Untitled California Attorney General Opinion

TO BE PUBLISHED IN THE OFFICIAL REPORTS
OFFICE OF THE ATTORNEY GENERAL
State of California
JOHN K. VAN DE KAMP
Attorney General
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:
OPINION : No. 88-302
:
of : May 18, 1988
:
JOHN K. VAN DE KAMP :
Attorney General :
:
CLAYTON P. ROCHE :
Deputy Attorney General :
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THE STATE ALLOCATION BOARD has requested the opinion of
this office on the following question:
May a school district which sells or leases real property
pursuant to section 39360 of the Education Code transfer interest
earned on the proceeds received therefrom to the school district's
general fund without the approval of the State Allocation Board?
CONCLUSION
A school district which sells or leases real property
pursuant to section 39360 of the Education Code may not transfer
interest earned on the proceeds received therefrom to the school
district's general fund without the approval of the State
Allocation Board.
ANALYSIS
Section 39360 et seq. of the Education Code governs the
sale or lease of surplus real property of school districts.
Section 39360 provides that a "school district may sell any real
property belonging to the school district or may lease . . . [such]
real property . . . which is not or will not be needed by the
district for school classroom buildings at the time of delivery of
title or possession. . . ."
Section 39363 of the Education Code places certain
restrictions on the use of the proceeds received from any such sale
or lease of real property. That section provides generally that
the funds "derived from the sale" and the "proceeds from a lease"
shall be used for certain capital outlay and maintenance costs, or
reserves therefor. The section, however, provides an exception and
permits "the proceeds" from the sale or lease to be deposited in
the district's general fund for any general fund purpose where the
district's governing board and the State Allocation Board find no
anticipated need for capital outlay or major deferred maintenance
projects for a five-year period of time.1
The question presented for resolution herein involves
interest which may be earned on the proceeds of the sale or lease.
It is whether the interest may be transferred to the district's
general fund for any general fund purpose without the concurrence
of the State Allocation Board. Stated otherwise, is the interest
earned on the proceeds of the sale or lease subject to the same
restrictions as are the proceeds of the sale or lease themselves
set forth in section 39363 of the Education Code? We conclude that
it is.
1
Section 39363 provides in full:
"The funds derived from the sale of surplus property
shall be used for capital outlay or for costs of
maintenance of school district property that the
governing board of the school district determines will
not recur within a five-year period. Proceeds from a
lease of school district property with an option to
purchase may be deposited into a restricted fund for the
routine repair of district facilities, as defined by the
State Allocation Board, for up to a five-year period. In
addition, the proceeds may be deposited in the general
fund of the district for any general fund purpose if the
school district governing board and the State Allocation
Board have determined that the district has no
anticipated need for additional sites or building
construction for the five-year period following such sale
or lease, and the district has no major deferred
maintenance requirements.
"The proceeds may also be deposited into a special
reserve fund for capital outlay, for costs of maintenance
of school district property that the governing board
determines will not recur within a five-year period, or
for the future maintenance and renovation of school sites
if the district governing board and the State Allocation
Board have determined that the district has no
anticipated need for school sites or building
construction or major deferred maintenance projects for
a five-year period following the sale or lease. Proceeds
deposited in the special reserve fund shall not be
available for general operating expenses as provided in
Section 42842."
2. 88-302
Initially, we examine the language of section 39363.
(Moyer v. Workmen's Comp. Appeals Board (1973) 10 Cal. 3d 222, 230.)
The section first speaks in terms of the "funds derived from the
sale of surplus property." It then speaks of the "proceeds from
a lease of school property." Finally it lumps both of these
together as "the proceeds" for purpose of the restrictions as to
use. Giving the key words "derived" and "proceeds" their usual and
customary meaning, we note that "derived" is defined in Webster's
Third New International Dictionary (1961) as:
"1. formed or developed out of something else:
DERIVATIVE: . . . ." (Id. at p. 608)
and "proceeds" is defined as:
"1a: what is produced by or derived from something
(as a sale, investment, levy, business) by way of total
revenue: the total amount brought in: . . . ." (Id. at
p. 1807.)
