Rural school bonds raise money for county school systems without having to share the proceeds with city school systems located within the county.
In Tennessee, multiple local entities may levy property taxes, including counties, cities, and special districts, such as special school districts. As a result, depending on where residents live, they may pay multiple property taxes at various rates. A person living within a city, for example, may pay two “sets” of property taxes: one to the county and one to the city.
Just as multiple governmental entities within a county may impose property taxes, multiple school systems may operate within a county. For example, a city school system may serve all students living within the city boundary, while the county system serves the remaining students.
Unlike county and city governments, however, local school systems may neither levy property taxes nor issue bonds. To finance capital projects, the county instead issues school bonds for the school system. These bonds are repaid over many years, likely at least in part by property taxes and sales tax.
If the county issues bonds for the county school system, the county property taxes used for debt service are paid by both city and county residents. In this scenario, since city residents help bear the cost of the debt used for county schools, state law requires that the proceeds of the bonds be shared with the city school system to provide proportionate funding for children of city taxpayers. The bond proceeds are split proportionately between the county and city school systems based on school attendance.
If the county does not want to share bond proceeds with the city school system, it may issue rural school bonds. In this case, the bonds are repaid only with property taxes levied on areas outside the city school system. Because city residents are not helping pay for debt service on the bonds, they are not entitled to a share of the proceeds.