[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Sanborn v. Hamilton Cty. Budget Comm., Slip Opinion No. 2014-Ohio-5218.]




                                        NOTICE
     This slip opinion is subject to formal revision before it is published in
     an advance sheet of the Ohio Official Reports. Readers are requested
     to promptly notify the Reporter of Decisions, Supreme Court of Ohio,
     65 South Front Street, Columbus, Ohio 43215, of any typographical or
     other formal errors in the opinion, in order that corrections may be
     made before the opinion is published.

                         SLIP OPINION NO. 2014-OHIO-5218
 SANBORN ET AL., APPELLANTS, v. HAMILTON COUNTY BUDGET COMMISSION
                                  ET AL., APPELLEES.

  [Until this opinion appears in the Ohio Official Reports advance sheets, it
            may be cited as Sanborn v. Hamilton Cty. Budget Comm.,
                         Slip Opinion No. 2014-Ohio-5218.]
County budget commissions—School board’s proposed conversion of inside-mill
        operating levy to permanent-improvement levy—R.C. 5705.341—
        Commission’s authority to disapprove conversion as not clearly required
        by budget.
 (No. 2013-1598—Submitted September 9, 2014—Decided December 2, 2014.)
              APPEAL from the Board of Tax Appeals, No. 2010-938.
                               ____________________
        O’NEILL, J.
        {¶ 1} This appeal confronts us with an issue of the statutory powers and
responsibilities of two important agencies of local government in Ohio:                the
boards of education, which operate Ohio’s school districts, and the county budget
commissions, which review the budgets of political subdivisions and which,
                             SUPREME COURT OF OHIO




among other things, approve or disapprove their tax levies. The Indian Hill
Exempted Village School District Board of Education (“BOE”) passed a
resolution to convert 1.25 “inside mills” from operating levies to permanent-
improvement levies. The BOE claims that its decision to do so lies within its
discretionary authority to allocate district funds and obtain the revenues necessary
to accomplish its objectives. The protesting taxpayers, appellants both before the
Board of Tax Appeals (“BTA”) and now before this court, disagree.
        {¶ 2} The impetus for the controversy lies in the fact that converting the
inside millage had the fully foreseen effect of increasing the effective rate of
taxation under the “outside millage,” so that the district experienced a net increase
of revenue and thereby imposed an increased burden on the taxpayers of the
district.
        {¶ 3} The Hamilton County Budget Commission approved the conversion
of the inside mills, but the commission members expressed their concerns about
the increased tax burden, and one member of the three-member panel dissented.
On appeal, the BTA affirmed the budget commission’s action in approving the
conversion of inside millage.
        {¶ 4} Before this court, the taxpayers argue that the budget commission
should have disapproved the conversion because the school district ran a healthy
surplus and, as a result, the funds were not shown to be “clearly required” in the
budget for the ensuing tax year. Although we are not persuaded by the more
extreme suggestion that a school district may not run a surplus, we do hold that
the “clearly required” standard in the eighth paragraph of R.C. 5705.341, when
applied in this case, imposed not one but two mandates. First, the BOE had to
show that the 1.25 converted mills were matched with permanent-improvement
expenditures in the budget, and the BOE made that showing. Second, the BOE
had to demonstrate that the revenue derived from the increased effective rate of
taxation under the outside mills was necessary to cover operating expenses during




                                         2
                                    January Term, 2014




the ensuing fiscal year. The BOE did not attempt to make this demonstration, and
the excess of revenue over expenditure in the budget persuades us that this
showing could not have been made. Accordingly, we reverse the decision of the
BTA, and we remand for further proceedings consistent with this opinion.
                DEFINING THE STATUTORY ISSUE BEFORE THE COURT
                      1. Outside mills distinguished from inside mills
         {¶ 5} Article XII, Section 2 of the Ohio Constitution provides as follows:


                 No property, taxed according to value, shall be so taxed in
         excess of one per cent of its true value in money for all state and
         local purposes, but laws may be passed authorizing additional
         taxes to be levied outside of such limitation, either when approved
         by at least a majority of the electors of the taxing district voting on
         such proposition, or when provided for by the charter of a
         municipal corporation.


