                        ________________________

                        No. 95-1481EA, 95-1482EA
                        ________________________



     _____________                 *
                                   *
     No. 95-1481EA                 *
     _____________                 *
                                   *
                                   *
Little Rock School District;       *
                                   *
       Plaintiff-Appellee,         *
                                   *
Anne Mitchell; Bob Moore; Pat      *
Gee; Pat Rayburn; Mary J. Gage;    *
                                   *
       Intervenors-Appellees,      *
                                   *
North Little Rock Classroom        *
Teachers Association; Pulaski      *
Association of Classroom           *
Teachers; Little Rock Classroom    *
Teachers Association;              *   On Appeal from the United
                                   *   States District Court
       Intervenors,                *   for the Eastern District
                                   *   of Arkansas.
Alexa Armstrong; Karlos            *
Armstrong; Ed Bullington;          *
Khayyam Davis; Janice Dent;        *
John Harrison; Alvin Hudson;       *
Tatia Hudson; Milton Jackson;      *
Lorene Joshua; Leslie Joshua;      *
Stacy Joshua; Wayne Joshua;        *
Katherine Knight; Sara             *
Matthews; Becky McKinney;          *
Derrick Miles; Janice Miles;       *
John M. Miles; NAACP; Joyce        *
Person; Brian Taylor; Hilton       *
Taylor; Parsha Taylor; Robert      *
Willingham; Tonya Willingham;      *
                                   *
       Intervenors-Appellees,      *
                                   *
     v.                              *
                                     *

                                     *
Pulaski County Special School        *
District, #1; North Little Rock *
School District; Leon Barnes;        *
Sheryl Dunn; Mac Faulkner;           *
Richard A. Giddings; Marianne        *
Gosser; Don Hindman; Shirley         *
Lowery; Bob Lyon; George A.          *
McCrary; Bob Moore; Steve            *
Morley; Buddy Raines; David          *
Sain; Bob Stender; Dale Ward;        *
John Ward; Judy Wear;                *
Grainger Williams;                   *
                                     *
       Defendants-Appellees,         *
                                     *
The Arkansas State Board of          *
Education; State of Arkansas;        *
                                     *
       Defendants-Appellants,        *
                                     *
Office of Desegregation              *
Monitor,                             *
                                     *
       Claimant.                     *
                                     *
     _____________                   *
                                     *
     No. 95-1482EA                   *
     _____________                   *
                                     *
                                     *
Little Rock School District;         *
                                     *
       Plaintiff-Appellant,          *
                                     *
Anne Mitchell; Bob Moore; Pat        *
Gee; Pat Rayburn; Mary J. Gage;      *
                                     *
       Intervenors-Appellants,       *
                                     *
North Little Rock Classroom          *
Teachers Association; Pulaski        *
Association of Classroom             *
Teachers; Little Rock Classroom      *
Teachers Association;                *
                                     *
       Intervenors,                  *
                                     *
Alexa Armstrong; Karlos              *



                                    -2-
Armstrong; Ed Bullington;        *
                                 *
John Harrison; Alvin Hudson;
Tatia Hudson; Milton Jackson;    *
                                 *
Stacy Joshua; Wayne Joshua;
                                 *
       Intervenors-Appellants,
                                 *
Katherine Knight; Sara
Matthews; Becky McKinney;        *
                                 *
John M. Miles; NAACP; Joyce
Person; Brian Taylor; Hilton     *
                                 *
Willingham; Tonya Willingham;
                                 *
       Intervenors,
                                 *
     v.
                                 *
                                 *
                                 *
District, #1;
                                 *
       Defendant-Appellee,
                                 *
North Little Rock School
District; Leon Barnes;           *
                                 *
Richard A. Giddings; Marianne
Gosser; Don Hindman; Shirley     *
                                 *
McCrary; Bob Moore; Steve
Morley; Buddy Raines; David      *
                                 *
John Ward; Judy Wear;
Grainger Williams;               *

       Defendants,               *

The Arkansas State Board of      *
                                 *
                                 *
                                 *
                                 *
                                 *
Monitor,
                                 *
           Claimant.
                                    ___________

                     Submitted:     November 16, 1995

                           Filed:   May 15, 1996
                                    ___________

Before RICHARD S. ARNOLD, Chief Judge, HEANEY and WOLLMAN, Circuit Judges.
                                ___________



RICHARD S. ARNOLD, Chief Judge.


