Temporary Interfund Borrowing Considerations During the Safe Reopening of California Public Schools

06.15.2020

As school districts consider and adopt their new budgets for the upcoming fiscal year, they may be faced with fiscal uncertainty and funding challenges, and may be considering the use of temporary interfund borrowing. 

The California Department of Education (“CDE”) has released guidance for school districts’ reopening after closures due to COVID-19.  CDE’s guidance will greatly alter how school instruction will occur and how school districts will administer their daily functions and may have impacts on costs and budgeting considerations.  In addition to these changes and challenges, school districts may also be faced with budget deferrals or budget cuts.  Budget deferrals and cuts, in the face of major changes to school instruction and administration, may leave school districts with potential cash flow issues and the need to review and consider alternative funding mechanisms or financings, including interfund borrowing.

Generally, California Education Code § 42603 authorizes interfund transfers, subject to State conditions and requirements: “The governing board of any school district may direct that moneys held in any fund or account may be temporarily transferred to another fund or account of the district for payment of obligations.”  Such transfer(s) must be repaid within the same fiscal year, or if the transfer takes place within the final 120 calendar days of a fiscal year, the following fiscal year.  Each transfer can only occur if the fund receiving the money will earn sufficient income, during the current fiscal year, to repay the amount transferred.  Additionally, no more than 75% of the maximum money held in any fund during a current fiscal year may be transferred.

Although authorized to make interfund transfers, school districts should be aware of other legal requirements, limitations, and restrictions on interfund borrowing resulting from the originating source of the borrowed funds.  Various funding sources may have specific limitations and potential restrictions.  Please note we provide the following examples for illustrative purposes and these examples and discussion are not intended to be an exhaustive list when interfund borrowing is under consideration.

• School Fees (commonly referred to as “Developer Fees”): School districts are authorized to temporarily transfer developer fees to another fund or account per Education Code § 42603, subject to certain conditions.  However, school districts must also remember to adhere to their annual and five-year reporting requirements pursuant to Government Code 66006. 
• Community Facilities District Monies (“CFD Monies”): Generally, Education Code § 42603 governs and authorizes the temporary borrowing of CFD Monies, subject to certain conditions.  However, distinctions exist between CFD bond proceeds and CFD special tax revenues, each of which has restrictions.  We encourage school districts to review their bond issuance and sale documents and agreements, CFD formation documents, joint community facilities agreements, and other applicable documents to ensure that interfund borrowing or loans of such funds are not prohibited or limited. 
• Proposition 39 General Obligation Bond Proceeds (“Prop 39 GO Bond Proceeds”): Unlike School Fees and CFD Monies, which are statutorily authorized funding sources, Prop 39 GO Bond Proceeds are first and foremost governed by the requirements and limitations of Article XIIIA of the California Constitution.  Specifically, the California Constitution states that Prop 39 GO Bond Proceeds may not be spent “for any other purpose, including teacher and administrator salaries and other school operating expenses.”  Accordingly, the Constitutional limitations may conflict with the Education Code authorization for interfund borrowing.  Several issues are raised by the potential borrowing of Prop 39 GO Bond Proceeds.  These include: (1) the potential loss of tax-exempt status of the bonds if such funds are used for unauthorized purposes; (2) issues related to continuing disclosure requirements; and (3) political and public concerns regarding utilization of such bond funds.

Please note that the express Constitutional prohibition applicable to bond proceeds expenditures is limited to Prop 39 GO Bond Proceeds and does not relate to Proposition 46 General Obligation Bond Proceeds (“Prop 46 GO Bond Proceeds”), which requires a 2/3rds approval of the voters.  Prop 46 GO Bond Proceeds are subject to different limitations and require a separate analysis.

As an alternative to interfund borrowing, school districts might consider tax and revenue anticipation notes (“TRANs”).  TRANs are short-term loans used for cash flow deficits and expenditures when school districts anticipate tax revenues.  Many school districts participate in pooled TRAN financings for cost-savings purposes.  TRANs must be repaid within the fiscal year that the borrowing occurs.  We understand that due to timing matters, school districts may not be able to partake in an effective TRANs financing transaction for this fiscal year.

We encourage school districts to consult and coordinate with legal counsel when engaging in interfund borrowing, transfers, or loans to ensure compliance with the California Constitution and State law, in addition to any applicable agreements limiting such actions.  If you have any questions concerning temporary interfund borrowing or financing options, please contact the attorneys listed. 

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

©2020 Atkinson, Andelson, Loya, Ruud & Romo