         {¶ 6} This provision underlies the distinction between “inside millage”
and “outside millage.” A “mill”—meaning “one one-thousandth”—is a rate of
tax imposed upon the tax base, which under the property tax is taxable value.1
Specifically, one mill is one one-thousandth of the taxable value, considered as
the amount of tax to be paid. It follows that ten mills equal one percent of taxable
value.
         {¶ 7} The constitutional provision quoted above allows property to be
subjected to ten mills without voter approval. Those first ten mills are “inside
mills,” or the inside millage. Beyond the first ten mills, additional taxes may be


1
  “Taxable value” in Ohio is 35 percent of the true value (also known as the market value) of the
property. Ohio Adm.Code 5703-25-05(B). The millage is the rate that is multiplied times the
taxable value to arrive at the amount of tax owed, subject to some further adjustments.




                                               3
                             SUPREME COURT OF OHIO




imposed with voter approval; those levies involve “outside mills,” or outside
millage.
        {¶ 8} By statute, a board of education has authority to use inside millage
for “any specific permanent improvement which the subdivision is authorized by
law to acquire, construct, or improve, or any class of such improvements which
could be included in a single bond issue.” R.C. 5705.06(A). In 1998, the General
Assembly enacted legislation that specifically prescribed a procedure for a board
of education to “change its levy within the ten-mill limitation in a manner that
will result in an increase in the amount of real property taxes levied by the board
in the tax year the change takes effect.” R.C. 5705.314. All parties agree that the
BOE in this case abided by those procedural requirements.
                  2. Outside mills and the H.B. 920 reduction factors
        {¶ 9} In 1976, the General Assembly passed H.B. 920, which provided
property-tax relief by reducing the taxes levied by outside millage. Am.Sub.H.B.
No. 920, 136 Ohio Laws, Part II, 3182, 3194. We have had occasion to address
this subject in the past:


        “The purpose of R.C. 319.301 [the H.B. 920 reduction statute], as
        amended, is to limit growth of real property tax revenues that
        would otherwise occur as a consequence of inflation of property
        values. R.C. 319.301 requires the application of tax reduction
        factors when property values increase due to reappraisal or update.
        The result is that a school district will receive the same number of
        dollars from voted levies after reappraisal as it did before
        reappraisal, even though real property valuation in the district has
        increased through real estate inflation.”




                                          4
                                January Term, 2014




(Footnote omitted.) State ex rel. Taxpayers for Westerville Schools v. Franklin
Cty. Bd. of Elections, 133 Ohio St.3d 153, 2012-Ohio-4267, 976 N.E.2d 890
(“Westerville Schools”), ¶ 21, quoting DeRolph v. State, 78 Ohio St.3d 193, 200-
201, 677 N.E.2d 733 (1997).
       {¶ 10} What is crucial for the analysis in this case is the distinction
between the actual millage approved by the voters and the tax reduction resulting
from applying the H.B. 920 reduction. As we noted in Westerville Schools, the
H.B. 920 tax-reduction factors “[do] not reduce the rate of the voter-approved
levies.” Id. at ¶ 22. Indeed, R.C. 319.301(F) specifically states: “No reduction
shall be made under this section in the rate at which any tax is levied.” Instead,
the reduction factors reduce “the effective or actual taxes charged and collected”
under the voter-approved rates, and do so in such a way that the levy collects the
constant amount of revenue in spite of appreciation of property value. Westerville
Schools at ¶ 22. Indeed, they are codified in the Revised Code together with the
“rollbacks,” which are conceived of as “partial exemptions,” not rate reductions.
R.C. 319.302.
       {¶ 11} Thus, the increased taxes that resulted from the conversion of
inside millage in this case did not involve an unvoted increase in outside millage,
which would be unconstitutional. Instead, those increased taxes reflected the
taxpayers’ loss of a portion of the benefit of the statutory reduction factors.
                 3. The 20-mill floor and the “unvoted tax increase”
       {¶ 12} A limit to the H.B. 920 reduction factors is the so-called 20-mill
floor. Under this provision, a school district that levies at least 20 mills for
operating expenses will not have its levies subjected to reduction below 20 mills
as an effective rate. R.C. 319.301(E); see also Ohio Adm.Code 5703-25-45(E);
Hastings, Manoloff, Sharb, Sheeran & Jaffe, Baldwin’s Ohio School Law, Section