        In this case, we must decide whether certain actions by the State of
Arkansas and the Arkansas Department of Education (collectively referred
to as the State) run afoul of the Little Rock Schools Desegregation
Settlement Agreement.       The plaintiffs, the Little Rock School District
(LRSD) and the Pulaski County Special School District (PCSSD), claim that
they do, and the District Court agreed.          We affirm in part and reverse in
part.


                                           I.


        This case is made up of three distinct issues with three separate
sets of facts.    The facts themselves are not in serious dispute.         The legal
consequences attaching to those facts in light of the Settlement Agreement
are.


        Before 1994, the State of Arkansas bore the entire burden of funding
the workers' compensation programs for all school districts in the State.
This approach, quite naturally, did nothing to induce individual school
districts    to   take   measures   that    might   reduce   workers'   compensation
exposure.     Therefore, the Arkansas General Assembly changed the law to
require individual school districts to provide their own coverage beginning
July 1, 1994.     See Ark. Code Ann. §§ 6-17-1411 to 1413 (Repl. 1993).




                                           -4-
        In order to soften the blow brought about by this change, the State
distributed "seed money" to all school districts for the 1994-95 school
year.    The amount distributed to each school district was based on the
number of students in the school district, rather than the number of
employees needing coverage.     This approach resulted in school districts
statewide receiving about one-half of the cost of their coverage, but the
plaintiff districts received only about one-third of their coverage costs.
Whether the State may cease funding workers' compensation insurance for the
plaintiff districts, and, if so, whether the State must distribute to them
one-half or one-third of the initial cost in seed money is the first issue
that we must address.


        The second issue involves "loss funding," and the manner in which the
State computes the amount of loss funding due the Pulaski County Districts.
Loss funding was created by the General Assembly in 1993, see Ark. Code
Ann. § 6-20-302 (Repl. 1993), for the purpose of financially assisting
school districts with declining enrollments.    The driving force behind the
law is the notion that school districts suffering enrollment reductions are
never able to reduce staff and cut expenses as quickly as students leave.
Of course, when students leave a district, so does the state funding that
comes with them.    Loss funding helps finance the transition period.


        The crux of the problem here is the manner in which the State
computes the amount of loss funding due LRSD and PCSSD.      Loss funding is
normally computed by (and here we simplify) calculating the loss in Average
Daily Membership (ADM) in a district as compared to the average ADM of the
three previous years, then multiplying that number by a multiplier.
However, the State, when figuring loss funding for the Pulaski County
Districts, varied the standard formula where majority-to-minority (M-to-M)
transfer students are concerned.




                                     -5-
       M-to-M students are peculiar to the districts that are parties to the
Settlement Agreement.       They are students who are of the majority race in
their home districts, and who voluntarily transfer to another Pulaski
County district where they are of the minority race.          The State, by way of
a funding formula contained in the Settlement Agreement, compensates both
the home district and the receiving district for each M-to-M student.            The
home, or sending, district receives one-half of the state aid that it would
have received if the student had remained in the district, while the
receiving, or host, district receives the full cost of educating the
student.


       When the State computes loss funding for sending districts, it treats
M-to-M students as if they were still in the district.          In other words, it
adds M-to-M students who transfer out of the district back into the ADM
prior to calculating loss funding.        It does so even though these students
are no longer being educated by the sending district.               This approach
results in a reduction in the amount of loss funding paid to the sending
district where the M-to-M students transferring out of the district
outnumber those transferring in.         We must decide whether the Settlement
Agreement allows the State to reduce the plaintiff districts' loss funding
in this manner.


