SHELBYVILLE, Tenn. (WGNS Radio) - The Tennessee Court of Appeals has ruled in favor of the City of Shelbyville in a high-stakes financial dispute with Bedford County over the allocation of local option sales taxes. The appellate decision affirms a lower court’s ruling that allows the city to terminate a decades-old tax-sharing agreement, officially returning an estimated $2 million in annual revenue to Shelbyville starting July 1, 2027. During oral arguments, Michael Catona, representing Bedford County, stated before the appellate judges in the Tennessee Court of Appeals... Scroll down for more.
The lawsuit stems from a 1974 handshake-style contract in which the City of Shelbyville agreed to relinquish a portion of its sales tax revenue to Bedford County. The funds were specifically designated to finance a county school construction and maintenance initiative known as "Building Program B." The attorney representing Shelbyville made a rebuttal before the judges.. That was attorney Sara Morgan for the City.
The debt for that specific building program was fully paid off in 1999. However, the original contract lacked a specific termination date, leading to a legal standoff when the city formally notified the county of its intent to cancel the arrangement and reclaim its statutory share of the tax revenue.
Following a declaratory judgment action filed by the city, Senior Judge Don R. Ash of Murfreesboro ruled last year that because the contract did not include a termination date, other than “Building B,” it could be terminated within a reasonable period of time or at will with reasonable notice. Judge Ash found that the city’s decision to terminate the agreement was not wrongful and upheld July 1, 2027, the date established by the City of Shelbyville and identified in court documents as the official termination date.
Bedford County appealed that decision, bringing the case before the state appellate court, as seen in court filings released on Thursday, August 13, 2026.
During oral arguments, the appellate panel, authored by Judge Steven W. Maroney, sided entirely with the trial court. In his ruling, Judge Maroney wrote, "Discerning no error, we affirm." Scroll down for more details.
Community and Financial Impact in Bedford County - The court's decision represents a monumental shift in local public finance and could lead to profound impacts on both city and county operations. Bedford County Mayor Chad Graham said in a written statement after reviewing the appeals court’s decision, “...the first indication is that this is a setback for educational funding in Bedford County. It will be up to the new county mayor and the new Board of Commissioners, who take office on Sept. 1, to decide whether or not to appeal the decision further.” County Mayor Graham did not seek re-election and will leave office on August 31, 2026.
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A Financial Blow to County Schools: Bedford County currently relies on the disputed $2 million annually to service debt for school buildings. Because the 1974 agreement strictly dedicated these funds to education, their loss creates an immediate funding gap for the county's school system.
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The Mayor further said, “Under the current system, which the city agreed to decades ago, the disputed sales tax revenues must be spent on debt for school buildings. That’s a dedicated fund, and that’s the only thing the county can use that money for. For the city, if this decision stands, those will be unrestricted funds which the city will be able to use for any purpose.”
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Pressure from Population Growth: Bedford County is experiencing continued population growth and dealing with aging educational facilities. The sudden loss of revenue will force county officials to either find alternative funding streams, adjust local taxes, or restructure future school construction debt.
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Unrestricted Revenue for the City: Conversely, the City of Shelbyville stands to gain a massive financial boost. Unlike the county, which was legally bound to spend the money solely on educational infrastructure, the city will receive these revenues as unrestricted funds. This means Shelbyville can allocate the $2 million annually toward any municipal purpose, such as public safety, infrastructure improvements, parks, or city services.
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Political Shifts and Future Appeals: The legal battle may not be over. The decision on whether to escalate the lawsuit to the Tennessee Supreme Court now falls to a newly elected administration.
Bedford County Mayor Chad Graham addressed the ruling, highlighting the difficult road ahead for the county's educational infrastructure. Graham confirmed, “The loss of that funding, about $2 million per year, will dramatically impact our ability to operate the school system. Our continued population growth, and the aging of our older school buildings, means we can’t simply get out of the business of building schools.”
As the September 1 transition of county leadership approaches, the community will be watching closely to see if the new Board of Commissioners accepts the 2027 contract termination or chooses to take the fight further, perhaps using a slightly different path.
