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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. 6194 November 28, 1983 SCHOOLS AND SCHOOL DISTRICTS: Authority to use earnings from the investment of bond proceeds to repay a borrowing which is not a part of the bond issue A school district is without authority to use the income from the investment of bond proceeds to repay a different debt which is not part of the bond issue. Honorable Donald H. Gilmer State Representative The Capitol Lansing, Michigan Honorable Paul Wartner State Representative The Capitol Lansing, Michigan You have requested my opinion as to the legality of a proposed use of unexpended proceeds of a bond issue. You advise that a school district issued qualified bonds to remodel and re-equip an existing school and to erect, furnish, and equip and addition thereto. Upon completion of this project, approximately 14 percent of the bond issue proceeds remained unexpended. The school district proposes, however, to invest the unexpended funds, separately borrow the money to pay for certain projects, (1) and then use the interest earnings of the invested funds to repay the borrowing. You inquire whether a school district may lawfully invest unexpended proceeds of a bond issue and use the interest earnings of the investment to repay a borrowing which is not part of the bond issue. The authority of a school district to issue bonds is contained in the School Code of 1976, 1976 PA 451; MCLA 380.1 et seq; MSA 15.4001 et seq. 1976 PA 451, supra, Sec. 1351 provides, in pertinent part: '(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.' Use of unexpended proceeds of a school district bond issue is governed by 1961 PA 108, Sec. 4a; MCLA 388.954a; MSA 3.424(114a), which provides, in pertinent part: '[A]n unexpended balance of the proceeds of sale of any school district bonds heretofore or hereafter issued, remaining after completion of the project, to the extent of 15% of the amount of the issue . . . may be used for school construction, equipment and site acquisition and development if that use is approved by the superintendent of public instruction, . . . and any remaining balance shall be paid immediately into the bond and interest redemption fund established for the bonds and shall be used either for the redemption of callable bonds, or, before the first call date only, for purchasing the bonds on the open market at not more than the fair market value or used to reduce the amount required to be levied to meet current principal and interest on the bonds as they become due.' Pursuant to these statutory provisions, unexpended proceeds of a bond issue must be used either to fund other approved school construction, equipment and site acquisition and development if approved by the Superintendent of Public Instruction, or to be deposited into the bond and interest redemption fund established for such bonds. Use of bond proceeds is limited to purposes enumerated in the statute authorizing the bond issue and such funds may not be diverted to other purposes or uses. OAG, 1979-1980, No 5588, p 461 (November 8, 1979). In the proposal being considered herein, the school district proposes to use the bond proceeds to create an investment fund, the earnings of which would be utilized to repay a borrowing used to finance various other projects. (2) This proposed use is not a purpose enumerated in the authorizing statutes. 1976 PA 451, Sec. 1351, supra, does not empower bonds to be issued for such purpose. 1961 PA 108, supra, Sec. 4a, explicitly requires that unexpended proceeds of a bond issue are to be used either to directly fund other approved school construction, equipment and site acquisition and development, or to be deposited in the bond and interest redemption fund for such bonds. Moreover, 1976 PA 451, supra, Sec. 1223(4) provides, in pertinent part: 'Earnings of an investment shall become a part of the fund for which the investment was made, . . .' Thus, interest earned by investing unexpended proceeds of a bond issue become part of the same fund as the unexpended proceeds and may not be used for any purpose for which the unexpended proceeds may not be used. OAG, 1981-1982, No 6028, p 529 (January 19, 1982). It is my opinion, therefore, that a school district may not lawfully use the interest earnings from the investment of bond proceeds to repay a different borrowing which is not part of the bond issue. Frank J. Kelley Attorney General (1)
(2)
This proposed second borrowing could result in the second borrowing being deemed violative of the arbitrage provisions of section 103(c) of the Internal Revenue Code, 26 USC 103(c) and 26 CFR Sec. 1.103-13 (arbitrage bonds). If the borrowing were deemed to violate the arbitrage provisions, the interest on the borrowing would not be tax exempt.
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