These definitions speak of that which is formed,
developed out of or produced by something else which we will call
the source. However, they provide little insight whether the
source must be immediate or includes more remote sources as well.
The definition of "derivative" is helpful on this point. It stated
in part:
". . .2: made up of or marked by elements or
qualities derived from something else (as from an
ultimate source). . . ." (Id. at p. 608.)
Use of the word "ultimate" in this definition indicates
that proceeds are "derived" from more remote as well as immediate
sources. We therefore construe the words "derived" and "proceeds"
in section 39363 to include the interest earned upon the proceeds
of the sale or lease as well as such proceeds themselves.
However, we need not rely solely on the words of the
statute. We can rely upon the common law to support this
interpretation of section 39363 of the Education Code. It is the
settled common law rule that "interest is an accretion or increment
to the principal fund earning it, and unless lawfully separated
therefrom becomes a part thereof." (Pomona City School District v.
Payne (1935) 9 Cal. App. 2d 510, 516. See also, e.g., Board of Law
Library Trustees v. Lowery (1945) 67 Cal. App. 2d 480, 482; 71
Ops.Cal.Atty.Gen. (1988) (Op. No. 87-204, issued 3/9/88); 65
Ops.Cal.Atty.Gen. 588 (1982); 59 Ops.Cal.Atty.Gen. 43, 45-46
(1976); 49 Ops.Cal.Atty.Gen. 59, 61 (1967); 44 Ops.Cal.Atty.Gen.
58, 60 (1964); 38 Ops.Cal.Atty.Gen. 207, 210 (1961).) [T]he common
law of England is, except where modified by Constitution or statute
the rule of decision in this state." (Philpott v. Superior Court
(1934) 1 Cal. 2d 512, 515, emphasis added; Civ. Code, § 22.2.) No
3. 88-302
specific legislation has abrogated the common law rule with respect
to section 39363 of the Education Code and the application of
interest. From this it necessarily follows that interest on the
proceeds would be a part of the proceeds and would be subject to
the same restrictions as are the proceeds themselves.
This office has so concluded in a number of analogous
situations. In 65 Ops.Cal.Atty.Gen. 588, supra, based upon both
the foregoing common law principles and "mere reasoned analysis" we
"concluded that interest or dividend income derived from the
investment of [election] campaign funds is subject to the same use
restrictions [prohibitions as to personal use] as are imposed upon
such funds" by the Elections Code. In 44 Ops.Cal.Atty.Gen. 58,
supra, this office concluded that interest earned on money in a
school district's bond sinking fund was subject to the same
restrictions as provided by statute for the sinking fund itself.
And in 38 Ops.Cal.Atty.Gen. 207, supra, we concluded that interest
on investments or deposits of "special gas tax street improvement
fund" money must be used only for highway purposes by a city by
reason of constitutional prohibitions and the general rule that
interest follows the principal.
It has, however, been suggested for several reasons that
this general rule is not applicable to the question presented
herein. First of all, it has been pointed out that the Legislature
in a number of situations has specifically provided in the
Education Code that interest on certain funds shall be deposited in
the particular fund earning such interest. See Education Code,
sections 39602 (self-insured liability fund), 39605 (fire loss
fund), 89701 (CSU parking revenue fund), 89704 (CSU continuing
education revenue fund), 89725 (gifts, bequests and donations to
CSU). The basic argument is that the specific inclusion of such
directions in some statutes demonstrates a legislative intent to
exclude the same requirement in other statutes - specifically
herein, section 39363 of the Education Code. (Cf. Safer v.
Superior Court (1975) 15 Cal. 3d 230, 238.) Or stated somewhat
differently, to conclude that section 39363 of the Education Code
requires that interest on the proceeds of the sale or lease of real
property be deposited with those funds and be subject to the same
restrictions would be tantamount to legislating by implication
(see, e.g., Krater v. City of Los Angeles (1982) 130 Cal. App. 3d
839, 845: "[a]n intention to legislate by implication is not to be
presumed.")
