School Officials Shaken by State Controller’s Ruling

At first, officials in several South Bay school districts thought the state auditors must be joking.

For years, the districts have been selling surplus schools to adjust to declining enrollments and routinely using interest earned on money from the sales for such general fund purposes as buying school supplies and paying salaries.

The county counsel told them it was perfectly OK to do that, as long as they preserved the principal for building and major maintenance projects. For the financially strapped districts, the interest income--ranging from thousands to several million dollars a year--has become a vital part of tight budgets.

Now the state auditors are saying that the interest, along with the principal, can be used only for capital projects. What the districts have been doing with their interest money is illegal, they say.

The districts must not only stop doing that, they must return the interest money already spent to their capital accounts.

And in a telephone interview, Greg Newington, audit manager in State Controller Gray Davis’ office, dispelled any notion that his agency is kidding.

“It is not our intention to bankrupt or close down school districts,” he said. “But the law on this matter is very clear, in our opinion, and we will pursue it until there is a resolution.”

He said contrary legal opinions in Los Angeles County are “off base” and just because everybody here is doing it is no excuse. Actually, he said, not everybody is doing it. Newington said an analysis of financial reports indicates that most districts throughout the state are interpreting the legal restrictions as he does.

‘It’s a Nightmare’

“I can’t believe this is happening,” said Ed King, business manager for the South Bay Union High School District, which received a visit from the state auditors last month. “It’s a nightmare.”

The district has relied heavily on interest from the $15-million sale of Aviation High School in 1984 to upgrade programs and teacher salaries after a long financial drought created by losses in enrollment and state aid, which is based on attendance.

King said his district has been notified that it will have to put $2.4 million back into its capital account.

“Since we have an ending balance of $150,000 in the current budget, I don’t see how we can do that,” he said.

Disputing Newington’s contention, King reeled off a long list of school districts, from San Francisco to the Mexican border, that he said use interest revenue for general expenses.

Newington said his auditors will be getting around to them, too.

Last week, a state auditor descended on the Palos Verdes Peninsula school district, which has diverted about $1.2 million in sale-of-school interest money to its general fund during the past seven years, district spokeswoman Nancy Mahr said.

She said officials there were “surprised, to say the least” that the state is challenging the district’s use of interest revenue. If the controller’s legal interpretation stands, she said, “the impact on us will be horrendous.”

She pointed out that the district, which lost 40% of its enrollment during the past 15 years, has already launched a program to dispose of up to $23-million in surplus property and use an estimated $1.7 million in annual interest income as a key element in stabilizing the district’s finances.

$1.5 Million Already Cut

Torrance school officials said they haven’t seen any state auditors yet. But that district also has relied increasingly on interest revenue to balance its budget. Trustee Dave Sargent said the district has already cut about $1.5 million in programs and personnel. The loss of well over $1 million in interest income, he said, would be a “monumental disaster.”

“How could they do this to us?” he said. “The last thing we need in education is another loaded gun pointed at our heads.”

In Redondo Beach, school officials are not expecting a state visit, since all of the closed campuses there are leased, not sold.

Manhattan Beach closed half of its 10 schools, but doesn’t have to dip into its interest from surplus sales. The district has obtained a state waiver that allows it to spend part of its capital fund for ordinary expenses.

School officials repeatedly referred to assurances by county legal authorities that the districts have a perfect right to spend their interest income on current expenses. And Audrey Oliver, principal deputy county counsel, said she is sticking by her opinion.

She said the state Education Code clearly places no restrictions on the use of interest income generated from the sale of school property. She restated her opinion in a letter to Newington’s office last week.

Newington said legal authorities in Sacramento are looking at the same law books and coming to a different conclusion. That conclusion, he said, is based partly on a 1964 ruling by the state attorney general.

Local school officials say their legal advisers believe the 23-year-old ruling--by then-state Atty. Gen. Stanley Mosk, now a state Supreme Court justice--applies to interest on money from bond sales, not surplus property.

“Give us a break,” said one official, who asked not to be identified. “The next thing we know they’ll be telling us we can’t spend lease income (from surplus property). Then they can come down here and put us out of business.”

On a more conciliatory tack, Newington said: “It isn’t a matter of someone going down there and forcing a transfer of funds or anything like that. There is still time to deal with this difficult matter.”

He said his office expects to complete a final report in “two or three weeks, and then we can go from there.” Legislative or administrative action may be necessary, he said, to “clear things up.”

Asked why South Bay Union was singled out for an audit, Newington said his office was checking the district’s handling of the Aviation High sale when an auditor’s curiosity was piqued by its use of interest income. Complaints from community activists, he said, were not a major factor in calling attention to the issue.