## F I L E D United States Court of Appeals Tenth Circuit 

### OCT 20 1997 

### PATRICK FISHER Clerk PUBLISH
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

BONNIE DUKE,

Plaintiff - Appellant,

v. No. 96-2135 GRADY MUNICIPAL SCHOOLS; GRADY SCHOOL BOARD; GEORGE YORK, Superintendent of the Grady Municipal Schools; PAT WOODS, JERRY POWELL, ALAN SUMRALL, PHIL BERRY, BRENT ARMSTRONG, Individually and in their official capacities as Members of the Grady Municipal School Board,

Defendants - Appellees.

- - - - - - - - - - - - - - - - - - - - - - - - - NEW MEXICO TRIAL LAWYERS ASSOCIATION, NEW MEXICO SCHOOL BOARDS ASSOCIATION,

Amici Curiae.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW MEXICO (D.C. NO. CIV-94-1075-MV)

Warren F. Frost, Warren F. Frost, P.C., Clovis, New Mexico, for Appellant. David F. Richards, Van Soelen, Greig & Richards, P. A., Clovis, New Mexico, for Defendants - Appellees.1 Under § 1292(b), an order not otherwise appealable may be immediately appealed

if the district court judge “shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.” 28 U.S.C. § 1292(b). The district court issued an order expressing that opinion, which we affirmed in an unpublished order declaring that an immediate appeal was authorized. Duke v. Grady Mun. Schs. , No. 96-503, No. 96-2011, 1996 WL 249494 (10th Cir. May 13, 1996). -2- Michael B. Browde, Albuquerque, New Mexico; William H. Carpenter, Carpenter & Chavez, Albuquerque, New Mexico; and Valerie A. C hang, Pasternack & Blake, P.C., Albuquerque, New Mexico, on the brief for Amicus Curiae New Mexico Trial Lawyers Association. Robert D. Castille, Simons, Cuddy & Friedman, LLP, Santa Fe, New Mexico, on the brief for Amicus Curiae New Mexico School Board s Association.

Before PORFILIO, ANDERSON, and BALDOCK , Circuit Judges.

ANDERSON , Circuit Judge.

This is an interlocutory appeal, pursuant to 28 U.S .C. § 1292(b), from an order of the district court in New Mexico, dismissi ng the 42 U.S.C. § 1983 claims of plaintiff, Bonnie Duke, against the Grady Public Schools, the Grady School Board, and the individual school board members in t heir official capacities. 1 The sole issue presented in this appeal is whether loca l school boards and districts in New Mexico are arms of the state and therefore enti tled to Eleventh Amendment immunity, or whether they are political subdivision s or some other form of local2Under New Mexico law, school districts are geographical areas designated as

political subdivisions, and school boards are their governing bodies. SeeN.M. Stat. Ann. §§ 22-1-2(K),(L). As both are defendants in this appeal, we refer to them interchangeably throughout this opinion, as, in fact, do both the New Mexico code and caselaw. -3- entity subject to liability under § 1983. We hold that local school boards and districts in New Mexico are not arms of the state a nd are therefore not entitled to Eleventh Amendment immunity. We therefore reverse and remand. 2

BACKGROUND Ms. Duke commenced this § 1983 action against the m embers of the Grady School Board in their individual capacities, allegi ng that they had deprived her of a protectable property interest in her employment w ithout due process of law. While her action was pending in the district court, the New Mexico Supreme Court issued its decision in Daddow v. Carlsbad Mun . Sch. Dist. , 898 P.2d 1235 (N.M. 1995), cert. denied , 116 S. Ct. 753 (1996). Daddow held that a local school board is not an arm of the state entitled to Eleventh Amendment immunity and that such a board is a “person” under 42 U.S.C. § 1983. Id. at 1241-44. This decision directly conflicts with our decision in Ma rtinez v. Board of Educ. , 748 F.2d 1393 (10th Cir. 1984), in which we held that s chool boards in New Mexico are arms of the state and as such are entitled to E leventh Amendment immunity. Id. at 1396. Martinez has been followed in published and unpublished dec isions.-4-