This first suggestion overlooks one crucial factor. The
rule that the interest follows the principal and becomes part of it
unless separated from it by statute, that is, the common law rule,
is applicable to section 39363 of the Education Code and
incorporated therein. No specific legislation has abrogated the
common law rule with respect to that section.
4. 88-302
A second suggestion which is made is that section 53647
of the Government Code changes this rule. That section is in what
was known as the Depository Act, now contained in section 53630 et
seq. of the Government Code. Historically, that act was enacted
pursuant to constitutional authorization to permit designated local
agencies to deposit their funds in state and national banks for
safekeeping. Also historically, school districts, which have
always been required by statute to deposit their funds with the
county treasurer, were unable to avail themselves of the benefits
of this act. (See now Ed. Code, § 41001.) This was explained
briefly in 30 Ops.Cal.Atty.Gen. 54, 55-56 (1957) as follows:
"Education Code section 5002 [now § 41001] provides
that all money received or collected by a school district
shall be paid into the county treasury to be placed to
the credit of the proper fund of the school district.
The County treasurer acts as ex- officio treasurer for
the school district. The funds remain the property of
the school district but are held in the custody of the
county (Pomona City School District v. Payne (1935), 9
Cal. App. 2d 510; see also Kennedy v. Miller (1893), 97
Cal. 429).
"Section 16 1/2 of Article XI of the Constitution,
which section provides for the deposit in banks of public
funds, was adopted in 1906. Prior to 1922, this section
provided for the deposit of public funds belonging to a
county or municipality. In 1922, this provision was
specifically amended so as to apply to moneys 'in the
custody of' as well as moneys belonging to any county or
municipality (see Pomona City School Dist. v. Payne,
supra, at p. 513). In discussing the 1922 amendment the
court, in the Pomona case, stated there was no doubt but
that the amendment was designed to authorize the deposit
in local banks of moneys belonging to school districts.
It is to be noted that this purpose was accomplished by
the insertion of the phrase 'in the custody of' rather
than by enlarging the definition of those political
entities whose funds might be deposited in banks. . . ."
Accordingly, section 53647 of the Government Code provides:
"(a) Interest on all money deposited belongs to, and
shall be paid quarterly into the general fund of, the
local agency represented by the officer making the
deposit, unless otherwise directed by law.
"(b) Notwithstanding the provisions of subdivision
(a), and except as otherwise directed by law, if the
governing body of the local agency represented by the
officer making the deposit so directs, such interest
5. 88-302
shall be paid to the fund which contains the principal on
which the interest accrued."
Subdivision (a) of the section is essentially derived
from the original Depository Act. Subdivision (b) was added in
1978 (Stats. 1978, ch. 126). It is urged that subdivision (a) of
this section would direct that any interest on school district
funds earned on the proceeds of the sale or lease of surplus real
property should go into the district's general fund despite
restrictions in section 39363 as to the proceeds themselves.2
Section 53647 of the Government Code has been the subject
of a number of cases and opinions of this office. As to case law,
none of the cases have been concerned with whether interest should
be credited to an agency's special fund as opposed to that agency's
general fund. The case law has been concerned with attemptsby the
county to claim such interest where it has been acting as "ex­
officio treasurer" of another agency's funds. Pomona City School
District v. Payne, supra, 9 Cal. App. 2d 510, the seminal case with
respect to the common law rule on interest following the principal,
was the first of these cases. The court there held that under such
common law principles the school district was the "local agency
represented by" the county treasurer, not the county, and
accordingly the county had no claim to interest on such funds.
Further case law has also prevented the county from claiming a
windfall of interest on other entities' deposits, (see Metropolitan
Water District v. Adams (1948) 32 Cal. 2d 620 (interest on security
deposit lodged with court in condemnation action); Fresno Fire
Fighters v. Jernagan (1986) 177 Cal. App. 3d 403 (interest on funds
deposited with court); Redevelopment Agency v. Goodman (1975) 53
Cal. App. 3d 424 (interest on condemnation judgment paid into court
pending appeal); Ostley v. Safer (1957) 147 Cal. App. 2d 671
(interest on money interpleaded with court); Board of Law Library
Trustees v. Lowery, supra, (interest on law library funds).
