School District Surplus Property: Uses of Proceeds from Sale or Lease

In recent years a number of school districts have sought to convert property assets into cash as capital funds have been depleted and as general fund revenues have diminished. Such conversion of land into dollars is not a simple process; the Legislature has, in fact, made the process more complex since 2006.

State law has consistently held that the proceeds from sales or leases of surplus property, as capital assets, must be used for capital purposes only; that is, the funds must be used to pay for buildings and other property with a limited exception allowing the proceeds to be placed in the General Fund (discussed below).

School district property may be used as an asset to create a one-time or an on-going source of capital funding for use in meeting district capital project needs that include property acquisition, new construction, modernization and rehabilitation, major maintenance, and deferred maintenance, as well as energy conservation or energy production and enhancing buildings to meet high performance building standards.

The Education Code controls the disposition of surplus property. In seeking such disposition a board of education must first appoint an advisory committee to review the needs of the district, which may recommend disposition or other alternatives. This body is referred to as the seven-eleven committee (Education Code 17389), that membership must include at least seven members, but no more than eleven. The code also directs the general composition of the membership, including a person with a land use planning background if such is possible. The committee must follow the open meeting statute referred to as the Brown Act, therefore an agenda must be prepared and properly noticed, and the general public may attend meetings and participate by way of public comment. The committee may meet only once or as many times as deemed necessary by the members in order to arrive at a recommendation to be communicated to the board of education. The board of education may accept the committee’s recommendation or it may formulate an alternative at the discretion of the members.

If school district property is to be declared surplus that must happen by action of a majority of the members of the board.  The district is thereafter required by statute to formally notice all other public agencies of the availability of the property. This must include local, state and federal entities. Any public agency interested in the property must provide a written response to the district within 60 days of the date of the formal notice of availability. The California Supreme Court in Moorpark v. Moorpark determined that the notification by the school district to other agencies is not an offer. In this matter the city failed in its attempt to take property from the district at a 75% discounted price without agreement of the district through the city’s interpretation of a provision of the Education Code, referred to as the Naylor Act, (Education Code 17485 – 17496), that allowed a district to consider providing such a discount under certain circumstances at district discretion (further comment on the Naylor Act discount in the next issue of Education’s Bottom Line).

The Education Code, through the Naylor provisions, has an established priority ranking of agencies to be considered if multiple agencies are interested in the property with Parks and Recreation having the highest priority; this differs with a Government Code section that places housing agencies such as Housing and Urban Development as the priority in considering the disposition of surplus property. The Education Code prevails here.

The school district however, is not obligated to sell or lease the property to the agency with a higher ranking if negotiations between the parties are not successful. After waiting the requisite 60 days of notice, if no public agencies are interested in the property or if negotiations are unsuccessful with public entities responding timely to the notice, the district may provide a subsequent notice in a newspaper of general circulation that the property is available for sale or lease to members of the public. The Code provides a process for accepting bids from the public that includes if necessary the hearing of competing offers verbally at an open session meeting of the board not unlike an auction.

Upon receiving cash proceeds from the sale or lease the district places the monies in a restricted capital fund. As noted above such funds are to be used for capital needs of the district however, due to general fund deficits some districts have sought legislation specific to their circumstances in order to be allowed to place such monies in their general fund. The Legislature has acted to both tighten the restrictions on the placement of capital dollars in the General Fund and in limited instances to allow for specific district exceptions.

With Senate Bill 1415 (Scott) in 2006, the Legislature signaled its wariness of districts seeking specific legislation allowing individual districts to place surplus property proceeds in the General Fund while still having unmet capital needs causing them to want to continue to access the state’s School Facility Program (SFP) for new construction or modernization funding. Statute disallowed such access if property sale or lease proceeds were so used. Notwithstanding the legislative concern, a limited number of districts sought and achieved this end. SB 1415 strengthened existing prohibitions to capital funds use for general purposes. This bill, now law, requires that a school district board may, with agreement of the State Allocation Board (SAB), place such capital proceeds into the general fund of the district to be used for “one-time expenditures” but not for “ongoing expenditures” such as salaries. The determination of what expenditures fall within each category is to be made by the SAB in consultation with the State Department of Education. The district, in order to use the funds for this one-time purpose must find that it will have no need of state capital funding for a period of 10 years. The SAB must agree. The district must not seek access to state new construction or modernization funds for a decade as noted unless after five years it can be demonstrated that new circumstances have arisen, such as enrollment growth or the need for new construction that the district could not have easily anticipated. At such time the district may appeal to the SAB seeking access to a state capital funding program.

This past session the Legislature and Governor considered several more district specific bills dealing with the surplus property proceeds issue as related to general fund deficits. Through the combined wisdom of both most were denied and yet a rationale was sought as a means to allow such in limited circumstances. We will address these in the next issue of Education’s Bottom Line.

Tom Duffy

tduffy@m-w-h.com