See, e.g. , Gonzales v. Mountainaire Pub. Schs. , No. 93-2297, 1994 WL 599514 (10th Cir. Oct. 31, 1994); Garcia v. Board of Educ. , 777 F.2d 1403, 1407 (10th Cir. 1985); Maestas v. Board of Educ. , 749 F.2d 591, 592 (10th Cir. 1984). With the district court’s permission, Ms. Duke, rel ying on Daddow , thereafter amended her complaint to include the sch ool district, the school board and the individual defendants in their official cap acities as school board members. The defendants, in their official capacities, relyi ng on Martinez , filed a motion to dismiss Ms. Duke’s complaint. Recognizing the conf lict between Daddow and Martinez , the district court felt obligated to follow Marti nez , and therefore entered an order dismissing Ms. Duke’s amended comp laint naming the school district, the school board and its members in theirofficial capacities. This interlocutory appeal from that order followed, in w hich Ms. Duke asks us to overrule Martinez and hold, as did the New Mexico Supreme Court in D addow , that local school boards and districts are not arms of the state shielded from § 1983 liability in their official capacities by th e Eleventh Amendment.

DISCUSSION The Eleventh Amendment provides that “[t]he Judicia l power of the United States shall not be construed to extend to any suitin law or equity, commenced or prosecuted against one of the United States by Citi zens of another State, or by3 We have referred in other cases to the four factors the Supreme Court held in

Mount Healthywere relevant to determining whether a local school district was an arm of the state: “(1) the characterization of the district under state law; (2) the guidance and (continued...) -5- Citizens or Subjects of any Foreign State.” U.S. C onst. amend. XI. It thus “largely shields States from suit in federal court without their consent, leaving parties with claims against a State to present them , if the State permits, in the State’s own tribunals.” Hess v. Port Auth. Trans-H udson Corp. , 513 U.S. 30, 39 (1994). Eleventh Amendment immunity, however, “ext ends only to the states and governmental entities that are ‘arms of the state.’ ” Watson v. University of Utah Med. Ctr. , 75 F.3d 569, 574 (10th Cir. 1996) (quoting Ambus v. Granite Bd. of Educ. , 995 F.2d 992, 994 (10th Cir. 1993) (en banc)). We described in Watson the inquiry necessary to determine whether an entity is an arm of the state: [W]e engage in two general inquiries. “[T]he court first examines the degree of autonomy given to the agency, as dete rmined by the characterization of the agency by state law and the extent of guidance and control exercised by the state. Second, the co urt examines the extent of financing the agency receives independent of the state treasury and its ability to provide for its own fin ancing.” “The governmental entity is immune from suit if the mone y judgment sought is to be satisfied out of the state treasury .”
Watson , 75 F.3d at 574-75 (citation omitted) (quoting Hal deman v. Wyo. Farm Loan Bd. , 32 F.3d 469, 473 (10th Cir. 1994)); see also Mount Healthy City Sch. Dist. Bd. of Educ. v. Doyle , 429 U.S. 274, 280 (1977); Ambus , 995 F.2d at 994. 33 (...continued)

control exercised by the state over the local school board; (3) the degree of state funding received by the district; and (4) the local board’s ability to issue bonds and levy taxes on its own behalf.” Ambus , 995 F.2d at 994; see alsoSonnenfeld v. City and County of Denver, 100 F.3d 744, 749 (10th Cir. 1996), cert. denied , 117 S. Ct. 1819 (1997). As we explained in Haldemanand Watson , the first two factors reflect the degree of autonomy of the particular entity, and the second two factors examine the source from which the entity receives its funds, and, in particular, whether a money judgment against the entity would be satisfied out of the state treasury.

4 Some other circuits have analyzed more critically the manner in which courts, after Hess , should apply the factors relevant to determining whether an entity is an arm of the state. See, e.g. , Harter v. Vernon , 101 F.3d 334, 339-40 (4th Cir. 1996) (holding that if the court finds the state treasury will pay the judgment, the entity is immune, but if it finds the treasury will not, then other factors should be considered), cert. denied , 117 S. Ct. 2511 (1997); Mancuso v. New York State Thruway Auth. , 86 F.3d 289, 293 (2d Cir.) (applying six factor test, and concluding that “[o]nly if those factors point in different directions” does the court consider whether the state’s integrity or treasury are affected), cert. denied , 117 S. Ct. 481 (1996); Hadley v. North Ark. Community Technical College , 76 F.3d 1437, 1442 (8th Cir. 1996) (examining state law characterization, degree of autonomy and “most importantly” source of operating funds), cert. denied , 117 S. Ct. 1080 (1997); Christy v. Pennsylvania Turnpike Comm’n , 54 F.3d 1140, 1150 (3d Cir.) (applying three factors and then considering them “in their totality”), cert. denied , 116 S. Ct. 340 (1995). Other courts have simply pointed out the difficulties and uncertainties in trying to apply the Eleventh Amendment analysis, particularly after Hess . See, e.g. , Gray v. Laws , 51 F.3d 426, 433 (4th Cir. 1995); see alsoAlex E. Rogers, Note, Clothing State Governmental Entities with Sovereign Immunity: Disarray in the Eleventh Amendment Arm-of-the-State Doctrine , 92 Colum. L. Rev. 1243 (1992) (discussing confusion prior to Hess ). -6- The Supreme Court has indicated more recently that “the vulnerability of the State’s purse [i]s the most salient factor in Eleve nth Amendment determinations.”
Hess , 513 U.S. at 48; see also Regents of the Univ. of Calif. v. Doe , 117 S. Ct. 900, 904 (1997); Sonnenfeld , 100 F.3d at 749. 4-7-

