________________________ No. 95-1481EA, 95-1482EA

________________________

_____________ * * No. 95-1481EA *

_____________ * * * Little Rock School District; * * Plaintiff-Appellee, * * Anne Mitchell; Bob Moore; Pat * Gee; Pat Rayburn; Mary J. Gage; * * Intervenors-Appellees, * * North Little Rock Classroom * Teachers Association; Pulaski * Association of Classroom * Teachers; Little Rock Classroom * Teachers Association; * On Appeal from the United * States District Court Intervenors, * for the Eastern District * of Arkansas. Alexa Armstrong; Karlos * Armstrong; Ed Bullington; * Khayyam Davis; Janice Dent; * John Harrison; Alvin Hudson; * Tatia Hudson; Milton Jackson; * Lorene Joshua; Leslie Joshua; * Stacy Joshua; Wayne Joshua; * Katherine Knight; Sara * Matthews; Becky McKinney; * Derrick Miles; Janice Miles; * John M. Miles; NAACP; Joyce * Person; Brian Taylor; Hilton * Taylor; Parsha Taylor; Robert * Willingham; Tonya Willingham; * * Intervenors-Appellees, * *

### -2- v. * *

* Pulaski County Special School * District, #1; North Little Rock * School District; Leon Barnes; * Sheryl Dunn; Mac Faulkner; * Richard A. Giddings; Marianne * Gosser; Don Hindman; Shirley * Lowery; Bob Lyon; George A. * McCrary; Bob Moore; Steve * Morley; Buddy Raines; David * Sain; Bob Stender; Dale Ward; * John Ward; Judy Wear; * Grainger Williams; * * Defendants-Appellees, * * The Arkansas State Board of * Education; State of Arkansas; * * Defendants-Appellants, * * Office of Desegregation * Monitor, * * Claimant. * *

_____________ * * No. 95-1482EA *

_____________ * * * Little Rock School District; * * Plaintiff-Appellant, * * Anne Mitchell; Bob Moore; Pat * Gee; Pat Rayburn; Mary J. Gage; * * Intervenors-Appellants, * * North Little Rock Classroom * Teachers Association; Pulaski * Association of Classroom * Teachers; Little Rock Classroom * Teachers Association; * * Intervenors, * * Alexa Armstrong; Karlos *Armstrong; Ed Bullington; * * John Harrison; Alvin Hudson; Tatia Hudson; Milton Jackson; * * Stacy Joshua; Wayne Joshua; * Intervenors-Appellants, * Katherine Knight; Sara Matthews; Becky McKinney; * * John M. Miles; NAACP; Joyce Person; Brian Taylor; Hilton * * Willingham; Tonya Willingham; * Intervenors, * v. * * * District, #1; * Defendant-Appellee, * North Little Rock School District; Leon Barnes; * * Richard A. Giddings; Marianne Gosser; Don Hindman; Shirley * * McCrary; Bob Moore; Steve Morley; Buddy Raines; David * * John Ward; Judy Wear; Grainger Williams; * Defendants, * The Arkansas State Board of * * * * * * Monitor, * Claimant.

### -4- ___________ Submitted: November 16, 1995

Filed: May 15, 1996

___________ Before RICHARD S. ARNOLD, Chief Judge, HEANEY an d WOLLMAN, Circuit Judges.

___________
RICHARD S. ARNOLD, Chief Judge.
In this case, we must decide whether certain actions by the State of Arkansas and the Arkansas Department of Education (collectively referred to as the State) run afoul of the Little Rock Schools Desegregatio n Settle ment Agreement. The plaintiffs, the Little Rock School Distric t (LRSD) and the Pulask i County Special School District (PCSSD), claim that they do, and the Dist rict Court agreed. We affirm in part and reverse in part.

I.
This case is made up of three distinct issues with three separat e sets of facts. The facts themselves are not in serious dispute. The lega l consequences attaching to those facts in light o f the Settlement Agreement are.
Before 1994, the State of Arkansas b ore the entire burden of funding the workers' compensa tion programs for all school districts in the State. This a pproach, quite naturally, did nothing to induce individual schoo l districts to take measures that might reduce workers' compensatio n exposure. Therefore, the Arkansas General Assembly changed the law t o require individual school districts to provide their own coverage beginnin g July 1, 1994. See Ark. Code Ann. §§ 6-17-1411 to 1413 (Repl. 1993).

