Could a Colorado school district transfer investment interest from its bond redemption fund to its general fund?

Plain-English summary

The Attorney General concluded that investment interest earned on a Colorado school district's bond redemption fund had to remain dedicated to bond purposes. A district could not arrange for a bank to credit that interest to its general fund.

Although § 22-42-119(1) did not expressly state where investment earnings went, the broader school-finance statutes separated bond money from the general fund and limited excess bond-fund money to reducing future levies or paying bond obligations early. The common-law rule that interest follows principal supported the same result.

The Colorado Constitution's public-debt provision and voter expectations also favored using both principal and earnings for the voter-approved debt. Moving earnings to ordinary operating purposes would materially depart from the purpose for which the bonds were approved.

Currency note

This opinion was issued in 2006. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

How the opinion applied in 2006

School boards and district finance officers

Bond redemption fund principal and its investment earnings were restricted to paying bond interest and redeeming the bonds. The district could not augment its general fund with those earnings.

County treasurers and custodians

Temporarily unneeded bond money could be invested as authorized by law, but the resulting interest remained attached to the bond fund.

Voters and public-finance readers

The opinion read the bond vote as carrying an expectation that money associated with the redemption fund would pay the approved debt, even when ballot language allowed earnings to be spent outside TABOR limits.

Common questions

Could a bank send bond-fund interest to the general fund?

No. The district could not contract around the restriction by directing the financial institution to credit another fund.

Why did interest stay with the bond fund?

The statutory scheme kept the funds separate, and the common-law rule treated interest as following the principal that produced it.

Could excess bond money be used for another school purpose?

The opinion said excess money was to reduce a future bond levy or pay bond obligations before their due date.

Background and statutory framework

Section 22-42-119 allowed temporary investment of redemption-fund money not immediately needed for debt service but required the fund to be used only for bond interest and redemption. A related fund-accounting provision reinforced separation between the bond and general funds.

The opinion also relied on article XI, § 6(1) of the Colorado Constitution, the common-law decisions stating that interest follows principal, and Busse v. City of Golden on staying within a voter-approved bond purpose.

Citations and references

Statutes and constitution: § 22-42-119(1), C.R.S. (2005); § 22-45-103(1)(b)(IV), C.R.S. (2005); COLO. CONST, art. XI, § 6(1).

Cases: Left Hand Ditch Co. v. Hill, 933 P.2d 1, 3 (Colo. 1997); Phillips v. Washington Legal Foundation, 524 U.S. 156 (1998); Busse v. City of Golden, 73 P.3d 660 (Colo. 2003).

Source

• Landing page: https://coag.gov/attorney-general-opinions/
• Original PDF: https://coag.gov/app/uploads/2019/08/No.-06-2-Whether-a-School-Districts-Investment-Earnings-on-its-Bond-Redemption-Fund-can-be-Paid-to-the-Districts-General-Fund.pdf

Original opinion text

Attorney General

STATE OF COLORADO

C ynthia H. C offman
Chief Deputy Attorney General

O ffice of the Attorney G eneral

J o h n W . Su t h e r s

State S ervices B uilding
1525 Shernian Street - Mh Floor
Denver, Colorado 80203
Phone (303) 866-4500

DEPARTMENT OF LAW

A llison H. E id
Solicitor General

FORMAL

No. 06-02

OPINION

AG Alpha No. TR TR AGBBS

Of

March 13, 2006

JOHN W. SUTHERS
Attorney General

This opinion is issued at the request o f Deputy State Treasurer Benson M. Stein. The Deputy Treasurer’s letter asks a question regarding the disposition o f investment interest earned on moneys in school districts’ bond redemption funds.

QUESTION PRESENTED AND CONCLUSION
Q u estion : Does Colorado law permit a school district to contract with a financial

institution so that investment interest earned on moneys in the district’s bond redemption fund (“BRF”) are paid to the district’s general fund, thus making such investment earnings available for general fund purposes, instead o f being used solely for BRF purposes? A n sw er: No. Investment interest earned on BRF moneys must be used solely for BRF

purposes. A school district may not contract to have such investment earnings credited to its general fund.