       The third issue arises out of the development of the Arkansas Public
School Computer Network (APSCN).          This statewide computer network for
public schools was mandated by the General Assembly.            Acts of 1989, No.
668.     Eventually, after consultation with representatives of all state
school     districts,   a   plan   was   developed   that    utilizes   educational
cooperatives in each Arkansas county to provide APSCN services.             Pulaski
County is the only county in the state that does not have an educational
cooperative.    However, the State did offer to provide APSCN services in
some form to the plaintiff districts.          (The Pulaski County districts were
initially left out of the APSCN plan altogether.            The Pulaski County




                                         -6-
districts were left out because their representatives at the development
meetings had so requested.      That problem is now irrelevant because when the
districts complained about the omission, the State amended its plan to
include them).


     Each school district in the state was given the same three options
under the plan.         First, a district could relinquish control over its
computer system operations and utilize the APSCN system provided through
the local educational cooperative, or Pulaski County's substitute for an
educational cooperative, which the State offered to create.                  Second, a
district could purchase, at its own expense, computer hardware identical
to the APSCN hardware, and software would be provided to the district free
of charge.   Finally, a district could use either existing or newly acquired
hardware that was different from that utilized by APSCN, but no software
or financial support would be provided.


     Some school        districts   found   all   three   of    these   options   to   be
unsatisfactory.     These districts were primarily those that already had
substantial investments in computer systems.         Thus, it would be unwise for
these districts to scrap their existing systems and utilize the APSCN
system.   The plaintiff districts are in this group.


     The District Court held that the State's actions in all three of
these sets of circumstances ran afoul of the Settlement Agreement.                     It
ordered the State to fund workers' compensation in the Pulaski County
districts    to   the   same   extent   that   funding    was    provided   statewide,
approximately one half of the cost of coverage.           It also ordered that the
State must exclude those M-to-M students lost to a sending district from
ADM for loss-funding purposes.       Finally, it ordered the State to pay over
to the Pulaski County districts the amount of funds spent on any other
educational cooperative in the state so that the Pulaski County districts
can install an APSCN-compatible computer system.




                                         -7-
                                    II.


     The parties spend some time addressing our standard of review.        In
this case we are applying the terms of a contract between the parties to
facts that have arisen since its creation.     As with any other case, we
review the factual findings of the District Court for clear error.        The
meaning of the terms in the Settlement Agreement, and their application to
the facts in this case, are legal questions over which we exercise plenary
review.


     This case is governed by the terms of the Settlement Agreement.       We
thus apply the terms of the Settlement Agreement to each of the sets of
facts before us.


                         A. Workers' Compensation


     The Settlement Agreement imposes upon the State an obligation to
continue to pay to the settling districts, among other things, "[t]he
State's share of any and all programs for which the Districts now receive
State funding."    Settlement Agreement § II, paragraph E.    The purpose of
this section of the Settlement Agreement is to prevent the State from
reducing other State aid in order to recoup the costs it incurred by way
of the Settlement Agreement.    Id. § II, paragraph L.   The State is also
barred from enacting any legislation that will have a "substantial adverse
impact on the ability of the Districts to desegregate."      Ibid.   However,
the same paragraph proceeds to read that "[f]air and rational adjustments
to the funding formula which have general applicability but which reduce
the proportion of State aid shall not be considered to have an adverse
impact on the desegregation of the Districts."   Ibid.


