Volume 26 Number 1
October 1986

THE LEGAL RESPONSIBILITY and cost of educating American Indian children has long been a controversial issue between the federal government and the states. Prior to 1953 the Bureau of Indian Affairs operated the only school system available to Indian children living on reservations or trust lands. Federal court rulings have since that time required states to provide free public schools on Indian land for Indian children. In essence, the courts have declared that Indians are citizens of their respective states with all rights guaranteed under state constitutions including access to public schools (see Note 1).

Each year fewer Indian children attend Bureau of Indian Affairs schools, thus increasing the enrollment of the public schools located on reservation trust lands. Unfortunately, most reservations do not contain large amounts of taxable land to support these public schools. In the states where large number of Indian children attend school the state finance systems are substantially based on revenues received from local property taxes.

Beginning in the late 1950s, Congress recognized this problem and enacted legislation to reimburse public school districts for the inequities of providing educational services for Indian children living on reservations possessing little if any taxable land.

However, over the years state politics have become an increasing factor in financing Indian populated schools as non-Indian populations perceive Indians receiving educational services for which they do not pay. This political fact has resulted in an attitude, in more than several state legislatures, of "let the federal government educate the "Indians." Unfortunately, federal categorical programs do not cover the entire costs to the states and states such as Arizona have attempted other means to lessen state contributions to educate Indian students living on reservations.

In specific, Federal Impact Aid under Public Law 91-874 to school districts populated by Indian children has resulted in a serious legal controversy in Arizona.

Eleven Arizona public school districts with large Indian enrollments brought suit in federal court in September 1982 against the Arizona State Board of Education and State Superintendent Carolyn Warner, contending that Arizona, under its school finance equalization (House Bill 2013), could not include federal impact aid funds under state-imposed spending limits. The loss of millions of dollars of spendable funds to Indian and military districts evoked strong responses of concern from congressional offices, Indian interests groups and the U.S. Department of Justice's Civil Rights Division.

In February 1983, the Arizona Indian districts carried the controversy one step further by filing an administrative appeal with the United States Department of Education, protesting the approval by that agency of the 1983 application of the state to equalize impact aid funds under the "Equalization Amendment" of Public Law 81-874 (see Note 2).

This legal and political conflict resulted in the passage--1984 of compromise legislation by the Arizona Legislature returning to the Indian districts access to some of their federal impact aid funds. However, the efforts of the Indian districts to have reversed Arizona's application with the U.S. Department of Education for equalization of impact aid funds is still being pursued.

The situation in Arizona seems to be a classic example of how easily a state can come into conflict with the Supremacy Clause of the United States Constitution under the present nationwide system of shared funding between federal and state governments. In many respects, Arizona in the 1980s appears to have followed in the same footsteps as Kansas in the 1960s, when, in Hergenreter v. Hayden, it was found to have substituted state judgment for federal judgment in passing competing laws for use of federal impact aid funds (see Note 3).

In 1950, Congress recognized two federally imposed burdens on selected school districts, and passed legislation to provide supplemental funding for those districts. The passage of P.L. 81-874 directly affected those school districts across the nation where, as a result of federal tax-exempt land, district revenues were substantially reduced; and local tax revenues and rates were directly affected by the presence of federally connected students.

The first federally imposed burden, as viewed by Congress, consisted of those districts having tax-exempt federal land which resulted in inability to raise local revenue without high tax rates. The second burden was in providing educational programs for federally connected students who would not be residing in the district other than having parents who were federally employed (see Note 4)

In 1953, Native American students attending public schools on or near Indian reservations were declared federally connected students under the P.O. 81-874 program. The inclusion of Indian students under the Impact Aid Program demonstrated a concern of Congress to alleviate the taxing problems of districts serving Indian children on or near reservations. Many of these districts possessed little, if any, taxable private land within their boundaries (see Note 5).

The actual entitlement of federal funds received by each "impacted" district results from an annual count of federally connected students in the district by a base per-pupil federal contribution. The base per pupil is increased by 25% for each student living on Indian land and by 50% for each federally connected handicapped student (see Note 6). The resulting district entitlement is adjusted by levels of congressional appropriations for the program.

A 25% increment for Indian students living on reservation land was enacted by Congress in 1978, recognizing that public school districts operating on Indian lands incurred extremely high operations costs which could not be recovered fully by local taxation or state funding (see Note 7).

In a prior amendment, handicapped students had been authorized a 50% increment of the base per-pupil authorization as Congress recognized the necessity of meeting special needs of federally handicapped students as well as those under P.L. 91-142. In addition, in 1978, Congress added a provision prohibiting states from imposing any election requirement on heavily impacted districts as a precondition to spending Impact Aid funds.