BACKGROUND
The Deputy State Treasurer asks whether § 22-42-119(1), C.R.S. (2005), requires that not only the BRF taxes themselves, but also all investment earnings on a school district’s BRF moneys be used “only for payment o f interest upon and for the redemption o f such bonds.’’ The statute reads in material part as follows: Bond fund - payment and redemption. (1) [Taxes to fund voterapproved school bonds] shall be collected in the same manner as other school district taxes and when collected shall be placed by the county treasurer in the bond redemption fund o f said school district. The moneys in said fund shall be used only for

payment of interest upon and for the redemption of such bonds
. . . ; but the board of education of said school district may withdraw, or . . . may instruct the third-party custodian administering the bond redemption fund . . . to withdraw, any or all of such moneys credited to said fund which are temporarily not needed to satisfy the obligations of bonded indebtedness, for the purpose of depositing or investing such moneys in the manner prescribed by law.
§ 22-42-119(1), C.R.S. (2005) (emphasis added). The investment earnings at issue here fall within the last clause o f the subsection quoted above - that is, the investment o f BRF moneys that “are temporarily not needed” to satisfy bonded indebtedness.

DISCUSSION
Subsection 22-42-119(1) contains no explicit language concerning the disposition o f investment earnings derived from BRF moneys. However, the school financing statutes, when read as a whole, compel the conclusion that investment interest earnings must be paid to and used solely for BRF purposes. This conclusion is also supported by the common law rule o f “interest follows principal,” by the Colorado constitutional provision on public indebtedness, and by voters’ expectations when voting on a bond issue.

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A. SCHOOL FINANCE STATUTES
First. § 22-42-119(1) must be read in the context o f title 22 as a whole. As the Colorado Supreme Court has stated: Our primary task in construing statutes that are part o f an overall statutory scheme is to give effect to the intent o f the General Assembly. When the General Assembly adopts a comprehensive regulatory program, the legislation should be construed as a whole, giving effect to all o f its parts in the context o f the entire scheme. Statutes related to the same subject matter are construed in p a r i m ateria, in order to give consistent, harmonious, and sensible effect to all o f their parts. Left H a n d D itch Co. v. H ill , 933 P.2d 1, 3 (Colo. 1997) (citations omitted). S ee a lso K rie g v. P ru d en tia l P ro p e rty a n d Cas. Ins. C o., 686 P.2d 1331, 1335 (Colo. 1984) (goal is to “arrive at a

construction that harmonizes a particular provision with the statutory whole”); P etitio n o fS .O ., 795 P.2d 254, 258 (Colo. 1990) (courts must choose construction o f statute which “best effectuates the purposes o f the legislative scheme”). Reading § 22-42-119(1) in the context o f title 22 as a whole leads to the conclusion that the legislature intended that investment earnings on BRF moneys should be credited back to the BRF and used for BRF purposes. The General Assem bly has enacted numerous provisions in title 22 to govern school finance. A number o f those provisions demonstrate a legislative preference to preserve all moneys associated with the BRF inviolate, and to use such moneys only for payment o f principal and interest on bonded indebtedness. Beginning with §22-42-119(1) itself, the statutory language and the entire statutory scheme indicate careful delineation and separation between a district’s general fund and other district funds, particularly the BRF.1 See, e.g ., § 22-45-103 (for accounting purposes, school district moneys are divided into seven separate funds with specific

1 This is also consistent with generally accepted accounting principles (“GAAP”).

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requirements for each; general fund includes all district revenues except, in ter a lia , revenues attributable to BRF). Another provision o f § 22-45-103 also affirms that the legislature was establishing a selfcontained scheme for the BRF, and that it intended that all moneys associated with the BRF inhere to the benefit o f the BRF, rather than being used for alternate purposes. Excess moneys in the BRF “shall be used to reduce the levy for the bond redemption fund in future years or to pay any then existing obligations o f the district payable from the bond redemption fund at a date earlier than they become due.” § 22-45-103(1 )(b)(IV), C.R.S. (2005). See a lso B o a rd o f C ou nty Comm"rs v. B a in b rid g e, In c., 929 P.2d 691, 710 (Colo. 1996) (school accounting and reporting