### -5- In order to soften the blow brought about by this change, the State dis tributed"seed money" to all school districts for the 1994-95 schoo l year. The amount distributed to each school district was based on th e numb er of students in the school district, rather than the number o f employ ees needing coverage. This approach resulted in school district s statewide receiving a bout one-half of the cost of their coverage, but the plaintiff districts received only about one-thir d of their coverage costs. Whether the State may cease funding workers' compensation insurance for th e plaintiff districts, and, if so, whether the Sta te must distribute to them one-half or one-third of the initial cost in see d money is the first issue that we must address. The second issue involves "loss funding," and the manner in whi ch the State computes the amount of loss funding due the Pulaski County Districts
. Loss fund ing was created by the General Assembly in 1993, see Ark. Cod e Ann. § 6-20-302 (Repl. 1993), for the purpose of financially assistin g school districts with declining enrollments. Th e driving force behind the law is the notion that school districts suffering enrollment reductions ar e never able to reduce staff and cut expenses as quickly as students leave. Of course, when stude nts leave a district, so does the state funding that comes with them. Loss funding helps finance the transition period.

The crux of the problem here is the manner in which the Stat e computes the amount of loss funding due LRSD and PCSSD. Loss funding is normally computed by (and here we simplify) calculating the loss in Averag e Daily Membership (ADM) in a district as comparedto the average ADM of the three previous years, then multiplying that number by a multiplier
. However , the State, when figuring loss funding for the Pulaski Count y Districts, varied the standard formula where maj ority-to-minority (M-to-M) transfer students are concerned.

### -6- M-to-M students are peculiar to the districts that are parties to the Settlement Agreement. They are students who are of the majority race in their home districts, and who voluntarily transfer to another Pulask i County district where they are of the minority r ace. The State, by way of a funding formula con tained in the Settlement Agreement, compensates both the home district and the receiving district foreach M-to-M student. The home, or sending, district receives one-half of the state aid that it woul d have received if the student had remained in the district, while th e rece iving, or host, district receives the full cost of educating th e student. When the State computes loss funding for sending districts, it treats M-to-M students as if they were still in the dis trict. In other words, it adds M-to -M students who transfer out of the district back into the AD M prior to calculating loss funding. It does so even though these students are no longer being educated by the sending district. This approac h results in a reduction in the amount of loss funding paid to the sending distri ct where the M-to-M students transferring out of the distric t out number those transferring in. We must decide whether the Settlemen t Agreement allows the State to reduce the plainti ff districts' loss funding in this manner.
The third issue arises out of the de velopment of the Arkansas Public School Computer Network (APSCN). This statewide computer network fo r public sc hools was mandated by the General Assembly. Acts of 1989, No
. 668. Eventually, after consultation with representatives of all stat e school districts, a plan was developed that utilizes educationa l cooperatives in each Arkansas county to provide APSCN services. Pulaski Countyis the only county in the state that does not have an educational cooperative. However, the State did offer to provide APSCN services i n some form to the plai ntiff districts. (The Pulaski County districts were initially left out of the APSCN plan altogether. The Pulaski County

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districts were left out because their representatives at the development meetings had so requested. That problem is now irrelevant because when th e districts complained about the omission, the State amended its plan t o include them).

Each sc hool district in the state was given the same three option s unde r the plan. First, a district could relinquish control over it s computer system operations and utilize the APSCN system provided through the local educational cooperative, or Pulaski County's substitute for an educational cooperative, which the State offered to create. Second, a district could purchase, at its own expense, computer hardware identical to the APSCN hardware, and software would be pro vided to the district free of charge. Finally, a district could use either existing or newly acquire d hardware that was different from that utilized by APSCN, but no software or financial support would be provided.

Some school districts found all three of these options to b e unsati sfactory. These districts were primarily those that already ha d substantial investments in computer systems. Thus, it would be unwise for these d istricts to scrap their existing systems and utilize the APSC N system. The plaintiff districts are in this group.

The Di strict Court held that the State's actions in all three o f these sets of circumstances ran afoul of the Settlement Agreement. I t ordered the State to fund workers' compensation in the Pulaski Count y distri cts to the same extent that funding was provided statewide , approximately one hal f of the cost of coverage. It also ordered that the State must exclude those M-to-M students lost to a sending district from ADM for loss-funding purposes. Finally, it ordered the State to pay over to the Pulaski County districts the amount of funds spent on any othe r educational cooperati ve in the state so that the Pulaski County districts can install an APSCN-compatible computer system.