Although the foregoing cases which were decided in the
context of what is now subdivision (a) of section 53647 of the
Government Code were not required to rule upon whether a particular
accrual of interest was to be credited to the general fund or a
special fund of the agency for which the county treasurer was
acting, we believe these cases are still of significance to us
herein. These cases either relied upon the common law rule that
2
We note parenthetically that although school district funds
must be deposited with the county treasurer, that district boards
have been authorized since 1951 to make direct investments of its
monies. Accordingly, these investments could draw interest
directly without the intervention of the county treasurer. (See
Ed. Code, § 41015, and discussion in 44 Ops.Cal.Atty.Gen. 58, 62,
supra.) Section 53647 would not appear to be applicable to that
interest.
6. 88-302
interest follows the principal and becomes a part thereof, or
considered prior cases which did rely upon that rule as
controlling. Furthermore, where the accrual of interest was to a
particular source of funds as in all the cases involving court
deposits, the appellate court did not concern itself with whether
the interest should be credited to some "general fund" but instead
had the interest follow the fund. In essence the appellate court
was concluding that under section 53647 the law "otherwise
directed" where the interest was to be deposited. Such interest
accrued not to the court for its general benefit, but to the owner
of the fund.
Likewise, with respect to section 39363 of the Education
Code, the law has "otherwise directed" where interest on the
proceeds of the sale or lease of surplus real property is to be
deposited. As we demonstrated at the outset herein, both the
wording of the section itself and the common law rule direct that
the interest is to be deposited to the principal fund, that is, to
the proceeds of the sale or lease of the property.
At least one opinion of this office supports this
conclusion, and is directly in point with respect to now
subdivision (a) of section 53647 of the Government Code. Where
possible, this office has relied upon legislative direction as to
which fund interest should be credited. (See generally 59
Ops.Cal.Atty.Gen. 43, 46, supra, (direction implied from statutory
scheme as well as common-law rule); 49 Ops.Cal.Atty. Gen. 59,
supra, (direction implied from statutory scheme); 44
Ops.Cal.Atty.Gen. 58, supra, (questions one and two: interest
controlled by specific constitutional or statutory provision); 38
Ops.Cal.Atty.Gen. 207, supra, (direction controlled by
constitutional mandate). However, in question number three of 44
Ops.Cal.Atty.Gen. 58, supra, this office was presented with the
question where the interest on sinking fund monies earmarked to
retire school district funds bonds should be credited. Although
the interest on the proceeds of the bonds themselves was
specifically directed by statute to be credited to the sinking fund
itself, the law was silent as to interest on that fund. We
concluded that such interest was restricted to the same use as the
sinking fund despite the provisions of, inter alia, section 53647.
We stated that the rule that the interest follows the fund was
applicable and thus could be "used for no purpose other than the
payment of principal and interest on the district's bonds." (Id.
at p. 64.) We reasoned:
"(a) Applicability of Government Code sections 53635
and 53647.
Government Code section 53635 reads:
'So far as possible, all money belonging to, or in
the custody of, a local agency, including money paid to
7. 88-302
the treasurer or other official to pay the principal,
interest, or penalties of bonds, shall be deposited for
safekeeping in state or national banks in the State
selected by the treasurer or other official having the
legal custody of the money.'
"Section 53635, like section 53647 which provides
for the placing of interest in the general fund, had its
origin in the Public Deposit Act of 1933 and is in the
same article of the Government Code (Article 2 of Title
5 of Division 2) and it may be assumed that as to some
types of entities it is proper to place interest earned
on sinking fund money in the entities' general funds. If
sections 53635 and 53647 stood alone they might be
controlling. Insofar as school districts are concerned
the two Government Code sections do not stand alone and
they must be read in conjunction with other portions of
the law touching upon the same subject. The Public
Deposit Act and the Government Code sections which
superseded it are statutes of general application
governing the investment of the several different types
of funds belonging to the various public entities that
exist in this state. Education Code section 21102, on
the other hand, is a statute of limited application, it
is concerned only with school districts and then only
with a particular type of fund belonging to the
districts. It is the recognized rule that a special
statute dealing expressly with a particular subject is
controlling over a general statute covering the same
matter. See 45 Cal.Jur.2d Statutes sections 119, 120 and
cases cited therein. That portion of Government section
53647 which directs the placing of interest on deposits
made by the county treasurer in the general fund is then
modified or superseded insofar as school district
deposits are concerned by the restriction found in
Education Code section 22101 that sinking fund money can
be used for no purpose other than the payment of interest
and principal on district bonds." ( Id. at p. 64;
emphases added.)