                                          5
                                  SUPREME COURT OF OHIO




40:26, 1043 (2013).2 This floor is an essential part of the BOE’s calculations in
this case: by converting the inside mills, the BOE caused the district’s tax
structure to hit the 20-mill floor, with the result that additional operating revenue
was generated by the increased effective rate of taxation under the outside mills.
      4. R.C. 5705.341 requires that the rate of taxation be shown to be “clearly
                         required” in a budget for the ensuing fiscal year
         {¶ 13} R.C. 5705.341, eighth paragraph, provides as follows:


                  Nothing in this section or any section of the Revised Code
         shall permit or require the levying of any rate of taxation, whether
         within the ten-mill limitation or whether the levy has been
         approved by the electors * * * in excess of such ten-mill limitation,
         unless such rate of taxation for the ensuing fiscal year is clearly
         required by a budget * * *.


(Emphasis added). Reinforcing this standard is the requirement in the fourth
paragraph of the same section that when action by the budget commission has
been appealed to the BTA, the BTA must “consider” and “modify” that action “to
the end that no tax rate shall be levied above that necessary to produce revenue
needed by the taxing district * * * for the ensuing fiscal year.”
         {¶ 14} Throughout this litigation, the BOE has pointed to permanent-
improvement expenditures in the budget for the ensuing tax year, and to nothing
else, to show that the conversion of the inside mills was “clearly required.”



2
  The treatise explains: “However, if reduction would cause the total taxes charged and payable
for current expenses to be less than twenty mills, the tax commissioner is required to calculate a
reduction factor which would cause the taxes * * * to equal either the lesser of the sum of the rates
at which those taxes are authorized to be levied or the same amount as would be collected if those
taxes were levied at the rate of twenty mills.”




                                                 6
                               January Term, 2014




                            FACTUAL BACKGROUND
         {¶ 15} On November 10, 2009, the BOE held a previously announced
public hearing concerning whether to change 1.25 mills of inside levy from
operating expenses to permanent improvements, pursuant to R.C. 5705.314. On
December 15, 2009, the BOE unanimously adopted a resolution converting 1.25
inside mills levied for current expenses to 1.25 mills levied for permanent
improvements.
         {¶ 16} The taxpayers who had protested to the BOE then took their
objections to the budget commission. There the primary issue, pursuant to the
eighth paragraph of R.C. 5705.341, was whether the tax budget submitted by the
BOE showed that the “rate of taxation for the ensuing fiscal year” was “clearly
required.”
             1. What the BOE’s budget for the ensuing fiscal year showed
         {¶ 17} At issue before the budget commission hearing was the school
district’s budget for the fiscal year commencing July 1, 2010, and ending June 30,
2011.     That budget shows under the “permanent improvements” category
projected revenue from the conversion of the 1.25 mills amounting to
$785,675.33 for the second half of fiscal 2011, during which the conversion
would be in place, and revenue of $725,238.76 for the first half of fiscal 2012
(July 2011 through December 2011).
         {¶ 18} The expenditures in the “permanent improvements” category for
fiscal   2011    were    “Textbooks—new      and    replacement,”   “Technology
replacement/Upgrades,”       “Replacement        bus     (2),”      “Maintenance
Equipment/Vehicles,” “Building equipment & Furniture,” “Repairs and
Maintenance for Permanent Items,” and “Building improvements.” The projected
“permanent-improvement” expenditures for fiscal 2011 on the spreadsheet in
these categories were $717,747.23, which is reflected as the sum of the first and