### -8- II.
The par ties spend some time addressing our standard of review. I n this case we are applying the terms of a contract between the parties to facts th at have arisen since its creation. As with any other case, w e review th e factual findings of the District Court for clear error. Th e meaning of the terms in the Settlement Agreement , and their application to the facts in this case, are legal questions overwhich we exercise plenary review.
This case is governed by the terms of the Settlement Agreement. We thus ap ply the terms of the Settlement Agreement to each of the sets o f facts before us. A. Workers' Compensation

The Settlement Agreement imposes upon the State an obligation t o continu e to pay to the settling districts, among other things, "[t]h e State's share of any and all programs for which the Districts now receive State funding." Settlement Agreement § II, paragraph E. The purpose of this secti on of the Settlement Agreement is to prevent the State fro m reducing other State aid in order to recoup the costs it incurred by way of th e Settlement Agreement. Id. § II, paragraph L. The State is als o barred from enacting any legislation that will h ave a "substantial adverse impact on the ability of the Districts to desegregate." Ibid. However, the same paragraph pr oceeds to read that "[f]air and rational adjustments to the funding formula which have general applicability but which reduce the proportion of State aid shall not be considered to have an advers e impact on the desegregation of the Districts." Ibid. Concisely put, the plaintiff districts argue that payment of wo rkers' compensation costs was a "program" for which the y received "State funding" when the parties entered into the Settlement

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Agre ement. Furthermore, to deprive them of those funds would have a "substantial adverse impact" on their ability to desegregate. The State, conversely, argues that workers' compensation is not a "program" within th e contemplation of the Settlement Agreement. Moreover, its decision to ceas e funding th e program was a "fair and rational adjustment" to a fundin g formula that has "general applicability." Thus, its discontinuation canno t be said to have an adverse impact on desegregation.

In a se nse, both arguments are correct. Workers' compensation i s a service that school districts must provide. While the State is correct in its assertion that workers' compensation funding is not a direc t educati onal program, it is still an expense that districts must bear
. Assuming finite funds, workers' compensation payments will decrease th e funds available for more direct educational programs. Moreover, Stat e payments for workers' compensation costs were a source of funds for school districts when the parties entered into the Settlement Agreement. Thus, funding of workers' c ompensation by the State is a "program" for purposes of the Settlement Agreement.

On t he other hand, we do not believe that the State's actio n regarding the "program" necessarily violates the Settlement Agreement. Th e programin effect at the time of the Settlement Agreement, as we see it, was equal State funding of workers' compensationfor all school districts. Thus, the State can change its funding scheme for workers' compensation, so long as the change is, in the words of the Settlement Agreement, "fair and rational" and of "general applicability."

We see this portion of the Settlement Agreement as an anti

retaliationclause. Its purpose, by its very words, is to prevent th e State from cutting other programs in order to pay for its desegregatio n commitments. If, for example, the State had passed a statute decreasing or eliminating workers' compensation payments

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for the settling districts only, while maintaining its system of paying th e costs to other school districts, this portion of the Settlement Agreement wouldclearly have been offended. The State did not do that, however
. Rather, it changed the funding formula for all d istricts in the State. So long as that change a ffects all districts to the same degree, it does not run afoul of the Settlement Agreement.
That, h owever, does not end our inquiry. When the State disburse d "seed money" to help school districts make the transition to paying their ownworkers' compensation costs, it paid about one-half of the expens e statewide. In the Pu laski County districts, it paid only about one-third of th e expense. This disparity arose because the State's formula use d enrollment rather than number of employees to determine how much money eac h district would receive. The Pulaski County districts are employee heavy compared to other districts, increasing their wo rkers' compensation costs. This result is precisely what the anti-retaliation clause was meant t o prevent. It funds the Pulaski County districts to a lesser degree tha n other districts in the state. It is of no moment that the State reached this result in a mathematically consistent manner. The District Cour t correctly held that the State must disburse seed money to the Pulask i County districts in the same percentage as it does statewide. B. Loss Funding

The issu e presented by the State's disbursement of loss funding i s whether, as to sendin g or home districts, M-to-M transfer students should be treated as any other student leaving the district. Loss funding i s computed by determining the decrease in average daily membership (ADM) for the year in question as compared to the average of the ADM for the previou s three years. The difference is multiplied by a statutorily determine d fraction. The resulting number is then added to the ADM for the year in1