Whether a local entity is an arm of the state under the Eleventh Amendment “is a question of federal law.” Doe , 117 S. Ct. at 904 n.5; see Howlett v. Rose , 496 U.S. 356, 376 (1990); Ambus , 995 F.2d at 995. However, “that federal question can be answered only after considering the provisions of state law that define the agency’s character.” Doe , 117 S. Ct. at 904 n.5. And while we have noted that most courts considering the issue since Mount Healthyhave held that local school districts or boards are not entitled t o Eleventh Amendment immunity, the question must nonetheless “be determined in eac h case on the basis of the individual state laws involved.” Ambus , 995 F.2d at 994.

A. Martinez Decision In Martinez , we held that “New Mexico from the outset has take n an extreme position on the responsibility of state gov ernment for the local school systems both as to administration and finances.” M artinez , 748 F.2d at 1394. Citing the New Mexico Constitutional provision thatthe State Board of Education “shall have control, management and direction . . . for all public schools,” N.M. Const. art. XII, § 6, and relying on the statute se tting out the State Board’s5N.M. Stat. Ann. § 22-2-2 includes among the state board’s powers and duties the

power to: B. determine policy for the operation of all public schools . . . in the state;

. . . E. designate courses of instruction to be taught in all public schools in the state;

. . . G. determine the qualifications for and issue a certificate to any person teaching . . . ; H. suspend or revoke a certificate held by a certified school instructor or certified school administrator, according to law, for incompetency, immorality or for any other good and just cause;

. . . J. prescribe courses of instruction, requirements for graduation and standards for all public schools . . . ; K. adopt regulations for the administration of all public schools . . . ;

. . . W. provide for management and other necessary personnel to operate any public school or school district that has failed to meet requirements of law, state board standards or state board regulations.

-8- powers, we concluded that the state exercised perva sive control over local school systems. Id. at 1394-95. 5 We also observed that there was “a separate system of pervasive financial control over all school districts.” Id. at 1395. In reaching that conclusion, we noted that under New Mexico law, the New Mexico Dep artment of Finance and Administration has complete budget-making authority over school district budgets, that the Department must include, in schoo l district budgets, a fund from6 The defendants in this case attempt to minimize the relevance of Daddowto this

case, asserting that the Daddowcourt’s analysis was directed to determining whether a local school board is a “person” for purposes of suit in state court under § 1983, and not to whether such school boards are entitled to Eleventh Amendment immunity in federal court. While that is true, the New Mexico Supreme Court in Daddowtook “guidance” from the Eleventh Amendment immunity analysis in Mount Healthy . Moreover, the court made it abundantly clear that it was analyzing the question of whether a local school board was or was not an “arm of the state” under Mount Healthy , which is, in fact, the analysis necessary to determine whether an entity is entitled to Eleventh Amendment immunity. SeeDaddow , 898 P.2d at 1239-43. -9- which to satisfy civil rights judgments, and that, at that time, approximately 96% of school funds statewide were provided by the stat e. Id. We thus concluded: Considering that the New Mexico State Board of Educ ation has the “control,” the “management” and “direction” of all public schools; that this authority has been implemented by the leg islature in detail; that the fiscal-budgetary matters for the districts are fully controlled by the state; that the state taxing method for scho ols is a statewide system of state taxes; that the funds so generated for the schools are applied on a formula to equalize funding among the districts and basically on school attendance, we must hold that t he local boards are indeed arms of the state system of education as pro vided in the state constitution. Id. at 1396.