                                        7
                             SUPREME COURT OF OHIO




second halves of fiscal 2011. Thus, the permanent-improvement fund would
experience a surplus of $151,643.03 for fiscal 2011 after the levy conversion.
Also, taking the spreadsheet at face value, the fund would experience a surplus of
$68,104.96 for the first half of fiscal 2012.
        {¶ 19} Most importantly for the resolution of this appeal, the budget
demonstrates a strong excess of revenue over expenditures for the ensuing fiscal
year.   Specifically, from July 1, 2010, through the end of 2010, the budget
projects a surplus of $724,506, and from January 1, 2011, through the end of the
fiscal year on June 30, 2011, the budget predicts a surplus of $1,124,805. This
means that the projected surplus for the entire fiscal year was $1,849,311. That
amount, when added to the preexisting surplus of $24,802,247, was predicted to
increase the unencumbered balance to $26,651,558 by the end of the fiscal year.
        2. The revenue increase was discussed at the budget commission hearing
        {¶ 20} At the budget commission hearing, David Nurre of the auditor’s
finance office summarized the situation.        The district had “requested and
authorized the transfer of 1.25 mills of inside millage to a permanent
improvement fund, which represents an un-voted increase in the [effective] tax
rate.” Nurre noted that the total district revenues for the fiscal year would be
$33,200,000 and the expenditures $31,800,000. The district carried a balance of
$24,802,000—about 78 percent of projected expenditures.
        {¶ 21} Nurre later observed that the levy conversion amounted to a request
for $1,678,000 for the permanent-improvement fund, that being the tax amount
generated by the 1.25 inside mills. Thereafter, Nurre responded to a question
from the county treasurer by stating that the current effective rate of taxation,
presumably for operating expenses, was 20.17 mills. By converting 1.25 inside-
operating-expense mills to permanent-improvement mills, the district would hit
the 20-mill floor. “So that would go down to 20 and that .17 mills would be
offset in a sense, that they would be levying about 1.08 mills of additional




                                          8
                                      January Term, 2014




millage.” Using Nurre’s numbers, the fact that the 1.25 inside mills would yield
$1,678,000 indicates that the 1.08 additional effective-rate mills would equal
about $1,449,792—that is, the approximate amount of additional revenue
generated by the increased effective rate of taxation under the outside millage
would be $1,450,000.3
                      3. Evidence in favor of converting the inside mills
         {¶ 22} With its budget, the BOE submitted a written argument that states
that the “ ‘clearly required’ component [is] established,” but discusses only the
relationship of redirected inside millage to enumerated permanent-improvement
expenditures. No attention is given to justifying the additional operating revenue
(c. $1,450,000) generated by the fact of hitting the 20-mill floor.
         {¶ 23} At the budget commission hearing, the two main witnesses for the
BOE’s position were the school district’s treasurer and the school superintendent.
Their statements (garnering agreement from their opponents on this point)
asserted that the district was highly rated in terms of educational excellence and
that it had long adopted prudent fiscal management that earned the best rating for
its bonds.
         {¶ 24} The school district’s treasurer made the following points:




3
  At page 5 of their brief, the taxpayers state that “the revenue raised by the tax increase was and is
approximately $1,726,038.” The taxpayers derive that number from a document certified by the
budget commission entitled “Official Certificate of Estimated Resources.” That number, however,
is labeled “Capital Projects Funds” and probably correlates to the proceeds from the 1.25 inside
mills that were converted rather than the revenue derived from the increased effective tax rate
under the outside mills. Interestingly, however, neither the BOE nor the county made any
objection or correction to the taxpayers’ assertion. Before the budget commission, the taxpayers
presented $1,360,000—the yield from about one mill—as the amount of revenue generated by the
increased effective tax rate under the outside millage. In any event, whether the number is
$1,360,000, $1,450,000, or $1,726,038, the point is the same: the total surplus for the ensuing
fiscal year exceeds the additional revenue, meaning that there would be a surplus even without the
additional revenue.




                                                  9
                            SUPREME COURT OF OHIO




          The bond issue from 2000 had funded construction of two new school
           buildings, a “$75,000,000 plus investment in [the] community,” and
           “[t]hose buildings need to be maintained over a period of time.”
          The school district anticipated “several threats to [its] revenue sources
           over the next couple of years,” including reductions in state funding.
          Responding to Auditor Rhodes’s observation that “what in fact the
           permanent improvement levy does” is “get you back to the 20 mill
           floor” with the result that “if you have a reappraisal with values
           shooting up, you don’t have to be subject to House Bill 920,” the
           treasurer answered affirmatively: “Mm hm.”
          In response to the auditor’s follow-up comment that as a result of
           converting the inside millage, “the people get an automatic un-voted
           tax increase based on the market value of their property,” the treasurer
           said that “it does work the other way, when the property values
           decline,” i.e., a steep decline in property values could preclude any
           additional revenue.
          Addressing the issue whether the district’s reserves were excessive, the
           treasurer stated that the board of education had “not resolved to
           designate its $24,000,000 balance as reserve.”
       {¶ 25} The superintendent also spoke. She stated that the BOE’s decision
to move millage “was made after a multiple year, comprehensive review of the
long range permanent improvement needs of the Indian Hill School District, and
in the context of the economic and multiple pressure on long-term revenue
funding that has been described.” She also noted that “the school district has
delayed many capital improvement projects over time,” and identified bus
replacements and an upgrade of the school auditorium as specific examples.