Accordingly, in 44 Ops.Cal.Atty.Gen. 58, 64, supra, we
pointed out that subdivision (a) of section 53647 allocates the
interest as between the proper entities. Whether such interest
should be credited to the general fund or a special fund of the
proper agency depends upon the source of the funds and restrictions
which have been placed on the use of those funds.
That this conclusion is correct with respect to the
proceeds of the sale or lease of real property by a school district
pursuant to section 39363 is evident when one considers that a
school district may, pursuant to section 41015 of the Education
Code, make direct investments of its funds which are not needed
8. 88-302
for the immediate requirements of the district. (See fn. 2,
ante.)3 As to such funds, section 53647 would not come into play.
Under the normal common law rule, interest would accrue to the
principal and be subject to the section 39363 restrictions as to
use. If our conclusion is incorrect as to the proper application
of section 53647 of the Government Code, we would have the
anomalous result that interest on funds directly invested by the
school district would accrue to the special fund and be subject to
the section 39363 restrictions under common law principles, but
interest on funds deposited with the county treasurer would accrue
to the district's general fund and would not be subject to such
restrictions.
In so concluding we have not overlooked possible contrary
inference which might be drawn from subdivision (b) of section
53647 of the Government Code. We would, however, point out that
subdivision (b) is only applicable if credit of interest is not
"otherwise directed by law." Furthermore, given the uncertainty
which may arise from statutes such as section 39363 of the
Education Code, it provides county treasurers and accountants a
vehicle to avoid such uncertainty. It permits them to bypass
subdivision (a) of section 53647 of the Government Code by
obtaining a direction from the governing body of the applicable
local agency to deposit interest directly into the fund which
contains the principal.
This conclusion is consistent with the legislative
history of Assembly Bill 2367, 1977-78 Regular Session, which
became chapter 126, Statutes of 1978, and enacted subdivision (b)
of section 53647 of the Government Code. Such history demonstrates
that the bill was introduced because of the concerns of the
treasurer of a single county that he did not have the
authority to credit interest earned from special funds directly to
those accounts, but had to first credit the interest to the special
districts general fund and then transfer the funds to the special
funds. (See Enrolled Bill Report, of A.B. 2376, dated March 9,
1978). Significantly for our purposes the legislative history also
points out as follows in the Assembly Committee on Local Government
Bill Analysis, dated March 7, 1978:
3
Section 41015 of the Education Code provides:
"The governing board of any school district or any
county office of education which has funds in a special
reserve fund of the district or county office of
education or any surplus moneys not required for the
immediate necessities of the district or county office of
education, is hereby authorized to invest all or any part
of the funds in any of the investments specified in
Section 16430 or 53601 of the Government Code."
9. 88-302
"(Note: Where The Use Of Money Is Specifically
Restricted By Law-- I.E. Gas Tax funds, or Bond Funds-­
Interest Earned On Such Money Is Credited To The Fund
Upon Which The Interest Is Earned Rather Than Being
Credited To The General Fund)"
In short, the legislative history acknowledged that subdivision (b)
was still qualified by the phrase in subdivision (a) of section
53647 of the Government Code that interest should be credited to a
special district's general fund only if not "otherwise directed by
law." This is the case herein.
Accordingly, it is concluded that a school district which
sells or leases real property pursuant to section 39360 of the
Education Code may not transfer interest earned on the proceeds
received therefrom to the district's general fund without the
approval of the State Allocation Board.
* * * *
10. 88-302