B. Daddow Decision In Daddow , the New Mexico Supreme Court specifically disagre ed with our analysis in Martinez , concluding “that the Tenth Circuit decision is er roneous.” Daddow , 898 P.2d at 1238. 6 It began by observing that the Martinez decision erroneously relied upon the broad language of N.M. Const. art. XII, § 6, and that-10-

the section “is not self-executing,” but rather, th e State Board’s powers are limited to the powers provided by statute, and the New Mexico Legislature has “given local boards exclusive power over employmentand discharge of school employees.” Daddow , 898 P.2d at 1240. The Daddowcourt further held that Martinez “did not consider all of the Mt. Healthy factors.” Id. at 1241. With respect to the first factor--how the entity is characterized under state law--the New Mexico Supreme Court concluded that a local school board is a “local public body” under N .M. Stat. Ann. § 41-4-3(C) (part of the New Mexico Tort Claims Act), and that it is not designated as a state educational institution under the New Mexico Consti tution. Id. ; see N.M. Const. art. XII, § 11. Thus, Daddow concluded that the first Mount Healthy factor clearly indicated that local school boards were not“arms of the state.” Daddow , 898 P.2d at 1241. With respect to the Mount Healthy factor directed at the control exercised by the state over the entity, the court in Daddow held that “[l]ocal school boards have significant political and financial autonomy.” Id. The court cited N.M. Stat. Ann. §§ 22-5-4(G) and (K), providing, respectively, that local school boards may “contract, lease, purchase and sell for the school district,” and that they may7N.M. Stat. Ann. § 22-5-4 lists numerous additional powers and duties of local

school boards.

8 The New Mexico Constitution prohibits school districts from issuing bonds except for capital improvements. N.M. Const. art. IX, § 11; N.M. Stat. Ann. § 22-18-1. Additionally, no obligation incurred pursuant to the issuance of a bond “shall be a charge against or a debt of the state or any of its political subdivisions.” § 22-19-16(B). -11- “issue general obligation bonds of the school distr ict.” Id. 7 The New Mexico court held that “[t]he fact that our local school b oards may issue bonds weighs heavily in favor of their autonomy and against thei r characterization as ‘arms of the state.’” Id. 8
The court in Daddow explicitly criticized the Martinez court’s conclusion that the State Board of Education has pervasive fin ancial control over the school boards because of the State Board’s involvement in budget-making: The [Martinez ] court did not consider, however, that the local b oard determines priorities for spending and has discreti on in spending funds generated under the Act as long as special ne eds programs are met. Critically, we note that under Section 22-19-16, no obligation issued by a local school board may be charged again st or become a debt of the state or any of its political subdivisi ons. Id. at 1241-42 (citation omitted). The Daddowcourt then considered the question of the source f rom which a judgment against a school district or board would b e satisfied. The Martinez court had concluded that such a judgment would be s atisfied out of state funds because state funds provided 96% of school districtfunds statewide and because9N.M. Const. art. VIII, § 7 provides as follows: No execution shall issue upon judgment rendered against . . . any . . . school district or board of education; or against any officer of any . . . school district or board of education, upon any judgment recovered against him in his official capacity and for which the . . . school district or board of education[] is liable, but the same shall be paid out of the proceeds of a tax levy as other liabilities of . . . school districts or boards of education, and when so collected shall be paid by the county treasurer to the judgment creditor. As we acknowledged in Martinez , however, that constitutional section is not selfexecuting. Martinez , 748 F.2d at 1395 (citing McAtee v. Gutierrez , 146 P.2d 315 (N.M. 1944)). The implementing statute is N.M. Stat. Ann. § 7-37-7(C)(3), which governs tax levies “necessary for the use of a governmental unit to pay a tort or workers’ compensation judgment for which a . . . school district is liable.” Thus, section 7 of Article VIII of the New Mexico Constitution, as implemented by § 7-37-7(C)(3), authorizes school districts or boards to impose tax levies to pay for tort or workers’ compensation judgments. The Martinezcourt concluded, however, that those (continued...) -12- Martinez interpreted particular state statutes to require s chool boards to include within their budgets an amount sufficient to cover such judgments. Daddow cited approvingly our statement in Ambus that “[t]he proper analysis focuses on whether the damage award would be paid directly by the state treasury, rather than indirectly through commingled state and local funds or state indemnification provisions.” Id. at 1242 (quoting Ambus , 995 F.2d at 996). The New Mexico court then held, without further elaboration, that “Section 7 of Article VIII [of the New Mexico Constitution], Section 7-37-7(C)(3), and Section 41-4-20 show that, generally, school district liabilities are not paid directly from state funds.” Id

