What Constitutes an Illegal
Gift of Public Funds?
By Thomas M. Griffin, J.D., Ph.D.
[Editor’s Note: Throughout the year, we receive a number of questions regarding whether school district funds can be spent on student incentives and staff appreciation. In fact, questions on gifts of public funds are one of the most asked about areas, in large part because the State Constitution simply states that the State Legislature cannot authorize any county, city, or other political subdivision to make any gift of public funds to an individual or corporation (Article 16, Section 6). As one can see, the question is left, “What is a gift of public funds?” Some agencies have drawn the line that anything more than a sticker, certificate, or button is the threshold, while others have adopted a dollar amount limitation.
Clearly, this matter is a legal issue far beyond our expertise, and, as we noted, an age-old question. In 1998, we turned to Thomas M. Griffin, former Chief Counsel to the California Department of Education, and, since leaving that position, an attorney specializing in school law issues. Tom was kind enough to write a very clear legal response to this question titled, “What Constitutes an Illegal Gift of Public Funds?” We recently asked Tom if we could reprint the article. Not only did he agree, but he offered to update the article. Tom is a true friend of public education.
We wish to express a hearty thanks and a tip of the hat for a job well done to Tom.]
As the school year gets under way, school boards must make numerous decisions on district expenditures. When a school board decides to spend district funds, it must ensure that it is not making a gift of those funds. Virtually every expenditure a district makes benefits a private individual or corporation to some extent. Even payment of salary benefits the employee; however, no one would assert that the payment of salary constitutes a gift. The state gives scholarships to deserving college students, including funds for room and board, but no one would seriously argue that scholarships are illegal gifts.
What about other proposed expenditures, such as:
· The district approves travel for an administrator and teachers to attend an out-of-district conference. May the district legally reimburse employees for tips to waiters, bell hops, and cab drivers?
· The school offers a reward to the class that reads the most books. The reward is that the entire class gets to go to a theme park or a movie. May the school legally pay the admission fee for all students?
· A school has a high truancy rate. The principal wants to pay students 25¢ per day of attendance as an incentive for attendance. May a school legally pay students to attend?
· A district wants to establish an endowment fund through an education foundation that guarantees funds for students who wish to attend college and who qualify by attendance in the district and maintaining the requisite grade point average. May the district legally expend district funds to the foundation for this purpose?
To answer these questions, we need to examine the nature of the constitutional prohibition against gifts of public funds.
Article 16, Section 6, of the California Constitution provides that the State Legislature cannot authorize any county, city, or other political subdivision to make any gift of public funds to an individual or corporation. On its face, Article 16, Section 6, may appear to apply only to actions of the Legislature itself, and not directly prohibit a subdivision, such as a school district, from making a gift of public funds. In at least one case, a party has raised the argument that the language only limits the Legislature, but the court declined to address the issue and decided the case on other grounds. (Board of Supervisors of San Diego County v. Lonegran (1980) 167 Cal.Rptr. 820). However, several cases seem to imply that the prohibition would also apply directly to school districts. (See, e.g., Albright v. City of South San Francisco (App. 1975) 118 Cal.Rptr. 901).
Section 6 exempts certain specified types of expenditures from the prohibition, two of which may apply to school districts. First, Section 6 does not prohibit a political subdivision, such as a school district, from joining with other such public agencies to enter a joint exercise of powers agreement, joining a publicly owned nonprofit corporation, or joining another public agency as authorized by the Legislature in order to provide for payment of Workers’ Compensation, unemployment compensation, tort liability, or public liability losses. Second, Section 6 allows a political subdivision to provide aid to private persons for the purpose of clearing debris during a period of disaster, if found to be in the public interest and if the aid is eligible for reimbursement.
The first exemption is obviously more common than the second. Many school districts enter a joint powers agreement to pool legal costs or insurance for Workers’ Compensation, unemployment compensation, tort liability, or public liability losses. Even if such an arrangement results in one school district paying more than the share of services it uses, the payment is not considered a gift of public funds.
If a school district’s expenditure does not fall under one of the two exemptions, it may be a gift unless the expenditure is for a public purpose. The purpose of the expenditure, not the recipient, is the important factor. If the funds are to be used for a public purpose, they are not a gift within the meaning of the constitutional prohibition (California Teachers Assn. v. Board of Trustees (1978) 146 Cal.Rptr. 850, 855). Even if a private party benefits from the expenditure, it is not a gift if it serves a public purpose (Paramount School District v. Teachers’ Assn. (App. 1994) 32 Cal.Rptr. 2d 311).
If the board of trustees has determined that a particular type of expenditure serves a public purpose, courts will almost always defer to that finding. For example, in Paramount, the court found that an arbitration award arising from a union grievance did not constitute a gift of public funds. The school district challenged a binding arbitration award granted pursuant to provisions of the Education Employment Relations Act (EERA), arguing that such an award constituted a gift of public funds. The court, however, found that the Legislature had determined that binding arbitration is an acceptable procedure for resolving disputes involving employer-employee relations in public schools. Therefore, the court inferred that, because the Legislature had provided that mechanism, the Legislature must have determined that binding arbitration was consistent with the EERA’s stated purpose of promoting the improvement of employer-employee relations. (Paramount, 32 Cal.Rptr. 2d at 321). Because the court inferred that the Legislature had determined that binding arbitration served a public purpose, it found that an arbitration award was not a gift of public funds. The determination of which expenditures are legal under Section 6 and which are not can perhaps be decided by examining court decisions and Attorney General opinions on this issue.