     Concisely put, the plaintiff districts argue that payment of workers'
compensation costs was a "program" for which they received "State funding"
when the parties entered into the Settlement




                                    -8-
Agreement.      Furthermore, to deprive them of those funds would have a
"substantial adverse impact" on their ability to desegregate.              The State,
conversely, argues that workers' compensation is not a "program" within the
contemplation of the Settlement Agreement.        Moreover, its decision to cease
funding the program was a "fair and rational adjustment" to a funding
formula that has "general applicability."        Thus, its discontinuation cannot
be said to have an adverse impact on desegregation.


     In a sense, both arguments are correct.          Workers' compensation         is
a service that school districts must provide.         While the State is correct
in its assertion that workers' compensation funding is not a direct
educational program, it is still an expense that districts must bear.
Assuming finite funds, workers' compensation payments will decrease the
funds available for more direct educational programs.             Moreover, State
payments for workers' compensation costs were a source of funds for school
districts when the parties entered into the Settlement Agreement.                Thus,
funding of workers' compensation by the State is a "program" for purposes
of the Settlement Agreement.


     On   the other hand, we do not believe that the State's action
regarding the "program" necessarily violates the Settlement Agreement.             The
program in effect at the time of the Settlement Agreement, as we see it,
was equal State funding of workers' compensation for all school districts.
Thus, the State can change its funding scheme for workers' compensation,
so long as the change is, in the words of the Settlement Agreement, "fair
and rational" and of "general applicability."


     We   see    this   portion   of   the   Settlement   Agreement   as    an   anti-
retaliation clause.      Its purpose, by its very words, is to prevent the
State from cutting other programs in order to pay for its desegregation
commitments.     If, for example, the State had passed a statute decreasing
or eliminating workers' compensation payments




                                        -9-
for the settling districts only, while maintaining its system of paying the
costs to other school districts, this portion of the Settlement Agreement
would clearly have been offended.      The State did not do that, however.
Rather, it changed the funding formula for all districts in the State.   So
long as that change affects all districts to the same degree, it does not
run afoul of the Settlement Agreement.


     That, however, does not end our inquiry.      When the State disbursed
"seed money" to help school districts make the transition to paying their
own workers' compensation costs, it paid about one-half of the expense
statewide.    In the Pulaski County districts, it paid only about one-third
of the expense.     This disparity arose because the State's formula used
enrollment rather than number of employees to determine how much money each
district would receive.    The Pulaski County districts are employee heavy
compared to other districts, increasing their workers' compensation costs.
This result is precisely what the anti-retaliation clause was meant to
prevent.     It funds the Pulaski County districts to a lesser degree than
other districts in the state.      It is of no moment that the State reached
this result in a mathematically consistent manner.       The District Court
correctly held that the State must disburse seed money to the Pulaski
County districts in the same percentage as it does statewide.


                              B.   Loss Funding


     The issue presented by the State's disbursement of loss funding is
whether, as to sending or home districts, M-to-M transfer students should
be treated as any other student leaving the district.       Loss funding is
computed by determining the decrease in average daily membership (ADM) for
the year in question as compared to the average of the ADM for the previous
three years.     The difference is multiplied by a statutorily determined
fraction.    The resulting number is then added to the ADM for the year in




                                     -10-
            and used to calculate Minimum Foundation Program Aid (MFPA) funds
Clearly, w                                                                  y
variable in determining loss funding.


              controversy in this case stems from the State's method fo
determining ADM when it calculates loss funding.     The State does not treat
                        nts as lost to a district for loss-funding purposes.
It                                   the ADM prior to figuring loss funding.
In     her words, it pretends that M-to-M transfer students are still in
           sending districts when it determines ADM for the loss-fundin
formula.     The plaintiff districts argue, and the District Court held, that



       We note initially that the State's approach does not comply with the
                statute.   The statute sets forth those "students who may be
     nted in average daily membership."      Ark. Code Ann. § 6-20-301(1)(A)
Majority-to-Minority transfer students are not among them.1    Th
violates the statute
ADM.