. 99 (...continued)

provisions did not permit school districts to raise taxes to pay for federal civil rights judgments, because “suits for violations of federal constitutional rights are not tort actions.” Martinez , 748 F.2d at 1396 (citing Wise v. Bravo , 666 F.2d 1328 (10th Cir. 1981)). Daddowdeclined to decide whether § 7-37-7(C)(3) applies to judgments arising from constitutional violations. Daddow , 898 P.2d at 1242. The New Mexico Tort Claims Act, N.M. Stat. Ann. § 41-4-20(A)(1)(c), requires local public bodies to “purchase insurance, establish reserves or provide a combination of insurance and reserves or provide insurance in any other manner authorized by law” to satisfy liabilities arising under the Tort Claims Act. Section 41-4-20(B) provides that “[t]he public school finance division of the department of finance and administration shall not approve the budget of any school district which has failed to budget sufficient revenues to insure or otherwise cover pursuant to this section every risk for which immunity has been waived . . . or liability imposed.” Daddowasserted, without explanation, that “Section 41-4-20 ensures that such liabilities [judgments arising from civil rights actions] will not be imposed upon the state treasury.” Daddow , 898 P.2d at 1242. It cited in support of that proposition Judge McKay’s partial dissent and partial concurrence in Garcia v. Board of Educ. , 777 F.2d 1403, 1416 (10th Cir. 1985) (McKay, J., dissenting in part and concurring in part), in which Judge McKay explained why § 7- 37-7(C)(3) (allowing school districts or boards to levy taxes to pay tort judgments) could be interpreted to apply to civil rights judgments, and also explained why a careful reading of the New Mexico statutes indicates that the Tort Claims Act’s mandate that school boards budget for civil rights judgments does not include civil rights judgments obtained in federal court, but only civil rights judgments obtained in state courts. Id. As Ms. Duke asserts, New Mexico has by statute established a New Mexico Public School Insurance Authority, N.M. Stat. Ann. § 22-2-6.4, which assumes the responsibility for the defense and indemnification of a claim such as Ms. Duke’s against a school board. §§ 22-2-6.1 to 22-2-6.10. Premiums are paid by the school boards and are included in their budgets. SeeLeDoux Aff. ¶ 4, Appellant’s App. at 32. -13- Thus, Daddowconcluded that the Mount Healthy factor which examines the source of any money judgment against the school dis trict or board suggested that New Mexico school boards were not arms of the state . Id.-14-

Finally, Daddow examined whether local school boards operate like other political subdivisions. After observing that local school board members are elected by popular vote from district residents; th at they may acquire and dispose of property and may sue and be sued; and that, whil e sales of school district property valued at more than $5000 must be approved by the state department of education, other local public bodies must obtain si milar approval prior to selling property, the New Mexico court concluded that “[s]c hool districts operate independently, like counties and municipalities.” Id. at 1243.

C. Our Standard of Review Defendants argue that, because Eleventh Amendment i mmunity is a question of federal law, we should give no deferenc e to Daddow , but should simply follow our Tenth Circuit authority in Martin ez . We have acknowledged that the existence of Eleventh Amendment immunity i s indeed a question of federal law. However, as the Supreme Court has not ed, that question can only be answered “after considering the provisions of state law that define the agency’s character.” Doe , 117 S. Ct. at 904 n.5. As the district court acknowledged, the conflict be tween Daddowand Martinez is clear and, thus, troublesome. While we must vi ew the issue of Eleventh Amendment immunity as a federal question, we cannot ignore the fact-15-

that the answer to the question requires a detailed analysis of New Mexico constitutional and statutory materials. And, “the State’s highest court is the best authority on its own law.” Commissioner v. Estate of Bosch , 387 U.S. 456, 465 (1967). We agree with the views recently expressed by the F ourth Circuit in an Eleventh Amendment case in which, as here, there wa s a state court decision on the status of the individual claiming Eleventh Amen dment immunity, and to which one party argued the Fourth Circuit should de fer. The court held that: [a]s a matter of federal law, a court may consider both the relevant state statutes, regulations, and constitutional pro visions which characterize the entity, and the holdings of state courts on the question. A federal court may “give deference to t he rationale used by a state court,” but the holding is not dispositi ve as a matter of federal law.
Harter v. Vernon , 101 F.3d 334, 342 (4th Cir. 1996) (citations omitted) (quoting Ram Ditta v. Maryland Nat’l Capital Park & Planning Comm’n , 822 F.2d 456, 460 (4th Cir. 1987)), cert. denied , 117 S. Ct. 2511 (1997); see also Metcalf & Eddy, Inc. v. Puerto Rico Aqueduct & Sewer Auth. , 991 F.2d 935, 942 (1st Cir. 1993) (“While not dispositive, consistent decisions of a state’s highest court construing an agency’s or institution’s relationshi p with the central government are important guideposts . . . .”). Accordingly, w e will give some deference to Daddow ’s rationale, but do not regard it as dispositive o f the issue before us. As Ms. Duke and the New Mexico Trial Lawyers Associati on, as amicus, urge, we-16-