Congressional intent consistently has been based on the notion that Impact Aid is general school purpose funding to be used for general school purposes. House Report No. 95-1137, May 11, 1978 states "Impact Aid is unique among Federal Education programs" both "because it is based on the notion of compensation for a federal burden and because it is used for general school purposes" (see Note 8).

In the state of Arizona, there are 49 public school districts which receive in excess of $20,000,000 per fiscal year in Impact Aid funds. A majority of these are Indian-populated districts in rural and isolated areas (see Note 9).

The procedures the districts used in receiving appropriated Impact Aid funds historically has been an October count of eligible students, forwarded in a formal application directly to Washington in January. The districts subsequently receive funds and budget them to meet the general needs of the district, as they are interpreted to be general use-monies.

The state of Arizona, for the most part, had no active involvement in the Impact Aid program before a special session of the Legislature in 1979-80, called specifically to devise a new state school finance system, to be effective in fiscal year 1980-81. The subsequent financial plan, implemented in 1980-81, basically attempted to establish an equalization system which would result in equal state funding rates to all districts by the 1985-86 school fiscal year. The vehicle to accomplish this equalization goal was to establish spending caps known as "revenue control limit" (RCL).

Specifically, Arizona House Bill 2013 states the intent of the law:

In addition, in making the distinction between "categorical" and P.L. 674 federal funds, the Arizona legislature did not allow the 50% handicapped increment to be treated as other federal categorical funds, rather including it as part of Impact Aid monies subject to the revenue-control limit. Arizona selected this course of action even though 20 U.S.L. 238 (d) (2) ( c ) states that the specific purpose of the funds (Impact Aid is subject to reversion if not so spent). In other words, handicapped funds bear all the statutory earmarks of federal categorical funding similar to those under P.L. 94-142 (see Note 12).

The background for equalization of Impact Aid funds, allowing a state count such funds as local contribution, began to evolve in 1966, when Congress condemned the practice of fifteen states counting Impact Aid as a local resource, like property taxes, and adjusting state-aid payments to impacted districts accordingly. Congress declared this practice to be in "direct contravention of congressional intent," and banned all such attempts.

In 1974, after extensive review, Congress granted the Secretary of Health, Education & Welfare authority to grant permission to approve state equalization formulas, provided appropriate recognition of the relative tax resources per child was in evidence (see Note 13). In 1978 Congress established a rigorous proceeding for states seeking approval of their equalization formulas. The development of specific criteria for testing a state's equalization formula was charged to the Secretary of the Department of Education, and subsequently has been criticized by Congress as providing too much leeway to the states (see Note 14).

One of the primary purposes behind Arizona's enactment of House Bill 2013--both as stated in its own statement of purpose, and as understood by officials of the Arizona Department of Education--was the ultimate equalization of maintenance and operations expenditures statewide by FY 1985-86. As an equalization plan, House Bill 2013 had many things in common with other state equalization plans which care 1) increased state responsibility for funding, 2) state aid tied to assessed valuation, and 3) adjustment of expenditure patterns of districts in the state. It also sought, after hopefully obtaining federal approval of the plan, to avail itself of the federal equalization allowance for reducing state aid to impacted districts.

The one thing House Bill 2013 did not have in common with other state laws seeking to equalize was that the Arizona law, and the officials implementing the law, seemingly treated federal requirements on the equalization of Impact Aid as an added benefit of ultimate equalization, rather than as an inherent part of the equalization plan itself.

Equalization under the Arizona plan consists of 1) guaranteeing a support level the District Support Level, with state aid varying depending on district taxable wealth, and 2) controlling expenditures through the Revenue Control Limit, until the District Support Level and the Revenue Control Limit for each district eventually come together in FY 1985-86.

The impact of the new state finance plan on Indian-populated school districts in 1980-81 was an immediate reduction in maintenance and operations budgets. Their extraordinarily high costs of operations previously had been supplemented by Impact Aid monies, which no longer were available to them as their revenue control limits declined. With one exception, all of the districts faced declining revenue control limits. Also, the resultant budget surplus of unspendable Impact Aid began to accrue during the 1980-81 fiscal year in the various county treasurer's offices (see Note 15).

Several Arizona Indian-populated districts reacted to the new finance system in 1981 by initiating an administrative hearing before the state board of education, contending that impact aid could not be counted as a local revenue subject to the state finance plan's restrictions. The State Board denied the request of the two districts in question and ratified the state Superintendent's directives. This action by the state board soon gave birth to an organization of 11 Indian districts acting together in a group called the Arizona Indian Education Project, staffed by two attorneys familiar with the financial and educational problems of Indian-populated districts.

