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Northern Burlington County Regional School District Board of v. Bret Schundler


February 3, 2012


On appeal from the New Jersey Department of Education.

Per curiam.


Argued September 21, 2011

Before Judges Sapp-Peterson and Ostrer.

Appellant, Northern Burlington County Regional School District Board of Education ("District"), appeals from the final administrative agency action of respondent, Bret Schundler, in his former capacity as Commissioner, New Jersey Department of Education ("Commissioner"), withholding monthly state aid payments from the District for the period February 2010 through June 2010. We reverse and remand for further proceedings.

The Commissioner's action was prompted by the implementation of Governor Christie's February 11, 2010 Executive Order 14 (Executive Order), which mandated that the Director of Budget and Accounting ("Director") immediately place in reserve necessary funds to balance the State's budget. The Executive Order noted the existence of surplus funds in many local school districts' budgets and targeted those surpluses as a source of reserve funds.

The District educates children of military personnel who reside on federal property located at the joint McGuire/Fort Dix/Lakehurst military complex in Northern Burlington County. The military population within the District represents approximately twenty-five percent of its total student population. Although the federal government does not pay property taxes, it provides Federal Impact Aid, 20 U.S.C.A. § 7701 to -14 ("Act"), in order to strengthen and improve elementary and secondary schools educating "children who reside on Federal property and whose parents are employed on Federal property." 20 U.S.C.A. § 7701. Unless the Secretary of Education has granted an exemption, a state, in calculating its aid to a school district that educates children residing on federal property, may not consider payments to such districts, pursuant to the Act, in determining:

(A) the eligibility of a local educational agency for State aid for free public education; or

(B) the amount of such aid; or

(2) make such aid available to local educational agencies in a manner that results in less State aid to any local educational agency that is eligible for such payment than such agency would receive if such agency were not so eligible.

[20 U.S.C.A. § 7709.]

After the Governor signed the Executive Order, state aid payments to the District were withheld for the remainder of February 2010 through June 2010. In response, the District appealed to the Executive County Superintendent (ECS). In support of its appeal, the District submitted its most recent audited financial reports. Based upon a review of those financials and the District's corresponding budgets for 2008 and 2009, the ECS was satisfied that approximately $1.5 million of unanticipated Federal Impact Aid represented "[ninety-four percent] of the $1.6 [million] of unanticipated revenue received for the year and thus was a major contributor to the $2.2 [million] of Federal Impact Aid identified as an allowable adjustment in undesignated surplus and/or designated as legal reserves." The ECS therefore recommended approval of the District's request to adjust the "State Aid" reductions under the Executive Order, which he reasoned was "in accord with the apparent intent of the 'Impact Aid Law, Section [7709].'" The ECS forwarded his recommendation to the Commissioner.

The ECS subsequently notified the District that its appeal would not be granted. The District continued to engage in discussions with representatives of the Commissioner and was once again advised, orally, that the state aid payments withheld would not be restored. The District formally petitioned the Commissioner to "consider a controversy which has arisen between the [District] and the [Commissioner], pursuant to the authority of the Commissioner to hear and determine controversies under the school laws[.]"*fn1

The Commissioner, "[a]fter careful analysis, consideration of [the District's] analysis, and [his] staff's discussion with [the District's] business administrator and auditor, . . . determined that the . . . original calculation of the reservation" based upon the District's excess surplus was correct. In reaching his decision, the Commissioner reasoned:

Impact Aid is recorded in the general fund with other sources of revenue such as state aid, tax levy, and miscellaneous revenue. Once received, it becomes part of the overall resources for use by the district. There is no authority, either in New Jersey statute or in generally accepted accounting principles (GAAP)[,] to set these funds in a legal reserve. The department does allow Impact Aid as an adjustment to the excess surplus calculation for the June 30, 2009 calculation.

The present appeal followed.

We begin our discussion recognizing that our standard of review is quite limited. In re Hermann, 192 N.J. 19, 27 (2007); Campbell v. Dep't of Civil Serv., 39 N.J. 556, 562 (1963). We accord a strong presumption of reasonableness to agency decisions and do not substitute our judgment for the wisdom of agency action if that action is statutorily authorized and not arbitrary or unreasonable. Bd. of Educ. of Englewood Cliffs v. Bd. of Educ. of Englewood, 257 N.J. Super. 413, 456 (App. Div. 1992), aff'd, 132 N.J. 327, cert. denied, 510 U.S. 991, 114 S. Ct. 547, 126 L. Ed. 2d 449 (1993). As long as the agency decision is contemplated under its enabling legislation, the action must be accorded a presumption of validity and regularity. Ibid.; Campbell, supra, 39 N.J. at 562. Moreover, where special expertise is required, an even stronger presumption of reasonableness exists. Bd. of Educ. of Englewood Cliffs, supra, 257 N.J. Super. at 456. We do not, however, accord such deference to an agency's "determination of a strictly legal issue." Univ. Cottage Club of Princeton N.J. Corp. v. Dep't of Envtl. Prot., 191 N.J. 38, 48 (2007) (quoting In re Taylor, 158 N.J. 644, 658 (1999)).

