finding the law in place during fiscal years 2005 to 2007 gave the school districts substantive rights and it was unconstitutional to retroactively impair their rights. ODE appealed to the Supreme Court, which agreed to hear the case.

Retroactivity Clause Added in 1851
The department maintained the retroactivity clause protects private parties and not arms of the state. While the term “retroactive” is not defined in the state constitution, the department points to historical cases and text indicating that drafters of the 1851 Constitution knew the term meant it did not apply to government bodies. The school districts countered that the drafters agreed to an absolute prohibition that included protection to local governments and argued past Ohio Supreme Court rulings have afforded the protection to local governments.

Justice Kennedy noted Article II, Section 28 states: “The general assembly shall have no power to pass retroactive laws, or laws impairing the obligation of contracts; but may, by general laws, authorize courts to carry into effect, upon such terms as shall be just and equitable, the manifest intention of parties, and officers, by curing omissions, defects, and errors, in instruments and proceedings, arising out of their want of conformity with the laws of this state.”

She stated that the Court has noted the literal meaning of the statute absolutely prohibits the legislature from passing any law that affects rights that are occurring, but also found that retroactivity is not always forbidden. She wrote that the Court must look at the purpose of the retroactivity clause before determining if a statute offends it.

She explained at the time Ohio constitutional framers were considering the clause, New Hampshire, Missouri, Tennessee, and Texas had adopted constitutional provisions prohibiting retroactive laws. She noted an 1818 New Hampshire case and an 1849 Texas case concluded that retroactive statutes applied only to individuals and private organizations, and that public officers consent to the alterations of their institutions if the public deems a change.

By 1847, the U.S. Supreme Court had recognized that public corporations, such as cities and counties, did not enjoy the same protections as individuals, Justice Kennedy explained. She cited a U.S. Supreme Court decision allowing a state legislature to revoke a previous grant of funds to a county. She wrote that deliberations at the Ohio constitutional convention revealed the advocates for the clause understood it to apply only to individuals and private corporations, and that Ohio Supreme Court decisions after its passage reflected their thinking.

“This court’s precedent in the years following the enactment of Article II, Section 28 provides further support for finding that the Retroactivity Clause applies to private citizens and corporations but not to political subdivisions. We have rejected retroactivity challenges to legislation that sought to impose a new duty and/or create a new obligation upon political subdivisions, consistently finding that the state is able to injuriously affect its own rights,” she wrote.

She noted three cases where the Ohio Supreme Court had ruled new state laws were unconstitutionally retroactive, two requiring refunds of taxes and tax penalties already collected by a county, and a third involving requests to correct a county’s errors in property valuation. She wrote that in those cases there was “an assumption that the protection afforded by the Retroactivity Clause is available to political subdivisions,” but there was not an express ruling affirming that political subdivisions have rights protected by the clause.

She cited the Court’s 1988 Avon Lake City School District v. Limbach as the decision providing the strongest support for the argument that political subdivisions are not protected. The Avon Lake case dealt with property valuations, and a challenge by the school district that its constitutional due process rights were violated by the Ohio Board of Tax Appeals when it would not consider the district’s appeal. The Court ruled that political subdivisions cannot assert their constitutional protections against the state, its creator.

“Accordingly, we have recognized that political subdivisions are not entitled to all protections afforded by the Constitution,” Justice Kennedy wrote.

Because political subdivisions are not protected by the retroactivity clause, the legislature could retroactively authorize the department to adjust local school funding calculations based on errors and to immunize the department against any legal claim from the school districts, the Court concluded.

The Court reversed the decision of the Tenth District Court of Appeals, and remanded the matter to the trial court for further proceedings.

Chief Justice Maureen O’Connor and Justices Terrence O’Donnell and Judith L. French joined Justice Kennedy’s opinion.

Retroactivity Clause Does Not Apply, Concurring Opinion States
In a concurring opinion, Justice Paul E. Pfeifer wrote that he would join two dissenting justices in finding the retroactivity clause is absolute and that it applies to laws impacting local governments. However, he maintained in this case the retroactivity clause did not apply because the school districts had no reasonable expectation that ODE was prohibited from reassessing enrollment figures and distributing funds accordingly.

“The ODE is not powerless to dispute enrollment figures submitted by the districts and to adjust the funds to be distributed,” he wrote.

Justice Pfeifer noted that prior rulings by the Court granted protection to local governments from retroactive laws and stated that this ruling eliminates any protection political subdivisions have from future retroactive state laws. Referring to the majority’s position as imposing “the nuclear option,” Justice Pfeifer warned, “The majority removes an important check on the power of the General Assembly. This court – not our Constitution – has given the clear green light to the General Assembly to assert a power it had no reason to believe it had until today.”

Clause Absolute, Dissent Asserts
In his dissent, Justice William M. O’Neill wrote the retroactivity clause is a restraint on the General Assembly, and the legislature is without constitutional authority to retroactively “adjust” the school funding laws to extinguish the rights of the school districts to enforce a valid law.

Justice O’Neill explained that the Tenth District did a proper analysis regarding the application of a retroactive law. Once a court determines a law is intended to apply retroactively, it must determine if the law is remedial to fix an error or if it is substantive. If it is substantive, then it is forbidden.

He noted the Court applied constitutional protections to a school district in a 1963 case (State ex rel. Kenton City School Dist. Bd. of Edn. v. State Bd. of Edn.) regarding the same school funding foundation formula law at issue in this case. The Kenton City ruling indicated the law entitled the school district to funding from the state through the formula and the school district could go to court to enforce its right to the funds.

“Unlike the current law, the law in effect for fiscal years 2005 through 2007 provides no departmental discretion to modify the statutory formula, yet that is what the department did. There is nothing any of the three branches of government can do to change what the law was at the time these funds were wrongfully withheld from public schools,” he wrote.

Justice Judith Ann Lanzinger joined the dissent.

2014-1769. Toledo City School Dist. Bd. of Edn. v. State Bd. of Edn., Slip Opinion No. 2016-Ohio-2806.

View oral argument video of this case.

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