The Court ruled a disputed 1990s tax-sharing agreement between the Warrensville Heights and Beachwood City School District is enforceable.

A tax-sharing agreement between the Warrensville Heights City School District and Beachwood City School District entered into in the 1990s is enforceable despite the agreement not being approved by the Ohio State Board of Education, the Supreme Court of Ohio ruled today.

In a 4-3 decision, the Supreme Court affirmed a split decision by the Eighth District Court of Appeals that the deal did not need state board approval. In its lawsuit against Warrensville Heights, Beachwood schools claimed the district was owed more than $5.5 million that Warrensville refused to release for tax years 2012 through 2017.

Writing for the Court majority, Chief Justice Maureen O’Connor explained that Warrensville Heights claimed that the deal was invalid because the school districts did not follow the state law overseeing the transfer of school district territory and the division of funds once territory is moved. But the negotiated deal did not require any actual transfer of territory. So, the contract between Beachwood and Warrensville Heights is enforceable without board approval, the chief justice concluded.

The Supreme Court remanded the case to the Cuyahoga County Common Pleas Court for further proceedings regarding Beachwood’s claims.

Justices Sharon L. Kennedy, R. Patrick DeWine, and Michael P. Donnelly joined Chief Justice O’Connor’s opinion.

In a dissenting opinion, Justice Patrick F. Fischer agreed with one of two arguments Warrensville Heights made regarding failure to follow state law on school contracting. Justice Fischer wrote that in order to share the money, the contract required the attachment of a fiscal certificate, affirming that the Warrensville Heights school district’s finances would not be negatively impacted by the transfer agreement. Because the agreement did not comply with R.C. 5705.412, the contract is invalid, he concluded.

In a separate dissenting opinion, Justice Melody Stewart wrote that the school districts needed the approval of the state board to enter into the tax-sharing agreement. She wrote the overall goal of the territory transfer law is to “protect the educational interests of schoolchildren affected” by the territory transfer, and she could not envision that state lawmakers would allow such a significant transfer of funds without state board approval.

Justice Jennifer Brunner joined Justice Stewart’s opinion.

School Districts Negotiate Future Revenues of Commercial Development
In 1990, the city of Beachwood annexed 405 acres of land known as Chagrin Highlands which was part of the Warrensville Heights City School District. Beachwood City Schools sought the state school board’s approval for the transfer of the land annexed by the city into the Beachwood city school district. Warrensville Heights schools objected. Under the version of R.C. 3311.06 in effect at the time, Warrensville Heights and Beachwood schools were obligated to negotiate to determine if a transfer agreement would be possible.

After several years of negotiations, the schools agreed to allow former Supreme Court of Ohio Justice and retired federal judge Robert Duncan to facilitate an agreement. In 1997, Duncan recommended that the Chagrin Highlands territory remain part of the Warrensville Heights school district but that the two schools start sharing tax revenues from the development once the property value exceeded $22 million. Once Chagrin Highlands exceeded the value, Warrensville Heights would receive 70% of the property tax revenues and Beachwood would receive 30%. The districts would also then “engage in joint educational programs and activities to benefit both districts,” according to the agreement.

School officials from both districts signed the agreement, and both school boards approved. As a condition of the agreement, Beachwood withdrew its request from the state board to annex the territory. Neither district asked the state board to approve the agreement.

Warrensville Heights Refuses to Share Revenues

In 2018, Beachwood schools sued Warrensville Heights for breach of contract for its refusal to share the Chagrin Highlands tax revenues, later adding other claims. In primary part, Beachwood claimed it was owed $5.57 million in tax revenues generated from 2012 to 2017.

Warrensville requested summary judgment from the trial court, and the trial court granted the motion, finding that school officials in 1997 “lacked the capacity to contract over the transfer of tax dollars” without state board approval. The trial court concludedthat the parties failed to follow the requirements of R.C. 3311.06 to obtain state board approval and, therefore, did not have an enforceable contract.

