By David M. Greenwald
The DJUSD, in response to public concerns expressed by the Measure M Oversight Committee and its chair Donna Neville, is relying on a September 30 memo as their continued position.
“After careful consideration and discussion, including the engagement and consultation of legal counsel, the District’s position is described in this memo, which is titled Board Policy on Interfund Borrowing,” Public Information Officer Maria Clayton told the Vanguard in an email on Thursday.
An email to Superintendent John Bowes was not returned and Board President Joe DiNunzio advised in a text that he would have to consult with legal counsel but did not get back to the Vanguard on Wednesday.
On Tuesday evening, the Measure M Citizen’s Oversight Committee unanimously backed a recommendation and letter from Chair Donna Neville, alleging that the school district is in violation of the law for failing to repay loans made from the Measure M fund to the district General Fund without paying interest on those loans as required by state law.
“The law here is clear. In attempting to address this issue with the district I consulted with more than a half dozen legal colleagues who work in public finance and bond compliance, and they all confirmed that interest must be paid on these loans,” Neville said in a letter that was to be sent to the district.
“Over the life of the Measure M program this failure to repay the loans with interest could amount to as much a half a million dollars in lost interest, depending on the amounts borrowed, interest rates, and the length of the loans,” she continued. “This is not only illegal; it is a betrayal of the voters’ trust.”
According to the memo dated September 30 from Superintendent John Bowes, the Citizens’ Oversight Committee “requested that the Board of Education consider whether it should amend Board Policy No. 
3110 (Transfer of Funds) to prohibit temporary borrowing of Measure M bond proceeds, and if not, whether it should amend the Policy to require the transfer of an amount equal to interest when the borrowing is repaid.”
Bowes said, after conferring with bond counsel and municipal advisor, “we determined not to recommend any changes to BP 3110 at this time.”
In their view, “The advice we received is that our temporary borrowing practices are not prohibited by law and are consistent with Generally Accepted Accounting Principles (‘GAAP’), rules of the Governmental Accounting Standards Board (‘GASB’), and the aforementioned CSAM and SACS.”
Instead they argue, “Education Code section 42603 gives broad latitude to a school district governing board to temporarily transfer funds from one fund or account to another under specified conditions.”
They note, “Interfund borrowing is distinguished in school district accounting from an interfund transfer, which describes a flow of assets from one fund to another without equivalent flow of assets in return and without a requirement for repayment.”
They add, “Although bond funds are deposited to the credit of the Building Fund and often also the Bond interest and Redemption Fund, all district cash is commingled in the County Treasury and merely accounted for as distinct funds, with each fund balance accorded its pro rata share of earnings.” They further argued, “Temporary borrowing between funds does not affect the fund balance of either fund, but does affect the cash balance. In the case of our district, such borrowing of cash from bond proceeds does not impair the ability of the district to perform bond projects and pay related expenses.”
It is their position, “There is no requirement that a temporary borrowing be repaid with interest.”
The California School Accounting Manual states the borrowed funds should be repaid by interest “if there are interest requirements related to those programs or funds.”
He adds, “There is no requirement for the Building Fund.”
Neville in her letter responds, citing points and authorities which she argues finds that “both state law and the legally binding bond covenants explicitly require that the interest earned on the Building Fund must remain with that fund. So, based on the case law, the district must repay loans from the Building Fund to the district’s General Fund with interest.”
Committee member Bret Hewitt explained, “It is a fundamental proposition that a dollar a week from now is not worth the same amount as a dollar today without an interest component. It’s called time-valued money.”
“If the school district is paying back $15 million and $12 million before that without interest, we are by definition diminishing the purchasing power of the bond funds,” he said. “There is no other way to look at that.”
He said, “It is clear to me that it is our duty, as champions of the bond fund, we need to push this matter.”
On Tuesday, the committee asked the full governing board to take up the issue. Neville in her letter noted that she first raised this concern to district staff and no action has been taken to get the full board to address it.
She wrote, “At a non-public meeting of the two-person policy subcommittee on September 14, 2020, the policy subcommittee decided not to recommend any changes to the district’s current policy related to interfund borrowing.”
She continued, “Because the two-person advisory subcommittee decided not to recommend any changes to the district’s interfund borrowing policy, the full board has never considered this issue at an open, public meeting.”
Instead, a statement was made during the “trustee announcements” portion of the meeting, indicating that the subcommittee was not recommending changes to the district policy.
—David M. Greenwald reporting
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Well, unfortunately, since this is a clear dispute about the letter of the law, it will have to be resolved in court.
Agree, as to mechanics… depending on the legal resolution, it could well be a trust, political issue…
If the legal issue is resolved by saying it’s OK, I could well initiate and/or support a recall effort as to how those in power, 2 trustees (and the Superintendent, indirectly) misled or ‘hid the football’ when Measure M was presented to the taxpayers.
If the legal issue is resolved by saying it’s not OK, I could well initiate and/or support a recall effort as to how those in power, 2 trustees (and the Superintendent, indirectly) misled or ‘hid the football’ when Measure M was presented to the taxpayers, and continued to act contrary to law.