are more comfortable affording some deference to a state court decision on Eleventh Amendment immunity when that decision find s no immunity. See Miller-Davis Co. v. Illinois State Toll Highway Aut h. , 567 F.2d 323, 330 (7th Cir. 1977) (“Especially when a state supreme court does not extend immunity but, rather, holds that an entity is not to be deemed th e state for purposes of sovereign immunity, we think the federal courts must pay care ful attention to the state opinion.”).

D. Analysis We conclude, after examining state statutes, the st ate constitution and state case law, that school districts and their governing boards in New Mexico are not arms of the state entitled to Eleventh Amendment im munity. In analyzing the Eleventh Amendment issue, we firstreiterate that, even after Hess and Doe , which emphasized the primacy of the impact on the state treasury as a factor in determining immunity, otherfactors remain relevant. Hess itself examined local versus state control, Hess , 513 U.S. at 44; the characterization and definition of the entity in it s enabling and implementing legislation, id. at 44-45; state court interpretations and characte rization of the entity, id. at 45; the functions of the entity, id. ; the fiscal independence of the entity, id. at 45-46; and the legal liability of the state for the entity’s debts, id. at10 Those “twin reasons” are the desire to protect the state treasury and to protect

state sovereignty. SeeHess , 513 U.S. at 52 (identifying “the States’ solvency and dignity” as the concerns “underpin[ning] the Eleventh Amendment”). -17- 46. It is only “[w]hen indicators of immunity poin t in different directions[] [that] the Eleventh Amendment’s twin reasons for being rem ain our prime guide.” Id. at 47. 10

1. Control Martinez and Daddow each reached different conclusions on the issue of control of local school boards in New Mexico. Afte r carefully examining the relevant statutory and constitutional materials, as well as the New Mexico Supreme Court’s decision in Daddow , we agree with the New Mexico court that school boards have considerable local autonomy and control. The New Mexico constitution empowers the State Boar d to “determine public school policy” and to “have control, managem ent and direction, including financial direction, distribution of school funds a nd financial accounting for all public schools.” N.M. Const. art. XII, § 6; see al so N.M. Stat. Ann. § 22-2-1(A). By statute, the State Board has general authority o ver schools statewide, and authority, inter alia, to establish standards regar ding curriculum, teacher accreditation and qualifications, and graduation re quirements. As we acknowledged with respect to the Utah State Board o f Education in Ambus ,-18-

“[e]ach of these responsibilities relates to the ma nagement of the school system in the state as a whole.” Ambus , 995 F.2d at 996. Local school boards, however, have many other respo nsibilities and duties, which they perform without state control and superv ision. For example, local board members are elected from residents of the dis trict in which they live, N.M. Stat. Ann. § 22-5-1.1; subject to state board regul ations, they “supervise and control all public schools within the school distri ct and all property belonging to or in the possession of the school district,” § 22- 5-4(A); they approve or disapprove all employment decisions, § 22-5-4(D); t hey “contract, lease, purchase and sell for the school district,” § 22-5-4(G); the y “acquire and dispose of property,” § 22-5-4(H); they “have the capacity to sue and be sued,” § 22-5-4(I); they can “acquire property by eminent domain,” § 22 -5-4(J); and they can “issue general obligation bonds of the school district,” § 22-5-4(K), although only for capital improvements. N.M. Const. art. IX, § 11; N .M. Stat. Ann. § 22-18-1. As with Utah school districts, “significant autonomy i s vested in the local boards.”11 Martinezalso concluded that the State Board had “complete” control over the

budgets of each local school board. Daddowdid not read the statutory scheme to impose that degree of control, nor do we. By statute, the State Department of Education shall “prescribe the forms for and supervise and control the preparation of all budgets of all public schools and school districts.” N.M. Stat. Ann. § 22-8-4. The procedure is as follows: “[E]ach local school board shall submit to the department an estimated budget for the school district for the ensuing fiscal year.” § 22-8-6(A). The State Department then “approve[s] and certif[ies] to each local school board a temporary operating budget for use by the local school board pending approval by the department of a final budget,” and, at a later date, the department “approve[s] and certif[ies] to each local school board . . . a final budget . . . based upon the estimated budget fixed by the local school board and the state superintendent .” § 22- 8-11(A)(1), (3) (emphasis added). Thus, while the State Department has approval authority over budgets, the budgets appear to be prepared initially by the local boards. Moreover, local boards have discretion to determine priorities for spending, “provided that the special program needs” are met. § 22-8-18(B). -19- Ambus , 995 F.2d at 996. 11 This factor therefore suggests such school boards should not receive Eleventh Amendment immunity.