In July 1982, the Arizona Indian Education Project filed for an injunction for preliminary relief in United States District Court for the District of Arizona in Tucson. In Indian Oasis Elementary District No. 40 of Pima County, et al. versus Carolyn Warner and the Arizona State Board of Education, the plaintiff districts claimed that state enforcement of Arizona Revised Statutes 15-481, 15-905G, and 14-947C violated the laws of the United States insofar as they imposed restrictions, impeded, and set conditions on the expenditure of Impact Aid. The plaintiffs maintained this was a clear violation of the Supremacy Clause of the United States Constitution, and that, without question, state statutes intruded into the federally defined area of permissible equalization of impact aid funding.

The plaintiff districts went on to argue that doctrine already established stated that no state might retard, impede or burden the operations of laws passed by Congress. Thus, the doctrine of McCulloch v. Maryland had been violated in Arizona since 1980 by the state's attempt at controlling the spending of Federal Impact Aid funds (see Note 16). In addition, they argued that the specific intent of Congress in creating funds for handicapped students had been for such students to be served directly by those funds, but that this was not being done, as these funds, along with all Impact Aid funds, were being treated as general funds under state equalization.

The Indian districts promoted a series of cases bearing directly on the Arizona controversy of state treatment of Impact Aid, including Shepeard V. Godwin and Middletown School Committee v. Bd. of Regents for Education of Rhode Island.

In Shepeard, Virginia statutes treated 50% of Impact Aid funds as local revenue. The court ruled that Virginia laws could not deny or interfere with the exclusive use of impact funds. The Arizona statutes permitted the state to treat 100% of the impact aid funds as local revenue (see Note 17). In Hergenreter v. Hayden, the court held it impermissible for a state to use a competing state law to change the purpose of impact aid.

In Middletown, the Rhode Island finance plan did not consider Impact Aid as a local revenue within the scope of the plan. Taxpayers filed suit and argued that Impact Aid had to be considered as part of their local tax effort. The court ruled it would be impossible to declare federal aid as part of any local effort, and that the supplementary effect of Impact Aid had to be maintained to coincide with the intentions of Congress" (see Note 18).

The above cases of undue state interference with the expenditures of a congressionally allocated general-purpose funds seemed to assure, to a reasonable degree, the integrity of impact aid being used as general-purpose funds by impacted districts.

The Arizona Indian districts, in summary, sought rulings from the court on the following three claims of unconstitutionality: 1) that federal assistance and Impact Aid are one and the same; 2) that Impact Aid could not be part of state-imposed expenditure limits; and 3) that it is not constitutional to include revenues derived from Impact Aid within the term "revenues from other than levy of taxes upon the taxable property with the school district" for purposes of an override election.

The Indian districts' plea for relief ended by asking the court to restrict the use of Impact Aid funds appropriated by Congress until at least such time as Arizona was able to satisfy the requirements of federal law for equalization, as this would be the proper time for the state to consider Impact Aid as a local revenue, subject to equalization. However, until that time, the state should not interfere with the spending by Indian districts of Impact funds (see Note 19).

A side issue was that implementation of the state plan in restricting use of Impact Aid moneys resulted immediately in the building up of sizeable cash balances in Indian districts. In Arizona, cash balances generated by spending limits on maintenance and operations budgets have to be used to reduce local taxes. In several of the larger districts, the only sizable taxpayers were utility companies which, would benefit directly from Impact Aid funds being declared as cash balances at the end of the fiscal year. The state's action, in fact, would result in millions of dollars of tax relief for these utilities through use of federal Impact Aid funds.

The response of the state to the contentions of the Indian districts' suit, Indian Oasis et al. v. Warner et al., was to admit many facts claimed by the districts and deny others. In general, the state remained insistent on a narrow interpretation and restricted usage of statutory language, and the two parties were not able to reach total agreement upon facts. However, a Motion for Summary Judgement was filed in federal court in November 1982 after collection and review of affidavits along with deposition transcripts.

The case was assigned to Judge Carolyn Richey of the Tucson court, but because of illness on her part, a definite hearing date for the summary judgement motion was not set until December, 1983. During that time, the state applied to the U.S. Department of Education for permission to equalize Impact Aid funds in Arizona. In February, this application for FY 1983 was heard in Arizona and attended by the state department of education and the plaintiff districts.

Several months later, the U.S. Department of Education, (USDE) issued a ruling granting preliminary approval for such equalization. The Arizona Indian districts subsequently filed an administrative appeal, contending USDE personnel had erred in their interpretation of equalization guidelines, especially in determining what Arizona school funds could or could not be counted as wealth-neutral. Under the two tests conducted to establish equalization, wealth neutrality and disparity were Arizona's first two attempts to gain permission to equalize but had been unsuccessful because of wealth disparity (see Note 20).