Beachwood appealed to the Eighth District. In a 2-1 decision, the Eighth District reversed the trial court, finding that state board approval was not required. The appellate court also rejected Warrensville Heights’ second argument that the contract was invalid because Warrensville Heights school leaders at the time did not include a fiscal certificate to the contract as required by R.C. 5705.412.

Warrensville Heights appealed to the Supreme Court, which agreed to hear both the claims that the agreement was invalid because of the lack of state board approval and the missing fiscal certificate confirming the district would not be financially harmed by the contract.

Supreme Court Analyzed Territory Transfer Law
Pursuant to state law, when a city annexes territory that includes part, but not all, of a school district’s territory, the annexed territory remains part of the school district unless the city follows the statutory procedures and obtains state board approval of the transfer of the territory into the annexing city’s school district.

R.C. 3301.06 provides the exclusive means for authorizing a transfer. Chief Justice O’Connor noted the question is whether, in the absence of an actual transfer of territory, R.C. 3311.06 requires state board approval. Warrensville Heights argued that because the law states a transfer of territory “or” the division of funds requires approval, the state board needed to approve the transfer even if no actual territory was transferred.

The Court concluded that the law only requires state board approval of the division of funds when a transfer of territory occurs. Since the agreement between Beachwood and Warrensville Heights did not transfer territory, it was not subject to R.C. 3311.06, the opinion stated.

Fiscal Certificate Applicability Assessed
In 1997, R.C. 5705.41 required all political subdivisions in the state to ensure government bodies set aside funding before making an expenditure. R.C. 5705.412 contained specific requirements for school districts, the opinion noted.

The law stated that for a school district to adopt “any appropriation measure, make any contract, give any order involving the expenditure of money, or increase during any school year any wage or salary schedule,” there must be a certificate signed by the school treasurer, superintendent, and school board president stating, in summary, that the school’s estimated revenues are sufficient to take the proposed action and ensure the district can operate an adequate educational program.

Warrensville Heights argued there was no such certificate attached to the resolution in 1997 and, without the certificate, the board in 1997 could not bind future school boards to the tax-sharing deal, the district maintained.

In rejecting the Warrensville Heights argument, the Court stated the law applies to contracts when schools “spend” public money. Warrensville Heights’ sharing of tax revenue received from Chagrin Highlands is not an expenditure, but “simply allocates collectable tax revenue between the two districts.”  Therefore, the Court concluded, the fiscal certificate was not required.

Certificate Applies to More Than Expenditures, Dissent Asserted
In his dissent, Justice Fischer stated the language of R.C. 5705.412 indicates the certificate is needed for more than actions to expend money. He wrote the law applies to four types of actions, of which making any contract and ordering an expenditure are listed as separate acts.

“The phrase ‘make any contract’ is broad and is not limited by any language requiring that the contract involve an expenditure or by any other language. Simply put, ‘any’ means any,” he wrote.

He stated the focus of the statute involves the broader “management of money,” not just spending it. The certificate was required to ensure Warrensville Heights could manage its finances when entering into the tax-sharing agreement, and because the districts did not comply with the law, the contract is unenforceable, he concluded.

Objective of Law Requires State Board Oversight, Dissent Maintained
Justice Stewart wrote that R.C. 3311.06 is a “remedial law,” and the legislature has made clear that remedial laws should be “liberally construed in order to promote their objective and assist the parties in obtaining justice.”

The transfer law sets out a procedure to request transfers of territory and the related division of funds with the goal of protecting the educational interests of schoolchildren affected by the territory transfer, the dissent stated. The division of funds, regardless of the actual transfer of territory, affects the educational interests of the Warrenville Heights students, Justice Stewart wrote. The law applies even when there is only the division of funds, the dissent stated, and the state board is empowered with assuring it is appropriate.

“Had the state board reviewed this matter, it would have done so ‘with primary consideration given to the present and ultimate good of the pupils in the affected districts,’” she wrote.

2020-1326. Beachwood City School Dist. Bd. of Edn. v. Warrensville Hts. City School Dist. Bd. of Edn., Slip Opinion No. 2022-Ohio-3091.

View oral argument video of this case.

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