A voter-approved property tax dedicated to public education cannot be diverted by a city to support bonds for other public purposes, the Arkansas Supreme Court ruled Feb. 21.

The court said the city of Fayetteville erred when it allocated a portion of a 2.75 mill increase in the property tax to support bonds for an economic development effort. The opinion upheld an earlier ruling by a circuit court in favor of Fayetteville School District No. 1.

The tax hike was approved by voters in 2010 to support $110 million of general obligation bonds to complete the district’s second high school.

The suit was filed in November 2011 when the county tax assessor certified 1.45 mills of the tax for support of $3.7 million of economic development bonds issued by Fayetteville.

The city created a downtown tax-increment financing district to fund the razing of several buildings for redevelopment as a hotel site. The hotel project has been canceled and the space is currently being used as a parking lot.

The court said the allocation violated a 2005 state law that prohibits the diversion of revenues from a property tax increase “if the additional money is pledged for repayment of a specific bond.” The Fayetteville TIF district was created 30 days before the law became effective.

The city contended that a 2007 judge’s order allowed the diversion, while the district said the earlier ruling applied to only the 2005 tax roll.

The school district’s outstanding tax-supported debt is rated Aa2 by Moody’s Investors Service.

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