The acceptance of the 1983 Arizona application by the U.S. Department of Education brought the controversy full circle. During the interim, while the Indian districts and the state waited for the summary judgement hearing date, Arizona legislative leaders met and began to work out possible compromise legislation which would protect the state from a potentially unfavorable ruling and, at the same time, provide some incentive for the Indian districts to drop the litigation in toto. In addition, there was a silent element of potential charges of racism, as all the affected districts were largely Indian except for several serving military populations. This, too, the legislature wished to avoid.

The Civil Rights Division of the U.S. Justice Department during 1982 and 1983 had made inquiries into state school funding. The department had, in fact, appointed a six-member investigation team which toured Arizona and interviewed numerous school district officials regarding state and federal finances in their districts. State department of education officials, as well as legislative leaders, were well aware of the interest of the Justice Department, and this further reinforced the desire on the state's part for compromise.

However, legislative leaders primarily were concerned about not taking the chance of a federal judge, in effect, declaring the entire state equalization program unlawful. They certainly did not wish to convene a special legislative session in 1984 for the purpose of redrafting school-finance legislation and making any necessary revisions. Secondly, it would have been very unwieldy and politically unpopular to be forced to redraft school-finance legislation before the five-year period of the equalization was complete.

After compromise legislation, which would at least meet the interests of the Indian districts partway, was drafted a meeting was held in the state superintendent's office involving attorneys for both parties. The outcome was that the Indian districts would ask the court for a postponement, until which time the legislature had the opportunity to pass or reject the proposed compromise legislation.

The following legislative session did produce the compromise bill. The legislation provided that the 50% categorical funding for handicapped Indian children be removed from the revenue-control limit, as well as the 20% add-on for extra costs of Indian districts. The bill, HB 1332, also removed Indian districts from holding public voting for budget overrides, as these moneys could be secured from Impact Aid funds (see Note 21). The result of the legislation was retrieval of some Impact Aid funds by Indian districts, but not to the pre1980 levels.

The administrative appeal filed by the Indian districts, in regards to the 1982-83 Arizona Equalization application, still is pending the ruling of an administrative judge. In the event the administrative law officer finds USDE erred in granting approval, the question surrounding the Supremacy Clause and the Arizona School Finance System again will surface, and most probably will be re-entered in the federal courts by the Indian districts. In addition, the Indian districts will use the experience gained in their recent confrontations with the state in organizing their forces and making concrete recommendations to the 1985-86 session of the Arizona Legislature, which will be charged with revising and redesigning the school-finance system in Arizona.

The final conclusion to the Impact Aid usage controversy in the various states rests with Congress, which has the authority to amend P.L. 81-874 and the equalization process to ensure that financial inequalities are not thrust upon Indian-populated school districts located in rural and isolated areas experiencing extraordinary operating expenses. The same clearer definition of the equalization process also would assist those districts having large numbers of children of military personnel.

Until Congress amends P.L. 874 to either eliminate equalization or to revise it, further conflict with state school finance plans is probable.

2. Indian Oasis et. al. v. Warner et. al. U.S. District Court, Tuscon (1982).

3. Hergenreter v. Hayden, 295 F Supp. 251, Kan. 1968.

4. P L. 53-247; 20 U.S.C. S 238 (a).

5. 25 U.S.C. S 304. 20 U.S.C. S 238 (d) (2) (D) ( C).

6. Impact Aid, Bureau of Indian Affairs, May, 1979. pp. 7-11.

7. Ibid.

8. 120 U.S.C. S 238 (d) (B) (i).

9. Impact Aid, Bureau of Indian Affairs, May, 1979, p. 11.

10. Arizona Revised States S 15-48 1.

11. Arizona Engrossed House Bill 2013, p. 12, 1979-80 General Session.

12. 20 U.S.C. 238 (d) (2) ( C).

13. 20 U.S.C. S 240 (d) (2).

14. House Report No. 98-85, 1974 U.S. Code Cong. & Admin. News, 4093, 4128-29.

15. A.R.S. S 15-946 (1980).

16. McCulloch v. Maryland, 4 Wheat. 316, 4 L Ed. 579, 609 (1819).

17. Shepeard v. Godwin, 280, F. Supp. 869 (E.D. Va. 1968, 3 Judge Court).

18. Middletown School Committee v. Bd. of Regents for Education of Rhode Island, 439 F. Supp. 1122 (D.R.L. 1977).

19. Indian Oasis v. Warner, (25) (7-19). 

20. Ibid. (23).

21. HB1332, Arizona State Legislature, 1983-84 Session.

Dr. Thomas Glass is associate professor of educational administration at Northern Illinois University. Previously, Dr. Glass has been superintendent of schools at Window Rock, Arizona on the Navajo Reservation and Assistant Superintendent of schools, Shelton, Washington. He is co-author of Community Control: A Study in Power Transition published by the Pendell Press and HERITAGE: Teaching American Indian Studies in the Elementary School published by Educational Services, Incorporated as part of the SPICE Series.