       The State, however, argues that the
to calculate loss funding in this manner.        The Stipulation for Propose
Order on Voluntary Majority to Minority Transfers (Stipulation), which is




       1



       (i)                                                         l
       distri     and are enrolled either within a public school
                 by the district or in a public school operated by
           her district or a private school for special educatio
       students,                                                   g
       from a written tuition agreement approved by the Department
       Education; and

       (ii) Legally transferred stude
       but attending a public school in the district.

                                      -11-
Agreement, reads that M-to-M transfer students "shall not be counted in the
number used to calculate regular state aid."            Stipulation, paragraph 13(c).
Further, the "number used to calculate regular state aid," in the case of
loss funding, is the reduction in ADM.           The only way not to include M-to-M
students in the number used to calculate state aid is to add them back to
the ADM as if they were not "lost" to the sending district.


      The State bolsters this argument with a more extreme position.                 It
is that, in exchange for the State's picking up the entire expense for M-
to-M transfer students, as we have described it, the plaintiff districts
agreed to forego all other State aid where those students were concerned.
In   other   words,   the    quid   pro   quo     for   the   State's   accepting   the
responsibility for paying approximately 150% of the cost of educating M-to-
M transfer students was the plaintiff districts' agreement to bypass other
types of state funding that would otherwise be paid for those students.


      The State reads the Settlement Agreement and the Proposed Order too
narrowly.    The funding programs described by the Settlement Agreement are
"exclusive of" funds due under other programs.             Furthermore, "[t]he State
will not exclude the Districts from any compensatory funding programs,
early childhood development, or other funding programs or discriminate
against them in the development of such programs or distribution of funds
under any funding program."         Settlement Agreement § II, paragraph F.


      We think this language answers the question before us.               The State,
under the terms of the Settlement Agreement, cannot exclude the Pulaski
County districts from "other funding programs" that are created after the
Settlement Agreement.       Refusing to credit the Pulaski County districts for
students who transfer from the districts for any reason, including M-to-M
transfer students, does just that.           It deprives these districts of the
financial benefit




                                          -12-
they would receive under the loss-funding program.


        The State would have us believe that the Stipulation contradict
reasoning.                                                                         d
cov        in the Settlement Agreement, while the Stipulation and only the
                       -to-M transfer students.        We disagree.    The theme of
the      ttlement Agreement was that the Pulaski County districts would
          the desegregation payments included in the agreement
to other state aid that they would have received.                 The language w
previously cited expresses that theme, as
funds paid by the State under this agreement are not intended to supplant
      existing or future funding which is ordinarily the responsibility of
                               Id. § II, paragraph E.


                                                                              tricts
of                                funding program available to all other school
dis          in the State.       It neither complies with the language of the
          own statute, nor meets the obligations the State accepted under th
Settlement Agreement.      The District Court
exclude M-to-M transfer students from ADM in the loss-funding formula.


                                       C. APSCN


             principles   we    have   already   discussed   resolve   the   questio
presented by the APSCN.        A program was developed and proposed for creating
                       chool district in the state was given the same three
op          including the Pulaski County districts.            Several districts,
      luding these districts, found all three options not to their liking
The Pulaski County districts desire, and
the State pay them an amount equivalent to what the State would spend for
     The District Court's order reaches beyond the terms of the Settlement
Agreement.     The State is not excluding the Pulaski County districts from
the program.    It is not offering the program to them in a manner different
from any other district.      In fact, the State offered to create a whole new
cooperative specifically so that the Pulaski County districts would have
the same options as other districts.          Finally, nothing in the Settlement
Agreement requires the State to pay over funds to the districts in lieu of
state-wide programs in which they choose not to participate.       With respect
to APSCN, the order of the District Court is reversed.


                                       III.


     The order of the District Court is affirmed with respect to the
workers' compensation program and loss funding.       We reverse the order with
respect to APSCN.      The cause is remanded for further proceedings consistent
with this opinion.


     A true copy.


             Attest:


                    CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




                                       -14-