### (i) l distri and are enrolled either within a public schoo l

by the district or in a public school operated by her district or a private school for special educatio stud ents, g from a written tuition agreement approved by the Department Education; and (ii) Legally transferred stude but attending a public school in the district. -11- and used to calculate Minimum Foundation Program Aid (MFPA) funds Clearly, w y variable in determining loss funding.

co ntroversy in this case stems from the State's method fo determining ADM when it calculates loss funding. The State does not treat nts as lost to a district for loss-funding purposes. It the ADM prior to figuring loss funding. In her words, it pretends that M-to-M transfer students are still i n

sending districts when it determines ADM for the loss-fundin formula. The plaintiff districts argue, and the District Court held, that

We note initially that the State's a pproach does not comply with the statute. The statute sets forth those "students who may be ntedin average daily membership." Ark. Code Ann. § 6-20-301(1)(A) Majority-to-Minority transfer students are not among them. Th 1 violates the statute ADM.
The State, however, argues that the to calculate loss funding in this manner. The Stipulation for Propose Order on Voluntary Ma jority to Minority Transfers (Stipulation), which is

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Agreement, reads that M-to-M transfer students "shall not be counted in th e number used to calculate regular state aid." Stipulation, paragraph 13(c)
. Further, the "number used to calculate regular state aid," in the case of loss funding, is the reduction in ADM. The only way not to include M-to-M students in the numbe r used to calculate state aid is to add them back to the ADM as if they were not "lost" to the sending district.

The Sta te bolsters this argument with a more extreme position. I t is that, in exchange for the State's picking up the entire expense for Mto-Mtransfer students, as we have described it, the plaintiff districts agreed to forego all other State aid where those students were concerned. In other words, the quid pro quo for the State's accepting th e responsibility for paying approximately 150% of the cost of educating M-to

M transfer students was the plaintiff districts' agreement to bypass other types of state funding that would otherwise be paid for those students.

The State reads the Settlement Agreement and the Proposed Order too narrowly. The fundin g programs described by the Settlement Agreement are "exclusive of" funds due under other programs. Furthermore, "[t]he State will n ot exclude the Districts from any compensatory funding programs , earl ychildhood development, or other funding programs or discriminat e against them in the d evelopment of such programs or distribution of funds under any funding program." Settlement Agreement § II, paragraph F.

We thin k this language answers the question before us. The State , und er the terms of the Settlement Agreement, cannot exclude the Pulask i County districts from "other funding programs" that are created after the Settlement Agreement. Refusing to credit the Pu laski County districts for students who transferfrom the districts for any reason, including M-to-M trans fer students, does just that. It deprives these districts of th e financial benefitthey would receive under the loss-funding program. The State would have us believe that the Stipulation contradict reas oning. d cov in the Settlement Agreement, while the Stipulation and only th e -to-M transfer students. We disagree. The theme of the ttlement Agreement was that the Pulaski County districts woul d

the desegregation payments included in the agreement to other state aid that they would have received. The language w previouslycited expresses that theme, as funds paid by the Sta te under this agreement are not intended to supplant existing or future funding which is ordinarily the responsibility of Id. § II, paragraph E.
tricts of funding program available to all other school dis in the State. It neither complies with the language of th e

own statute, nor meets the obligations the State accepted under th Settlement Agreement. The District Court exclude M-to-M transfer students from ADM in the loss-funding formula.

C. APSCN principles we have already discussed resolve the questio presented by the APSCN. A program was developedand proposed for creating chool district in the state was given the same three op including the Pulaski County districts. Several districts , luding these districts, found all three options not to their liking The Pulaski County districts desire, and the State pay them anamount equivalent to what the State would spend for

### -14- The District Court's order reaches beyond the terms of the Sett lement Agreement. The State is not excluding the Pulaski County districts from the program. It is not offering the program to them in a manner different from any other district. In fact, the State off ered to create a whole new cooperative specifically so that the Pulaski County districts would have the same options as other districts. Finally, nothing in the Settlement Agreement requires the State to pay over funds t o the districts in lieu of state-wide programs in which they choose not to participate. With respect to APSCN, the order of the District Court is reversed.

III.
The order of the District Court is affirmed with respect to th e workers' compensation program and loss funding. We reverse the order with respect to APSCN. The cause is remanded for further proceedings consisten t with this opinion.
A true copy.

Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.