Some of the decisions that have sustained the legality of particular expenditures are:
· The granting of a retroactive salary adjustment, particularly where the salary was not fixed when the work was performed. (39 Ops.Cal.Atty.Gen. 200)
· The cost of inoculating teachers against contagious diseases (31 Ops.Cal.Atty.Gen. 27)
· The payment of unemployment insurance contributions to the state UI fund (LAUSD v. Livingston, Cal.App. 1981, 125 Cal.App. 3d 942)
· The payment of teachers’ retirement benefits (Teachers’ Retirement Board v. Genest (2007)
· The payment by a school district to a corporation for research and development services (California School Employees Association v. Sunnyvale School District (1973) 36 Cal.App. 3d 46)
· The provision of free textbooks to high school students (MacMillan Co. V. Clarke (1920) 184 Cal. 491)
· The dedication of some school property for a public street (Ransom v. Los Angeles City High School District (1954) 129 Cal.App. 2d 500)
· Raising pensions after the employees have retired (Home v. Souden (1926) 199 Cal. 508)
· The provisions of food services as part of the educational program (C.S.E.A. v. Sequoia Union High School District (1969) 272 Cal.App. 2d 98)
On the other hand, courts have struck down the following proposed expenditures:
· The canceling of a debt without consideration would be considered a gift (Ojui v. Chaffee (1943) 60 Cal.App. 2d 54). Thus, a district generally has a duty to recover funds paid in error
·
Where compensation has been fixed and service performed, it is
unlawful for the employer to make a gift to employees or raise their salaries
retroactively (Robinson v. Dunn (1888) 77 Cal. 473; Lamb v. County Peace
Officers Retirement Com. (1938) 20 Cal.App. 2d 348.
· Generally, to be legal, an expenditure must be for the benefit of the public agency making the expenditure and not another public agency (Chapman v. Fullerton (1928) 90 Cal.App. 463).
· The expenditure of funds for the restoration of the San Diego mission (Frohliger v. Richardson (1923) 63 Cal.App. 209).
· Granting a license to use public property that would interfere with the public’s use of the property (San Vincente Nursery School v. County of Los Angeles (1956) 147 Cal.App. 2d 79).
Under a prior version of Section 6, the courts also deferred to the discretion of the political subdivisions, such as a school board’s determination of public interest. In a 1966, California Supreme Court case, for example, a taxpayer challenged a city council’s decision to allow two businesses to construct a pedestrian walkway over a public street, which could interfere with the public’s use of the street. In deciding to allow the walkway construction, the city council had determined that the walkway would be in the public’s interest, citing safety benefits among others. The court deferred to the city council’s finding (Irwin v. City of Manhattan Beach (1966) 51 Cal.Rptr. 881). It further stated that a court could only review the city council’s determination on public interest if there were allegations of fraud, oppression, or abuse of discretion. Under the current version of Section 6, a court would probably apply this same test to a school board’s decision.
Thus, while the language of Section 6 does not explicitly state so, a school board’s expenditure of funds should not be considered a gift of public funds if one of the following is true:
1. The Legislature has provided that a school board must or may make such an expenditure.
2. The expenditure falls under a specified exemption (e.g., joint powers agreement).
3. The district’s governing board has determined that the expenditure serves a public purpose.
Many district expenditures may not fall under the specified exemptions or be specifically authorized by the Legislature, but may fall into the third category. If the district’s governing board has determined that an expenditure is in the public interest, a court should not review the board’s determination unless there are allegations of fraud, oppression, or clear abuse of discretion. If there are no such allegations, the court should defer to the board’s discretion.
To answer the specific questions posed at the outset of this article, we suggest that:
· The reimbursement of employees for tips paid is legal if the amount is reasonable. Tips are as valid a business expense as is the dinner or cab ride itself. Just as the district has policies that limit the reimbursement of meals, it should limit the amount or percentage that is reimbursable as tips.
· A board may determine that a trip for students to an amusement park to reward academic achievement serves a public purpose by encouraging academic achievement. Such determination should not be considered a public gift even though a private party (the student or the amusement park) may benefit. When deciding to spend funds in such a manner, however, the board should adopt a resolution stating that it has determined that such an expenditure benefits the public interest. The resolution should also state the general reasons that the board has determined that the expenditure serves a public purpose.
· An expenditure of funds to students to, in essence, bribe them to attend school can be a legal expenditure, provided the board finds that such an expenditure serves the public purpose of advancing attendance which, in turn, advances the education mission and purpose of the district.
· Even though the beneficiaries of the district foundation scholarship program are no longer enrolled in the district, the board may well conclude that the incentive and availability of college funds creates the incentive for current students to stay in school and achieve the grades that the district desires.
While some expenditures may appear at first glance to be a gift, such expenditures are legal if the public receives a benefit therefrom. The board’s determination of a public purpose is not likely to be set aside by a court unless it is clearly arbitrary and erroneous.
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Thomas M. Griffin, J.D., Ph.D. has been practicing school law since 1972 and is now semi-retired in Sacramento.