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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL


Opinion No. 6028

January 19, 1982

CONSTITUTIONAL LAW:

Const 1963, art 9, Sec. 6--prohibits use of investment earnings of bond proceeds for operating purposes

SCHOOLS AND SCHOOL DISTRICTS:

Earnings on investment of building and site fund moneys

A school district may not use the income from investment of bond proceeds placed in a building and site fund for operating purposes. 1980 PA 273 violates Const 1963, art 9, Sec. 6.

Honorable Thomas H. Brown

State Representative

The Capitol

Lansing, Michigan

You have requested my opinion on several questions related to 1980 PA 273 which amended the School Code of 1976, 1976 PA 451; MCLA 380.1 et seq; MSA 15.4001 et seq, Sec. 1223(4), to provide:

'Earnings of an investment shall become a part of the fund for which the investment was made, except in the case of earnings of an investment from a building and site fund, which may be credited until not later than July 1, 1982, to either the building and site fund or the general fund of the school district' [Underscored language added by amendment.]

In your letter of request you ask:

'Will this new legislation adversely affect the sale of future bonds? Will it cause our bond rating to be lowered? Would each school district be restricted as to the amount they can use? Would interest accumulated prior to the effective date of P.A. 273 be available to use as operating funds or only the interest accumulated after that date?

'I ask these questions only to clarify what will happen to our future bonding requests.'

1980 PA 273, supra, effective October 8, 1980, amended 1976 PA 451, Sec. 1223, supra, to allow investment income from a building and site fund to be retained, in the discretion of the board of education of the school district, either in the building and site fund or, in the alternative, be transferred to the general fund, provided such transfer is made on or before July 1, 1982.

Although building and site funds may be established in various ways, your question relates only to moneys in a building and site fund established to receive bond proceeds. (1)

Transfer of money from the building and site fund to the general fund was considered in OAG, 1977-1978, No 5240, p 267 (November 4, 1977). It concluded that where a building and site fund is created by a bonding resolution of a school district and the bond proceeds are deposited in such fund, the district may not transfer money out of such fund to the general fund even with the approval of the electors in the school district. See also, OAG, 1963-1964, No 4123, p 55 (March 22, 1963). It should be noted that neither opinion specifically discussed interest earnings. These opinions were based upon the premise that a school district has no authority to issue bonds for operating expenses and, therefore, may not indirectly use the bond proceeds for that purpose.

Public money must be accounted for as provided by law. 1976 PA 451, supra, Sec. 1218, requires the State Board of Education to prescribe uniform accounting procedures for school districts. The board has promulgated Administrative Code 1979, R 340.852, which requires that, in the absence of specific approval of the State Board of Education, the chart of accounts prescribed by the state board shall be used by local school districts. This chart of accounts is published in a manual entitled Financial Accounting for Michigan School Districts.

Public school accounting generally follows a fund basis principle of accounting. This principle requires the segregation and independence of the various funds, which is described in this manual on pages II-B-1 & 2 as follows:

'A fund is an independent fiscal and accounting entity with a self-balancing set of accounts. Legal reporting requirements and the varied nature of school districts' operations preclude a single set of accounts for recording and summarizing all transactions of a school district. Records must be organized on a multiple-fund basis with each of the several funds being complete, independent accounting entities. Each fund will account for assets, liabilities, fund balances, revenues, and expenditures and may provide budgetary control in a balanced set of accounts. Account groupings may be used within a fund to provide the separate accountability necessary to conform with the legal and local policy requirements.

'The following six funds are mandated . . ..

'1) General Fund . . ..

'2) Debt Retirement . . ..

'3) Building and Site Fund . . ..'

The fund principle is also applied to school district accounts by 1976 PA 451, supra, Sec. 1215, which requires separate funds for operating, library, building and site, and debt retirement. Thus, bond proceeds must be deposited in the building and site fund for capital improvements.

Prior to its amendment by 1980 PA 273, 1976 PA 451, Sec. 1223(4), supra, required investment earnings to remain with the building and site fund without exception. Further, the use of unexpended proceeds is also governed by 1961 PA 108, as amended; MCLA 388.951 et seq; MSA 3.424(111) et seq, Sec. 4a, which provides that such proceeds, up to and including 15 percent of the amount of the bond issue, may be used for certain purposes set forth in the section if such use is approved by the Superintendent of Public Instruction for qualified bonds or the Municipal Finance Commission for nonqualified bonds. Absent such approval, this section requires the money be immediately paid into the debt service account for the bonds. See OAG, 1979-1980, No 5588, p 461 (November 8, 1979). Under the fund principle of accounting, discussed above, interest income would be included within this statutory provision.

Therefore, even if the bonding documents did not specify the use of such investment income, the provisions of 1976 PA 451, Sec. 1223(4), supra, in existence at the time bonds were delivered, will be read into the contract and become a part thereof. State Highway Commissioner v Detroit City Controller, 331 Mich 337, 352; 49 NW2d 318, 327 (1951).

It is my opinion, therefore, that the transfer of any investment income from a building and site fund established with bond proceeds delivered prior to October 8, 1980, would be in derogation of the contract with the bondholders.

Further, Const 1963, art 9, Sec. 6, imposes millage limitations upon ad valorem taxes that may be levied by school districts. Exceptions to these limitations are set forth in the 'non-limitation' clause of this constitutional provision which permits levy of taxes without limitation as to rate or amount in order to meet debt service on bonds. (2)

It may be said in essence that the effect of 1980 PA 273, supra, is to enable a school district which has issued bonds for capital purposes to use the interest earnings for operating purposes, rather than return the interest to debt service in order to reduce outstanding indebtedness. It would follow that the property owners assessed for the indebtedness pay not only for the principal borrowing but also would be assuming the obligation for the interest transferred to operating which would otherwise have reduced the indebtedness. The school district would be indirectly levying debt service millage for operating purposes in violation of Const 1963, art 9, Sec. 6. Therefore, 1980 PA 273, supra, is in derogation of Const 1963, art 9, Sec. 6, insofar as it may be construed to apply to building and site funds established with bond proceeds.

It is my opinion that the use for operating purposes of investment income from a building and site fund established with bond proceeds would be in derogation of Const 1963, art 9, Sec. 6, whether such bonds were delivered before or after the effective date of 1980 PA 273, supra.

This answer to the first question makes it unnecessary to answer your remaining questions.

Frank J. Kelley

Attorney General

(1) Authority to issue bonds is set forth generally in 1976 PA 451, as amended, supra, Sec. 1351; as follows:

'(1) A school district may borrow money and issue bonds of the district to defray all or a part of the cost of purchasing, erecting, completing, remodeling, improving, furnishing, refurnishing, equipping, or reequipping school buildings, including library buildings, structures, athletic fields, playgrounds, or other facilities, or parts thereof or additions thereto; acquiring, preparing, developing, or improving sites, or parts therefor, or additions thereto, for school buildings, including library buildings, structures, athletic fields, playgrounds, or other facilities; purchasing school buses, participating in the administrative costs of an urban renewal program through which the school district desires to acquire a site or addition thereto for school purposes; refunding all or part of existing bonded indebtedness; or accomplishing a combination of the foregoing purposes.'

(2) Const 1963, art 9, Sec. 6, as amended by the Headlee Amendment (Proposal E), effective December 22, 1978, prohibits the issuance of bonds with an unlimited tax pledge without an affirmative vote of the electors. OAG, 1977-1978, No 5417, p 740 (December 20, 1978). Further, school district bonds for school construction must be voted. OAG, 1979-1980, No 5652, p 608 (February 13, 1980).

 


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