Just my opinion, ‘biased’ by past actions/interpretations by DJUSD.
DJUSD CFD #1, for example… I actually defended that, DJUSD CFD #2, the City CFD’s, by pointing out they were time certain as to their ends/ending dates… City CFD’s are straight-forward. DJUSD CFD #1 was different… I was duped by DJUSD to think it had a ‘life’… recently have discovered that DJUSD’s position is that it has “eternal life”… given that, and these revelations, perhaps DJUSD believes that Measure M will be judged to have “eternal life”…
Yeah, I’m ticked off, BIG TIME! Not about the $$$, per se… that is a biting gnat, but not a huge problem for me… it is the deception, arrogance… like Dad said, “It’s not that I didn’t like HS, it was the principal/(principle?) of the thing…”
But it’s for the kids, and therefore anything the DJUSD does is therefore righteous, right?
Don is right… it will be a legal question… but it will also be a political question… it needs to be fully vetted and resolved before DJUSD ‘goes back to the well’, for sure…
The problem with the legal solution is that DJUSD’s legal costs of mounting their defense of the practices being questioned are likely to be more than the interest costs that the General Fund would pay the Measure M Bond Fund if DJUSD’s Board and Administration decided to abandon the path articulated in the September 30 memo.
The Board and Administration decision is even more fiscally irresponsible because any legal costs incurred are actually money that is “lost” (paid to an outside party) while any interest costs that are paid are actually “preserved” (moved from one internal fund to another internal fund).
If I were a member of the School Board or the Administration I would think twice before recommending and/or pursuing a policy that is both fiscally irresponsible and ethically/morally questionable.
Maybe a legal question but in my mind a legal question about an accounting standard disagreement. There is no malfeasance here, nobody is personally profiting anything.
If DJUSD has to borrow from a bank to cover their short term expenses they must pay interest. Since they borrow from themselves they figured they were saving money.
The district issued the bonds and had the money in the bank. The question I have is what is that money earning in interest where they are storing it? The district borrowed long but is saving it short term. Asking the district to pay a long term rate on money being saved short term for a short term intra-district loan makes little sense and defeats the purpose of not going to a bank for the loan.
Ron’s statement above is fundamentally/fatally flawed. If the district goes to a bank to borrow, the interest costs (whatever they are) flow out of the district’s coffers to the lending institution. If the district’s General Fund goes to the Measure M Bond Fund to borrow, the interest costs and revenues (whatever they are) stay inside the district. There is no cash/costs outflow because the interest revenues to the Measure M Bond Fund offset (to the penny) the interest costs to the General Fund. Metaphorically it is taking money out of their left pocket and putting it in their right pocket.
Perhaps I wasn’t clear enough but we are mostly saying the same thing. The question remains what is a fair interest rate and what would be the cheapest way to borrow the funds?
The district borrowed the money long term and is paying the long term rate. It is holding it in a shorter term account until its used for construction. If the district borrows from one fund temporarily should they pay that other fund the long term borrowing rate or the short term holding rate?
In the previous article I saw the figure 4% interest used as a rate one fund owes the other. I’m not sure which rate offset that would be, but I assume its the longterm borrowing rate since rates are so low. If so, this would be the wrong rate to charge because the funds, while waiting to be spent, are likely earning much less in a shorter term account.
Whatever rate the district must pay between funds the question then becomes whether its cheaper to go to the bank than to borrow internally.
Its likely the district thought it would be cheaper to borrow internally. In fact it should be.
A fair internal interest rate sould be @ the rate of the Construction Cost Index increase rate. The $$$ is for construction… the CCI rate of interest would go a long way to make sure the construction funds do not lose value for the purpose which they were intended for…
My guess is that would be a high rate. It would likely keep the district from robbing Peter to pay Paul but the money is sitting there unused waiting for construction to start so tapping a portion of it, short term, as a bridge loan until money comes in from the state is simply the district trying to keep overall costs down.
Ron – One point you’re missing – it was sitting there *collecting* interest. So by taking the money out, the building fund loses that interest, and that’s what they need to recoup.
I’m not ignoring it but its not getting the 4% that the Measure M Oversight Committee claimed was owed from the general fund to the Measure M fund. Current short term rates being what they are its more likely to be under 1%.
I don’t know all the particulars but before the recent drop in interest rates I tied up some 2 year CD’s at 2.4% interest just a little over a year ago. Since the bond measure passed 2 years ago 4% accumulated interest earnings could very possibly be correct.
Ron G… your guess would be wrong… CCI changes: Dec 2019-Dec 2020 was 3.6%… previous year was 1.3%… but the fact is, 0.00% interest is, literally, nothing… therefore, irresponsible…
Unless one considers that the public should be an inexhaustible ATM machine… whatever asked, should be granted… that’s not realistic.
I guess the point I’m making is how much money did the construction fund lose by not collecting interest from the amount borrowed by the district for other purposes? That amount is what the district should pay to the construction fund. My guess is its significantly less than the oversight committee is claiming.