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School City of Gary v. Derthick

December 31, 1959


Author: Hastings

Before HASTINGS, Chief Judge, and KNOCH and CASTLE, Circuit Judges.

HASTINGS, Chief Judge.

School City of Gary, Indiana, petitioner herein, filed an application for a direct grant from the federal government under Public Law 815, 81st Cong. as amended, 20 U.S.C.A. ch. 14.*fn1 This application was denied by L. G. Derthick, Commissioner of Education, Department of Health, Education and Welfare, respondent (Commissioner). Appeal from that decision is taken to this court pursuant to Public Law 815, 20 U.S.C.A. § 277(b).*fn* It appears that this is a case of first impression before a Court of Appeals reviewing the Commissioner's refusal to grant benefits under the statute before us.

Public Law 815 was passed in 1950 to provide direct federal financial assistance to school districts whose resources had been severely restricted or whose facilities had become greatly overcrowded because of activities of the Government. Congress enacted this law to fulfill a federal "obligation" to these impacted areas.*fn2

This obligation had arisen in two ways. First, in acquiring and maintaining large areas of land for defense purposes, the land having been freed from local property taxes, the federal government had substantially lessened the tax base upon which local communities relied to finance their school facilities. The problem was compounded because frequently such federal establishments were staffed with military personnel whose children attended local schools.Second, post-war defense contracts had served as incentives for many people to move to defense production areas, thereby substantially increasing the number of children to be educated in local facilities.

Public Law 815 fulfilled this federal obligation by providing direct aid to assist in the construction of school facilities required by the increased number of federally-connected pupils. In the administration of this program, Congress based eligibility for assistance on the increase in the number of students measured from a base year. Congress classified these students in three categories: children whose parents live and work on federal property (Class A); children whose parents live or work on federal property (Class B); and children whose parents neither live nor work on federal property, but whose federal connection arises from other federal activities such as the performance of government contracts by private employers of the parents (Class C). The case before us concerns an application based solely on an increase recognized by Class C.

Federal assistance under Public Law 815 was not designed to compensate fully for the costs of increased construction, but rather the Government agreed to provide a percentage of the average perpupil cost of constructing minimum school facilities. The statutory percentage for the Class C classification was 45% of such cost.

If an applicant was eligible under the first two classifications, aid was available without reference to the effect of the federal activity on local financial resources.However, in Class C, since the local economy might have been greatly stimulated by increased defense production, federal aid was available only when the construction of additional educational facilities would impose an "undue financial burden on the taxing and borrowing authority" of the applicant school district. Public Law 815, § 305(c). 20 U.S.C.A. § 295(c)*fn** .

The determination whether an undue financial burden exists was left to the discretion of the Commissioner of Education. In judging the impact of additional school construction on local taxing and borrowing authority, the Commissioner has considered both federally-connected and non-federally-connected pupils who are without adequate facilities and for whom the applicant has a concurrent need for constructing minimum school facilities.

The School City of Gary (applicant), on November 14, 1957, made application for a direct grant of $2,350,000 under Public Law 815, basing its application upon its increased pupils in Class C. It was stipulated that the applicant requires additional minimum school facilities for 3,751 federally-connected pupils (at a construction cost of $3,751,000) and for 8,621 non-federally-connected children (at a cost of $8,621,000). The total cost of providing adequate facilities for these ill-housed school children is $12,372,000.

These statistics confirm a pressing need for additional facilities. To meet this need, applicant has utilized the resources at hand to a large degree. It was stipulated that the over-all 1957 tax rate per hundred dollars, for Gary, Indiana, is $9.86, of which the school tax rate is $5.39, both rates higher than those of any of the other five largest cities in Indiana. Gary has levied a Cumulative Building Fund Tax at the rate of $1.25 per hundred dollars, the statutory maximum (Burns' Ind.Stat.Ann. § 28-1110 (1958 Repl., Supp.)), which yields $3,000,000 per year. It has virtually utilized all legal bonded indebtedness. Applicant's debt limit under the Indiana Constitution at the time of application was $4,706,521, of which all but $31,521 was exhausted. Further, applicant requested aid from the Indiana Veterans Memorial Loan Fund, but such aid was not available. All these facts indicate that applicant has made strenuous efforts to cope with the problem of providing increased school facilities.

However, on April 24, 1958, the office of the Commissioner made a preliminary denial of applicant's request for funds, stating that the required additional construction would not impose an undue financial burden on applicant. This denial was based largely on the failure of applicant to utilize "Holding Corporations" pursuant to the Indiana School House Holding Corporation Act, Burns' Ind.Stat.Ann. § 28-3201 et seq. (1948 Repl., Supp.), to provide additional school construction. Applicant admits that it has not attempted to utilize the benefits of this Act.*fn3

On June 20, 1958, applicant requested a formal hearing which was held before a hearing examiner on October 23 and 24, 1958. On March 24, 1959, the hearing examiner filed his Initial Decision denying applicant's request for funds.On May 7, 1959, the Commissioner denied further review of the Initial Decision. This appeal followed.

The main point in controversy throughout this proceeding is the applicability of the foregoing Indiana School House Holding Corporation Act (Schoolhouse Act). The Schoolhouse Act provides a method whereby a school district may lease facilities. Since Public Law 815 provides for construction of facilities, applicant contends that, as a matter of statutory interpretation, consideration of the Schoolhouse Act is irrelevant. Continuing, he argues that since the hearing examiner found that requiring applicant to build additional schools would constitute an undue financial burden, the Commissioner is compelled to grant its request ...

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