2. Designation Under State Law With respect to school districts’ designation understate law, the New Mexico Constitution enumerates “State educational i nstitutions,” but local school districts are not among them. “School district” is defined in the Public School Code as “an area of land established as a political subdivision of the state,” N.M. Stat. Ann. § 22-1-2(K), of which the local board is its governing body. § 22-1- 2(L). The Tort Claims Act defines a “local public body” as “all political subdivisions of the state and their agencies, instr umentalities and institutions.”-20-

§ 41-4-3(C). It defines the “state” or “state agen cy” as “the state of New Mexico or any of its branches, agencies, departments, boar ds, instrumentalities or institutions.” § 41-4-3(H). The section concernin g notice of claims suggests that school districts are classified as local public bod ies. It states as follows: Every person who claims damages from the state or a ny local public bodyunder the Tort Claims Act shall cause to be presen ted to the risk management division for claims against the state , the mayor of the municipality for claims against the municipality, the superintendent of the school district for claims ag ainst the school district , the county clerk of a county for claims against t he county, or to the administrative head of any other local publi c body for claims against such local public body . . . a written notice . . . . N.M. Stat. Ann. § 41-4-16(A) (emphasis added) (citations omitted). The section in the Tort Claims Act addressing the establishmentof a public liability fund defines a school district by reference to the Publi c School Code, § 22-1-2, which, as indicated, defines a school district as a politi cal subdivision. Thus, while certainly not definitive, statutory definitions sug gest the New Mexico legislature intended school districts or boards to be political subdivisions or local public bodies, not arms of the state. This factor therefo re points away from Eleventh Amendment immunity for such entities.-21- 3. State Court Interpretations Daddow , as a detailed and lengthy analysis by the state’s highest court, is entitled to some deference with respect to its conc lusion that school boards are not arms of the state under New Mexico law. We rec ognize that the precise issue- -Eleventh Amendment immunity for a local school boa rd--was not the issue before the court in Daddow , as it involved a § 1983 action brought in state c ourt. Nonetheless, the court’s direct discussion of the M ount Healthy factors, its specific use of the Eleventh Amendment analysis for“guidance,” and its direct and pointed criticism of Martinez make it relevant to our analysis. Thus, this factor also points away from Eleventh Amendment imm unity.

4. Fiscal Independence of School Districts As all parties agree, New Mexico school districts s tatewide receive an average of approximately 95% of their funds from th e state. The Grady Municipal School district receives 98% of its funds from the state. Moreover, New Mexico has adopted an equalizing formula to fun d its schools, pursuant to which each school district’s total budget is calcul ated by a formula which considers a number of factors. The state provides funding for the budget in the amount by which the budget exceeds local and federa l revenues, less five percent. N.M. Stat. Ann. § 22-8-25. As we have indicated, s chool districts or boards may12All school districts in New Mexico are insured either through the Public School

Insurance Authority or a private carrier. Judgments up to $250,000 are paid by the Authority, with any excess above that paid by a private carrier secured by the Authority. SeeLeDoux Aff. ¶ 4, Appellant’s App. at 32. -22- levy taxes to pay for tort or workers’ compensation judgments, but not for federal civil rights judgments. School districts may issue bonds, but only for capital improvements. Thus, school districts receive virtu ally all their money from the state, and they appear to have no independent fundr aising ability. This factor therefore points in favor of Eleventh Amendment imm unity.

5. State Treasury Liability for Judgments The final, but the most important, factor is whethe r the state treasury would be at risk of paying a judgment against a New Mexic o school district or board, like defendant Grady Municipal Schools and its boar d. While the Supreme Court has indicated that this is the most “salient” facto r, it is also among the most difficult to apply. This case, in particular, high lights the confusion in this area of Eleventh Amendment jurisprudence. It appears that a civil rights judgment such as Ms. Duke’s would be paid from the New Mexico Public Schools Insurance Author ity or from a private insurance carrier. 12 Premiums for participation in the Authority come from the school districts’ budgets, which, in turn, are fund ed almost exclusively by the-23-