                                        10
                                   January Term, 2014




        {¶ 26} Other supporters of the levy conversion spoke, largely reiterating
the main points advanced by the treasurer and the superintendent.
                          4. Evidence against the levy conversion
        {¶ 27} Ruth Hubbard spoke on behalf of the Committee for Responsible
School Spending, a citizens’ group opposed to the levy conversion. Hubbard
began by quoting R.C. 5705.341’s prohibition of any tax rate above what was
necessary to “produce the revenue needed * * * for the ensuing fiscal year” and
emphasized that “to [their] way of thinking, that means next year.” It followed
that the surplus in the projected budget for the ensuing fiscal year meant that the
school district could not justify a levy conversion that actually raised taxes.
        {¶ 28} Hubbard next used an exhibit to make the following points:
           The school district had an “operating reserve fund” of about
            $25,000,000,4 which amounted to about 79 percent of projected
            operating expenses.
           The taxpayers’ study indicated that comparably excellent districts in
            the county maintained “reserves” of about 35 percent of their
            expenses.
           The Indian Hill district’s surplus funds “more than doubled” over the
            preceding five years.
           The BOE projected an excess of revenues over expenditures of over
            $3 million in 2010, and over $1 million in 2011.
           The BOE identified $700,000 in permanent-improvement expenses
            that were previously handled as operating expenses. By converting the
            inside millage, the BOE both more than covered the identified
            expenses while generating additional operating revenue because of the
            20-mill floor. That money simply increased the surplus.

4
  According to the school district’s budget, the unencumbered balance going into the “ensuing
fiscal year” was $24,802,247.




                                             11
                              SUPREME COURT OF OHIO




        {¶ 29} Notably, none of the BOE representatives controverted any portion
of Hubbard’s presentation, except for pointing out that the permanent-
improvement expenditures would exceed $700,000 over a full fiscal year.
        {¶ 30} Other speakers against the levy amplified Hubbard’s concern about
the outsized cash surplus in the district.
                       ACTION BY THE BUDGET COMMISSION
        {¶ 31} The budget commission hearing was held on April 13, 2010. The
commission tabled the issue and took it up again on April 20, 2010.
Representatives of the BOE and the taxpayers were present. The lead counsel for
the BOE stated his opinion that the budget commission did not have authority to
substitute its judgment for that of the BOE. The prosecutor’s delegate and County
Treasurer Goering clearly were convinced of the need to defer to the school
board’s judgment and discretion under these circumstances. The auditor was not.
        {¶ 32} The budget commission voted two to one, with the treasurer and
the prosecutor’s delegate concurring, to accept the 1.25-millage conversion; the
auditor dissented.
                                APPEAL TO THE BTA
        {¶ 33} On May 20, 2010, the Committee for Responsible School Spending
and individual members Fred Sanborn, Richard and Carole Cocks, and Ruth
Hubbard appealed to the BTA pursuant to R.C. 5705.341. The BTA dismissed
the committee from the appeal for lack of standing.
        {¶ 34} The parties submitted the case to the BTA on the budget
commission transcript and briefs. On September 13, 2013, the BTA issued its
decision.   BTA found that “Indian Hill submitted a budget which ‘clearly
required’ specific revenue to pay for the costs of itemized improvements which
were eligible for payment via such fund.”         BTA No. 2010-938, 2013 WL
6833234, *3. The BTA did not address the fact that the permanent-improvement
fund was newly created, was apparently fundable on a continuing basis by




