The N.C. Constitution requires that fines and penalties collected by the state for violations of penal law go to help fund public schools. Does this provision also apply to various sorts of payments to state agencies made as excise taxes, tax penalties or additional taxes, traffic, parking, vehicle registration, and library fines, late fees, civil penalties, or simply penalties? The answer, according to a three-judge panel of the N.C. Court of Appeals, is sometimes.
The N.C. School Boards Association and the school boards of Wake, Durham, Johnston, Buncombe, Edgecombe, and Lenoir counties brought suit against a variety of state agencies, seeking a judgment that the various payments should go to the schools and not be kept by the agencies themselves. The agencies, which contended that the payments were not punitive in nature, lost before Superior Court Judge Abraham Penn Jones. The state agencies appealed.
“This appeal presents issues of great importance to an array of State departments, agencies, and licensing boards as well as to our State’s system of public education,” said Judge Rick Elmore for the Court of Appeals. “Determination of how the substantial monetary sums at issue here — as much as $75 million annually, according to defendants — may be constitutionally collected and distributed will have a significant and lasting impact on agencies and institutions which play a vital role in the lives of all North Carolinians.”
Article IX, Section 7 of the N.C. Constitution states: “[T]he clear proceeds of all penalties and forfeitures and of all fines collected in the several counties for any breach of the penal laws of the State, shall belong to and remain in the several counties, and shall be faithfully appropriated and used exclusively for maintaining free public schools.”
The N.C. Supreme Court has interpreted this to mean “the clear proceeds of all penalties and forfeitures in all cases, regardless of their nature, so long as they accrue to the state.” It has also noted, however, that “only payments which are ‘punitive rather than remedial in nature and [are] intended to penalize the wrongdoer rather than compensate a particular party’ are subject to Article IX, Section7.” The actual classification depends on the nature of the offense and not its label.
Based on these criteria, the appeals court examined the revenue sources at issue. The court found several of the measures to be penal and not remedial in nature. These included payments collected by the Department of Transportation from overweight trucks and for lapses in insurance coverage.
State law allows the Department of Environment and Natural Resources to assess fines as part of its efforts to protect the environment. Since 1998, the Division of Water Quality has allowed violators to undertake a “supplemental environmental project” in lieu of some portion of a fine. The appeals court agreed with the lower court that such money for such projects should go to the schools as the N.C. Constitution requires it.
In many cases, the appeals court ruled against the school boards. The Court of Appeals found that penalties for late filings, underpayments, and failure to comply with various provisions of the N.C. tax code to be remedial. A long line of federal cases has held federal tax penalties to be remedial and the state court simply extended the concept to the similar state tax system. Similarly, the court found to be remedial penalties in the state’s unemployment insurance system.
The school boards also argued that certain revenues generated by state universities were penalties and should be paid over to the public schools. The Court of Appeals rejected these arguments and overturned Jones’s ruling awarding revenue from campus parking tickets, parking permit sales, and library fines to the schools. The appeals court noted that these were remedial in nature as they help to offset the costs of campus traffic control, parking, and libraries. In addition, the N.C. Constitution separately created the UNC system, making a transfer to the public schools inappropriate.
The court also noted that controlling N.C. Supreme Court decisions had held that illegal drug excise tax payments were remedial in nature and should not go to the public schools.
Late fees paid to a variety of licensing agencies by those that were tardy in renewing their licenses were deemed by the appeals court to be too small to be punitive in nature.
The Court of Appeals also ruled that for public policy reasons, civil penalties paid by a school system should not revert to the public schools. Were these penalties to go to the schools, the offending school system would receive a portion of the money back. The N.C. Supreme Court had previously ruled that “[p]ublic policy in this jurisdiction, buttressed by the uniform decisions of this Court, will not permit a wrongdoer to enrich himself as a result of his own misconduct.”
The case is N.C. School Bds. Ass’n v. Moore, (02-507).
Lowrey is a Charlotte-based associate editor at Carolina Journal.