state. According to the affidavit of the Executive Director of the Authority, Dr. Eugene LeDoux, premiums “are collected [from school districts] based on such factors as district size and claim history.” LeDou x Aff. ¶ 4, Appellant’s App. at 32. Thus, as a practicalmatter, because virtually all of the operating fun ds of a school district in New Mexico, including the premiu ms which purchase the insurance from which a judgment would be satisfied, come from the state, the state treasury pays, at least indirectly, for a jud gment against a school district and its governing board. Some courts, following Hess but prior to Doe , held that could be sufficient to confer Eleventh Amendment im munity. See Mancuso v. New York State Thruway Auth. , 86 F.3d 289, 296 (2d Cir.) (“[W]e must also ask whether a judgment against the Thruway Authority wo uld have the practical effect of requiring payments from New York.”), cert. denie d , 117 S. Ct. 481 (1996); Hadley v. North Ark. Community Technical College , 76 F.3d 1437, 1441 (8th Cir. 1996) (“[E]ven if [the entity] could initially sati sfy a judgment from other operating revenues, such as tuition payments or fed eral grants, the judgment would produce a higher operating budget shortfall t hat must, by state law, be satisfied by an appropriation from the state treasu ry.”), cert. denied , 117 S. Ct. 1080 (1997); Ristow v. South Carolina Ports Auth. , 58 F.3d 1051, 1054 (4th Cir. 1995) (holding that even if the state was not legal ly liable for a judgment against the Ports Authority, depletion of its resources wou ld require the state to provide it-24-

greater financial assistance). As indicated, howev er, all those cases followed
Hess but pre-dated Doe

. The question is whether that practical impact analy sis satisfies the Supreme Court’s test for when a state’s treasury is vulnera ble for Eleventh Amendment immunity purposes, as set out in Hess and Doe together. In Hess , the Supreme Court asked whether either of the two states which had joined to create a bi-state entity were “legally and practically” obligated to satisfy a judgment against the entity. Hess , 513 U.S. at 51. In Doe , the Court appeared to give primacy to the legal liability of the state: “‘The question is no t who pays in the end; it is who is legally obligated to pay the judgment that is being sought.’” Doe , 117 S. Ct. at 903 (quoting Doe v. Lawrence Livermore Nat’l Lab. , 65 F.3d 771, 777-78 (9th Cir. 1995) (Canby, J., dissenting), rev’d , 117 S. Ct. 900 (1997)). We interpret
Doe to require us to focus on legal liability for a ju dgment, rather than practical, or indirect, impact a judgment would have on a stat e’s treasury. As the Court specifically stated, “it is the entity’s potential legal liability, rather than its ability or inability to require a third party to reimburse it, or to discharge the liability in the first instance, that is relevant.” Id. at 904. And while such a focus in some ways ignores economic reality, it also provides a c lear and workable test in this very confused area of the law. It directs courts a way from having to make caseby-case fact-specific determinations of the practic al impact on state treasuries. In13 Indeed, this partly explains some of the confusion in the case law. In Ambus , for

example, we held that Utah school districts, which receive approximately 62% of their funds from the state, were not arms of the state. We held in Watsonthat the University of Utah Medical Center, which received only five percent of its funds from the state, was an arm of the state. In Belanger v. Madera Unified Sch. Dist. , 963 F.2d 248 (9th Cir. 1992), the Ninth Circuit held that a school district which received 75% of its funding from the state was an arm of the state. In Mt. Healthythe Supreme Court held that the school district was not an arm of the state despite receiving “a significant amount of money from the State.” Mt. Healthy , 429 U.S. at 573. -25- this case, involving 98% state revenues, it may be relatively easy to determine the practical effect on the state treasury, but determi ning when the impact is sufficient as the percentage of state revenues decl ines becomes increasingly difficult. 13 As applied to New Mexico’s school districts and the ir boards, we must conclude that the factor relating to the liability of the state treasury points away from Eleventh Amendment immunity, for the simple re ason that the state of New Mexico is not legallyliable for a judgment against a school district. Because this most important factor suggests there should be no E leventh Amendment immunity, and because most of the other relevant fa ctors point the same way, we hold that school districts and their governing boar ds in New Mexico are not arms of the state, and they are accordingly not shielded by the Eleventh Amendment from liability for a § 1983 action in federal court . In so holding, we conclude that Martinez is no longer the law and is effectively overruled. We have polled the active judges on the court and they unanimously agr ee in this decision.-26-

For the foregoing reasons, we REVERSE the judgment of the district court, and REMAND for further proceedings.