California Appellate Court Rules That School District Entitled to Retain Unused Hardship Funding Provided by the State of California

05.27.2022

On May 24, 2022, the California Court of Appeal (3rd District) ruled that the San Bernardino City Unified School District (“District”) was entitled to retain the entirety of unused hardship funding on a project provided by the State of California (“State”). In San Bernardino City Unified School District v. State Allocation Board (Case No. C092003 [March 24, 2022]), the Court of Appeal held that the Leroy F. Greene School Facilities Act of 1998 (“Greene Act”) “allows a district to retain savings of hardship funding ‘achieved by the district’s efficient and prudent expenditure of these funds…’ (Education Code § 17070.63(c).)”, and that the regulation relied on by the State Allocation Board (“SAB”) to demand that the District return unused hardship funding to the State conflicted with the Greene Act, and was therefore unenforceable.

The case stems from a high school that the District built using state and local funding (“Project”). The State contributed new construction funding, as well as hardship funding for the Project. After completion of the Project, the State Office of Public School Construction determined by audit that the District was required to return the project savings, or the funds the District did not use for the Project “to reduce the financial hardship apportionment of this project” under California Code of Regulations (“CCR”) § 1859.103. The District appealed the determination, but the SAB ruled that the District could not retain the project savings/unused financial hardship funds. The District then filed an administrative mandamus action to overturn the SAB’s decision. The trial court entered judgment in favor of the District, finding that the regulation relied upon by the SAB conflicted with the statutory scheme, and that the District was entitled to retain the hardship funding. The SAB appealed.

In affirming the trial court’s judgment, the Court of Appeal explained “[a] regulation is invalid and unenforceable if it conflicts with the Legislative intent as manifested in the statute.” Examining Education Code § 17070.63(c), the general savings statute within the Greene Act, the Court of Appeal determined that “the general savings statute is generally applicable to the entire Greene Act, including the hardship funding provisions, unless there is some indication the Legislature intended some exception to that general application.” (Emphasis added.) The Court of Appeal consequently reasoned that “if the general savings statute applies, the District is entitled to retain the savings on the project built with the hardship funding and use the savings ‘for other high priority capital outlay purposes.’” According to the Court, CCR 1859.103, which requires the return to the State of the savings “would be invalid under such circumstances because it conflicts with the general savings statute.”

The SAB argued that the Legislature intended a different result, specifically that it did not intend for school districts to retain savings from hardship funding because: (1) the Legislature authorized the SAB to promulgate regulations, (2) the purpose of the hardship funding is to provide extraordinary additional funds, and (3) the specific statutes and regulation concerning hardship funding control over the general savings statute.

The Court of Appeal did not find the SAB’s arguments persuasive. First, the Court of Appeal clarified that while it is undisputed that the SAB has the authority to promulgate regulations, such authority is irrelevant to the issue before the court. Second, the Court of Appeal determined that the statutory language and appellate record did not support the SAB’s argument that the purpose of hardship funding is to provide extraordinary additional funds for construction when a hardship is established. Rather, the Court of Appeal specifically noted that pursuant to the plain meaning of the general savings statute and existing language of the Greene Act, the Legislature adopted a different public policy approach, “one that rewards a district for its efficiency and prudence by allowing it to retain savings, thereby freeing up hardship funding that might otherwise be requested by the district in the future.” Third, the Court of Appeal disagreed that the specific hardship funding statutes control over the general school facilities funding statutes. The Court of Appeal reasoned that because the language of the general savings statute allows a school district to retain savings without differentiating between regular and hardship funding, and because nothing in the hardship funding provisions, which are part of the Greene Act, conflict with the application of the general statute, there was no conflict between the general savings statute and the hardship funding statutes. Thus both are given full effect.

The Court of Appeal concluded to the extent CCR 1859.103 requires a school district to return hardship funds, it conflicts with the Greene Act, specifically Education Code § 17070.63(c), and is unenforceable. Accordingly, the Court of Appeal affirmed the trial court’s judgment that the District is entitled to retain the unused hardship funding it received from the State and utilize such remaining funds for other high priority capital outlay projects.

For more information about this case, state funding requirements and/or legal obligations related to the receipt of state funds for school district public construction projects, we encourage contacting the authors of this alert, or your regular AALRR counsel.