                                             12
                               January Term, 2014




operating-expense funds, and carried its own surplus under the budget submitted
by the BOE. The BTA further held that the limitation of reserve accounts set
forth at R.C. 5705.13 was inapplicable, because the BOE in this case had not
established a reserve account. According to the BTA, “appellants’ objections
relate to the wisdom of converting such funding for permanent improvements, a
discretionary budget decision for which neither the budget commission nor this
board may substitute its own judgment.” Id. In so holding, the BTA did not
address the overriding concern expressed by the taxpayers: that no need was
shown for the overall increase in revenue that resulted from converting the inside
millage.
       {¶ 35} The BTA affirmed the budget commission’s approval of the levy
conversion, and the taxpayers have appealed. We now reverse.
                             STANDARD OF REVIEW
       {¶ 36} The BTA’s review of the approval by the budget commission of the
conversion of inside mills is, by statute, a plenary proceeding in which the BTA is
empowered to “modify any action of the commission with reference to the fixing
of tax rates, to the end that no tax rate shall be levied above that necessary to
produce the revenue needed by the taxing district or political subdivision for the
ensuing fiscal year,” and by which “the findings of the Board of Tax Appeals
shall be substituted for the findings of the budget commission.” R.C. 5705.341,
fourth paragraph.   Our review of the BTA’s decision, by contrast, involves
determining whether the decision was reasonable and lawful. R.C. 5717.04,
eighth paragraph.
       {¶ 37} The BOE contends that the BTA made a factual determination that
the school district “submitted a budget which ‘clearly required’ specific revenue
to pay for the costs of itemized improvements which were eligible for payment
via such [permanent-improvement] fund.”         BTA No. 2010-938, 2013 WL




                                        13
                             SUPREME COURT OF OHIO




6833234, *3. Because the BTA was the finder of fact, the BOE urges that we
must defer to the BTA’s decision.
       {¶ 38} Closer inspection reveals, however, that the BTA’s decision relies
on its constricted reading of the scope of its authority—along with that of the
budget commission—to review the school district’s budget under the “clearly
required” standard. On the factual level, the BTA’s finding explicitly addresses
the permanent improvements in the budget but ignores the taxpayers’ argument
that the budget surplus negated the need for additional revenue.
       {¶ 39} Accordingly, because the taxpayers’ argument calls upon us to
correct the BTA’s construction of the scope of review under the “clearly required”
standard set forth in R.C. 5705.341, we confront a question of law in this appeal
that is subject to de novo review. See Akron Centre Plaza, L.L.C. v. Summit Cty.
Bd. of Revision, 128 Ohio St.3d 145, 2010-Ohio-5035, 942 N.E.2d 1054, ¶ 10.
                                     ANALYSIS
    1. Expenditures for permanent improvements could have been made without
                                 converting the inside mills
       {¶ 40} As already discussed, we have before us the question of how the
“clearly required” standard of R.C. 5705.341, eighth paragraph, should be applied
in the present situation. At the outset, it is important to note that, as all parties
have acknowledged, converting the inside levies was not a legal condition
precedent to making the permanent-improvement expenditures.              That is so
because the law permits the BOE to pay for permanent improvements using funds
derived from operating levies.
       {¶ 41} As primary authority, R.C. 5705.05 is pertinent.         That section
provides that a political subdivision “may include in [a current-expense] levy the
amounts required for carrying into effect any of the general or special powers
granted by law to such subdivision, including the acquisition or construction of




                                         14
                                January Term, 2014




permanent improvements.”        (Emphasis added.)      As one secondary authority
summarizes it:


                 A board [of education] may include in the general tax levy
       for current expenses, within the ten-mill limitation, the amounts
       required to carry into effect any of its general powers, including
       construction of permanent improvements and payment of
       judgments, but excluding payment of debt charges.


(Emphasis added.) Hastings, Manoloff, Sharb, Sheeran & Jaffe, Baldwin’s Ohio
School Law, Section 43:29, 1151.
        2. The BOE’s conversion of inside mills generated two increments of
         revenue: the permanent-improvement fund and new operating revenue
       {¶ 42} The second preliminary point is that converting the inside millage
generated not one but two increments of revenue. It did so by affecting not one
but two rates of taxation in the district: it converted 1.25 inside mills, and it
caused an increase in the effective rate of taxation under the outside mills.
       {¶ 43} As discussed, the school board started in a position of being just
above the 20-mill floor, i.e., it had levies in place that, after reduction of outside
levies, generated a little more than 20 mills of taxation for the district’s operating
expenses.    By redesignating a portion of inside millage to the permanent-
improvement fund and away from operating expenses, the school district achieved
two objectives: (i) it continued to receive the 1.25 inside mills, although they are
now earmarked for permanent improvements instead of being more generally
available for operating expenses, and (ii) it continued to receive 20 mills for
operating expenses—in spite of the loss of the 1.25-mill inside levy for operating
expenses.




