The Arizona Legislature makes decisions this session on three bills about pipeline valuation that will impact student funding for public schools.

The valuation of Transwestern Pipeline Company is important for Arizona’s rural and remote school districts outside Maricopa and Pima counties and in Western Arizona, because it is a source of local property taxes for schools, said Chris Kotterman, director of governmental relations  for Arizona School Boards Association.

Since pipelines are centrally assessed property, the Department of Revenue sets the formula for valuing them at the state level. Then  Arizona’s counties value the pipelines in their boundaries and collect local property taxes on them, a portion of which is disbursed to public schools, Kotterman said.

In Arizona, local funding for schools – including local property taxes, bonds and overrides – make up 45 percent, or the majority of public school funding, since 2018.

#Legislative Legit: Pipelines and student funding

Video edited by Jacquelyn Gonzales/ AZEdNews

Transwestern Pipeline Company disputed the Arizona Dept. of Revenue’s valuation, a court ruled in the company’s favor, which lets the pipeline company collect a refund from the tax authority, Kotterman said.

“Sometimes that doesn’t happen until years later when the money’s already been spent. You can see how that’s not only a problem for school districts, but also cities, towns, counties and more,” Kotterman said.  

The current law allows school districts to request that the Arizona Department of Education adjust their state funding if this happens as a result of a lawsuit, Kotterman said.

Since the pipeline company’s refund affects public school’s prior years and current year funding, Arizona Legislators introduced three bills this session to help school districts deal with this funding issue.

Senate Bill 1449, sponsored by Sen. Sine Kerr, would allow the Superintendent of Public Instruction to adjust state aid for a school district in the current year if the governing board requests the recalculation of state aid for a prior year due to a change in assessed valuation that occurred as a result of a court judgement in accordance with Section 42-16213, a decision by a county board of equalization in accordance with Section 42-16108, or a decision by the state board of equalization in accordance with Section 42-16162.

“Senate Bill 1449 just passed the Senate this week so it’s on its way over to the House,” said Leigh Jensen, governmental relations associate for Arizona School Boards Association.

“What it does is it requires the Superintendent of Public Instruction to adjust the basic state aid for a school district in that current year if the (school district’s) governing board requests a recalculation, because of a judgement in a prior year that changed the valuation of a centrally assessed property and changed their tax rate,” Jensen said.

“The important part about this is that if this your situation, this bill would require you to apply to the (Arizona) Dept. of Education to have them look into that for you,” Jensen said.

“If you are in this situation, and you’re a governing board member watching, keep a watch on this one and you’ll have a chance to let the Department know that you would like to be readjusted for that and make up for the loss (of funding),” Jensen said.

“Going forward it will add also decisions of the County Board of Equalization and the State Board of Equalization, which is good,” Kotterman said.

“The current statute does allow it for the current year for court actions, so if you are in that situation you can go ahead and do it now, but the bill would make it retroactive as well,” Kotterman said.

The next bill will minimize this problem in the future, Kotterman said.

House Bill 2316, sponsored by House Majority Leader Rep. Ben Toma, which would amend Section 42-14204 of the Arizona Revised Statutes by adding a section related to pipelines has already been approved by the Arizona Legislature and was signed by Gov. Doug Ducey on Feb. 18, 2021.

House Bill 2316 adds a section to Arizona revised statutes that states adjustments to base value used to determine the full cash value of pipeline property when there is a final court ruling that the full cash value is more than the market value using standard appraisal methods, there is an agreement between a pipeline company and the department that is the result of a pending tax appeal, and there is an agreement between the pipeline company and the department to correct an error in the calculation of the full cash value  of the system plant in service.

“What this does is it allows the base value of a centrally assessed property – if it’s disputed in court – to be reset,” said Rico Yanez, governmental relations intern for Arizona School Boards Association. “This basically just makes it so the formula won’t swing from one way or another. It kind of stabilizes the full cash value of what these system plants are worth when they value them.”

“The crux of this issue is whether or not the full cash value of the pipeline is commensurate with what it’s actual value is,” Kotterman said. “Basically, the company contends that the pipeline is routinely overvalued and therefore subject to higher taxes.”

“This creates a process where if there’s a court ruling on it, which there has been, then you can reset the base value – and that’s the value that’s used so that we don’t have to keep arguing over the value,” Kotterman said.

That takes care of the stability issue, but we still have this issue of past tax overpayments and that’s where the next bill comes in, Kotterman said.

Senate Bill 1603, sponsored by Sen. David Gowan, which would appropriate $16.1 million from the state general fund in the fiscal year 2021-2022 to the Dept. of Administration to disburse to political subdivisions in this state that paid refunds ordered in the Transwestern Pipeline Company v. Arizona Dept. of Revenue litigation, was given a due pass recommendation by the Senate Democrat Caucus and the Senate Republican Caucus on Feb. 16, 2021.

“Senate Bill 1603 deals with some of those past issues and it appropriates $16 million from the state general fund to political subdivisions that paid property tax refunds to Transwestern Pipeline Company in 2016,” said Sarah Jedlowski, governmental relations intern for Arizona School Boards Association.

“Retroactive from 2016 to now,” Kotterman said. “That’s literally the money bill for school districts.”

If you’re in a small district, “which has had to make these payments and hasn’t been able to do other things, because you had to make them, this well get you some money to be made whole,” Kotterman said.

“Hopefully, this package (of bills) together will allow us to put this issue behind us for a little while anyway and allow our smaller districts to move forward and stop having to worry about their budgets in relation to tax judgements,” Kotterman said.