Here, the Commissioner's decision was not based upon his interpretation of a statute or regulation authorizing his action. Rather, the decision represents the Commissioner's policy decision that once the District received its Federal Impact Aid and it is "recorded in the general fund with other sources of revenue[,]" those funds become "part of the overall resources for use by the district[,]" except for "an adjustment to the excess surplus calculation for the year in which it is awarded[.]"

As was recently noted in Catholic Family and Community Services v. State-Operated School District, 412 N.J. Super. 426, 442 (App. Div. 2010):

The absence of any reference to specific statutory or regulatory authority is significant because our standard of review, although generous and deferential to an agency vested with particular and technical responsibilities, still requires that the decision by the Commissioner be grounded in the record and the law. The [local school districts] also ha[ve] a reasonable expectation that known and uniform rules, standards, interpretations, advice and statements of policy will be applied to them. When the Commissioner relies on unarticulated standards or statements of policy, we are confronted with the essence of arbitrary action.

Arbitrary action increases the risk that a decision may be influenced by "caprice, or passion, or partiality." Ibid. (citation omitted).

Although on notice from the District and ECS of the District's reliance upon the Act in requesting an adjustment, the Commissioner's decision reflects absolutely no consideration of 20 U.S.C.A. § 7709, which clearly and unambiguously restricts states, whose local districts are the recipients of such aid, from considering that aid in any manner that would result in less state aid being awarded to a school district than what it would receive in the absence of such Federal Impact Aid. Rather, the Commissioner merely notes the absence of any "authority, either in New Jersey statute[s] or in generally accepted accounting principles (GAAP)[,] to set these funds in a legal reserve." The authority to do so, however, stems from the Act.

Under the United States Constitution, federal law is deemed "the supreme Law of the Land." U.S. Const. art. VI, cl. 2. Thus, it is well-settled that where a state law or regulation conflicts with federal law, state law is preempted, "'whether Congress' command is explicitly stated in the statute's language or implicitly contained in its structure and purpose.'" R.F. v. Abbott Labs., 162 N.J. 596, 618 (2000) (quoting Gade v. Nat'l Solid Wastes Mgmt. Ass'n, 505 U.S. 88, 98, 112 S. Ct. 2374, 2383, 120 L. Ed. 2d 73, 84 (1992)). The issue here, however, does not involve a conflict between state law and federal law. Rather, it is a conflict between a policy and federal law. It therefore stands to reason that the Commissioner's action, guided merely by his unilateral policy decision, is clearly preempted under federal law. See, e.g., Hous. Auth. & Urban Redev. Agency v. Taylor, 171 N.J. 580, 593 (holding state law authorizing local housing authority to designate counsel fees and late charges as "additional rent," resulting in an increase in tenant's rent beyond the thirty percent limit established by the Brooke Amendment,*fn2 was preempted by federal law defining tenant rent, which law "precludes any other assessments from being defined as 'additional rent'"). Moreover, U.S. Const. art. I, § 8, cl. 1 includes the congressional power to "provide for the . . . general Welfare of the United States. . . [.]" "Incident to this power, Congress may attach conditions on the receipt of federal funds." South Dakota v. Dole, 483 U.S. 203, 206, 107 S. Ct. 2793, 2795, 97 L. Ed. 171, 177 (1987).

The only relief available to states subject to the mandatory prescriptions of the Act is expressly set forth in subsections (b) and (c) of 20 U.S.C.A. § 7709, which permits states to apply to the Secretary of Education for an exemption. That was not done here.

Further, not only is Congress's prohibition against considering Federal Impact Aid to reduce state aid to local districts clearly stated in the Act, remedies available to the secretary against states violating the Act's provisions are also clearly set forth:

(e) Remedies for State violations.

(1) In general. The Secretary or any aggrieved local educational agency may, not earlier than 150 days after an adverse determination by the Secretary against a State for violation of subsections (a) or (d)(2) or for failure to carry out an assurance under subsection (b)(3)(B), and if an administrative proceeding has not been concluded within such time, bring an action in a United States district court against such State for such violations or failure.

(2) Immunity. A State shall not be immune under the 11th amendment to the Constitution of the United States from an action described in paragraph (1).

(3) Relief. The court shall grant such relief as the court determines is appropriate.

[20 U.S.C.A. § 7709.]

Not having sought relief in accordance with the above provisions, the Commissioner may not take action that contravenes the Act.

We conclude the Commissioner lacked authority under the Act to reduce state aid by offsetting it against the district's "excess surplus" to the extent that "excess surplus" included Impact Aid, even if not set aside in a "legal reserve." The District asserted that its excess surplus is comprised entirely of unanticipated Federal Impact Aid dating back to the 1999. In its submissions to the ECS and Commissioner, it included its auditor's report in which the auditor reviewed budget reports and fund balances for a ten-year period and concluded "impact aid is a major contributor to any fund balance being on hand." In view of the Commissioner's determination that Federal Impact Aid becomes part of the general fund, the Commissioner made no findings as to whether the $2,141,169 withheld was all attributable to the Federal Impact Aid, as the District contends. We therefore remand for further proceedings to determine the source of the District's reserve funds.

Reversed and remanded for further proceedings consistent with this opinion. We do not retain jurisdiction.

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