                                         15
                             SUPREME COURT OF OHIO




       {¶ 44} The district continued to receive 20 mills for operating expenses
because the H.B. 920 reduction of outside levies was decreased by operation of
law to retain a 20-mill overall effective rate for operating expenses.          Thus,
converting inside millage brought the school district additional revenue, which
means the district residents wound up paying more property tax. And that is the
precise ground on which the appellants as taxpayers object: that they must pay
more taxes because the outside levies are reduced less than they otherwise would
be reduced. At the same time, they must pay the inside millage that has been
redirected to the permanent-improvement fund.
       {¶ 45} As already noted, the rate of taxation stays within the outside mills
approved by the voters, so there is no constitutional violation. That said, the
change in the inside millage must still comply with the statutes—specifically, it
must satisfy the “clearly required” standard of the eighth paragraph of R.C.
5705.341. The specific issue is whether the “clearly required” standard should be
applied to the increased effective rate of taxation under the outside mills.
      3. The “clearly required” standard should have been applied to both the
             permanent-improvement revenue and the new operating revenue
       {¶ 46} The eighth paragraph of R.C. 5705.341 provides that the “rate of
taxation for the ensuing fiscal year” must be “clearly required by a budget” in
order to be approved by the budget commission. The BOE’s consistent and
exclusive focus on the permanent improvements in the budget implicitly relies on
the contention that the sole relevant “rate of taxation” is the 1.25 inside mills that
were converted to a permanent-improvement levy. But the taxpayers demand that
consideration be given to the additional tax that they must pay as a direct,
foreseeable, and foreseen result of converting the inside mills.
       {¶ 47} We agree with this contention. We hold that the “rate of taxation”
referred to by R.C. 5705.341 in the eighth paragraph encompasses, in this
situation, not only the 1.25 inside mills but also the estimated 1.08-mill increase




                                         16
                                January Term, 2014




in the effective rate of taxation under the outside millage, which results from the
conversion of the inside mills. Our holding means that the review by the budget
commission and the BTA should have extended to determining not only whether
the 1.25 mills that are newly devoted to permanent improvements were matched
to permanent-improvement expenditures in the budget but also whether the
increased effective rate of taxation under the outside millage was necessary to
maintain the balance between revenue and expenditures once the inside mills
were newly earmarked for permanent improvements.
       {¶ 48} It is evident that neither the budget commission nor the BTA
addressed this aspect of the analysis. That constituted a legal error.
       {¶ 49} But if due consideration is given, it is evident that, as a matter of
law, the increased effective rate for the outside mills was not “necessary to
produce the revenue needed by the taxing district”—and therefore not “clearly
required”—under R.C. 5705.341. That is so because the amount of the projected
surplus of revenue over expenditure for the ensuing fiscal year was $1,849,311,
an amount exceeding the $1,450,000 raised by the increased effective rate. Thus,
even after devoting the 1.25 inside mills to permanent improvements, the budget
would have had a small surplus; it follows that the additional revenue from the
outside mills was not “clearly required.”
       {¶ 50} Indeed, far from defraying current operating expenses, the
increased revenue from the outside mills padded the district’s surplus. To permit
a tax increase that performs no function other than to increase the amount of
budget surplus would deprive the “clearly required” standard of all meaning.
                  4. The case law does not dictate a contrary result
       {¶ 51} The BOE relies heavily on S. Russell v. Geauga Cty. Budget
Comm., 12 Ohio St.3d 126, 465 N.E.2d 876 (1984), which distinguishes between
“determin[ing] whether any rate of taxation is clearly required by the budget,”
which the budget commission must do, from “mak[ing] a judgment call on the




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desirability of programs” whose funding is set forth in the budget, which the
budget commission may not do. Id. at 132. The BOE asserts that the conversion
of the inside mills and the concomitant generation of additional revenue from the
outside levies lay within its discretionary authority, even if the additional revenue
did not meet a current need within the ensuing fiscal year.
       {¶ 52} S. Russell does not support the BOE’s position here. In S. Russell,
a health district levy had been approved by the voters pursuant to R.C. 3709.29,
and under R.C. 5705.31(E), the budget commission was required to approve such
levies without modification if they had been “properly authorized.”               R.C.
5705.31(A) also insulated the levy at issue in S. Russell because it was outside
millage. S. Russell at 129. By stark contrast, those constraints do not limit the
budget commission’s authority here, because this case involves an increased
effective rate of taxation under the outside mills, which is a tax increase that is not
exempted from modification by the budget commission under R.C. 5705.31.
       {¶ 53} On the other hand, S. Russell did specifically acknowledge that the
scope of the budget commission’s review under the “clearly required” test
encompasses “whether there has been excessive taxation, i.e., will the tax
generate more funds than shown to be needed within the budget of the district or
subdivision.” S. Russell at 132. We conclude that it is this portion of S. Russell
that applies in the present case. Here the conversion of inside millage led to an
increased effective rate of taxation under the outside millage. The BOE has at no
time offered a justification of that increase based on current expenses set forth in
the budget submitted; instead, the BOE has relied completely on long-range
planning and the advisibility of maintaining, and even increasing, its surplus
funds on account of funding uncertainties in the future.
       {¶ 54} The BOE also relies on an opinion from the attorney general. In
2005 Ohio Atty.Gen.Ops No. 2005-002, that official opined that a school district
could perform the kind of inside-millage conversion at issue in the present case.




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                                January Term, 2014




Specifically, the attorney general found that the fact that the conversion brought
the district onto the 20-mill floor, and thereby increased the yield from the outside
levies, did not per se invalidate the conversion of the inside millage. Indeed, the
attorney general noted that the legislature enacted R.C. 5705.314 in 1998 for the
purpose of permitting the conversion of inside millage and opined that “by the
enactment of R.C. 5705.314, the General Assembly has recognized the possibility
that a school district might increase taxes by changing the use of its inside
millage.” Id. at 8.
       {¶ 55} With respect to whether any particular conversion must be
approved by the budget commission, however, the opinion becomes hazier. The
opinion specifically declines “to make findings of fact or to determine the rights
of particular parties” and disavows making any “determinations regarding the
validity or effectiveness of particular actions taken with regard to the matter”
under consideration. Id. at 2. The attorney general refers to the controlling
principles from S. Russell but does not actually say how they apply. Indeed, the
opinion states as follows:


       If * * * the board of education of a school district proposes to levy,
       for purposes of permanent improvements, the amount of property
       tax allocated to the school dist4rict within the 10-mill limitation
       that, in the previous year, was levied for operating expenses, the
       county budget commission is not empowered to disapprove or
       modify the levy, provided that the levy was properly authorized
       and the amounts to be levied are clearly required by the school
       district’s budget.


Id. at 11. Thus, with respect to the precise issue presented by this case, the
opinion sheds no additional light.




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                             SUPREME COURT OF OHIO




                   5. The narrow nature of the holding in this case
       {¶ 56} Nothing in this opinion should be construed to disapprove, as a
general matter, the discretion of a board of education to budget with a surplus. A
school district is generally entitled to collect revenue under its inside millage and
its voter-approved outside mills (the latter being subject to the H.B. 920 reduction
factors), while maintaining a significant balance of unencumbered funds.
       {¶ 57} The disposition of this case depends upon the issue that specially
arises here—an unusual circumstance.          Here, the increased effective rate of
taxation under the outside mills raised revenue and increased taxes overall, and
our holding is that that increased revenue had to correlate to current expenditures,
rather than constituting excess revenue for the district. To the extent that the
district seeks to retain the millage and the effective tax rates imposed in previous
years, the issue presented in this case simply does not arise.
                                   CONCLUSION
       {¶ 58} For the foregoing reasons, we reverse the decision of the BTA.
Additionally, we remand to the BTA with the instruction that, pursuant to the
fourth paragraph of R.C. 5705.341, the BTA issue an order modifying the action
of the budget commission consistent with this opinion.
                                                                   Decision reversed,
                                                                 and cause remanded.
       O’CONNOR, C.J., and PFEIFER, O’DONNELL, LANZINGER, KENNEDY, and
FRENCH, JJ., concur.
                               __________________
       1851 Center for Constitutional Law, Kelsey E. Hackem, and Maurice A.
Thompson, for appellants.
       Graydon, Head & Ritchey, L.L.P., Bruce I. Petrie Jr., and Harry J. Finke
IV, for appellees Indian Hill Board of Education and Indian Hill Exempted
Village School District.




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                           January Term, 2014




      Joseph T. Deters, Hamilton County Prosecuting Attorney, and Thomas J.
Sheve, Assistant Prosecuting Attorney, for appellee Hamilton County Budget
Commission.
                        ______________________




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