statute establishes funds for various purposes; expenditures from each fund limited to its specified purpose; BRF revenues may be used only for “obtaining or using real property or equipment for school buildings, sites, or structures”). Next, § 22-42- 102(2)(a) authorizes districts to contract bonded indebtedness for certain delineated purposes. None o f these purposes includes augmentation o f the general fund. While
§ 22-42- 102(2)(b) provides that the specified purposes “shall be broadly construed,” it would be unreasonable to stretch such purposes to include augmenting a district’s general fund. The general fund is used for normal operating expenses, as opposed to the special one-time purposes related to the district’s physical plant specified in § 22-42- 102(2)(a). Thus, § 22-42-102(2)(a) does not contemplate that a district can incur bonded indebtedness for general fund purposes, which would be the practical result if investment earnings on BRF moneys were credited to the general fund. To the contrary, borrowing for general fund purposes is limited to short-term debt to be repaid within six months o f the close o f the fiscal year. § 22-40-107, C.R.S. (2005). See a lso A b ts v. B o a rd o f E du c., 622 P.2d 518 (Colo. 1980).

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In sum, various statutes that are a part o f the school finance law demonstrate that the General Assembly intended that BRF moneys be circumscribed and kept apart from general fund moneys and purposes.

B. THE COMMON LAW
Additionally, the common law2 supports the conclusion that interest earned on BRF moneys must be used solely for BRF purposes. As a general rule, all investment earnings should be credited to the principal from which they arise. The U.S. Supreme Court discussed the English common law doctrine that “interest follows principal” in P h illip s v. W ashin gton L eg a l F o u n d a tio n , 524 U.S. 156 (1998). As the Supreme Court in that case concluded,

The rule that “interest follows principal” has been established under English common law since at least the mid-1700's . . . .
[Ijnterest shall follow the principal, as the shadow the body. 524 U.S. at 165 (internal citations and quotation marks omitted). S ee a lso F a b u lo u s P h arm acies, Inc. v. B e c k w ith , 449 U.S. 155, 162 (1980) (same).

This common law doctrine has also been widely applied in the area o f public funds. See, e.g., Q ueen v. M o o re , 340 S.E.2d 838, 841 (W. Va. 1986) (with regard to student activities fees,

in absence o f lawful separation, interest presumed to be an accretion to the fund earning it); S tate v. D ick h erb er, 576 S.W.2d 532, 537 (Mo. 1979) (general principle that interest on public funds designated for specific purpose follows those funds, in absence o f unequivocal legislative expression otherwise). See a lso S ta te v. M o n to y a , 575 P.2d 605 (N.M. 1978) (interest accrued on bonds for one project may not be diverted to another related bond project).

2 Pursuant to § 2-4-211, C.R.S. (2005), English common law is “the rule o f decision and shall be considered as o f full force” in Colorado unless it is “repealed by legislative authority.”

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Application o f this doctrine to the question presented leads to the conclusion that, just as the principal contained in the BRF is by legislative mandate devoted solely to payment o f bonded indebtedness, the interest earned on that principal is to be similarly circumscribed.

C. CONSTITUTIONAL PROVISION ON PUBLIC INDEBTEDNESS
Moreover, article XI o f the Colorado Constitution, entitled “Public Indebtedness,’’ suggests that not only is the public debt o f political subdivisions, including school districts, to be strictly controlled, but that repayment o f such debt is a priority. In particular, section 6(1) provides in material part as follows: No political subdivision o f the state shall contract any general obligation debt by loan in any form . . . except by adoption o f a legislative measure which shall be irrepealable until the indebtedness therein provided for shall have been fully paid or discharged, specifying the purposes to which the funds to be raised shall be applied and providing for the levy o f a tax which together with such other revenue, assets, or funds as may be pledged shall be su fficient to pay the interest and principal o f such de b t . . . . COLO. CONST, art. XI, § 6(1). Using interest earned in BRF accounts for BRF purposes is consistent with article XFs mandate to use interest to fully pay and discharge debt.

D. VOTER EXPECTATIONS
Finally, reference must also be made to the intent o f the voters in approving the bond measure in question. The ballot question presented to voters states only that the investment earnings are not to be counted for TABOR purposes; it nowhere indicates that such earnings will be credited to the district’s general fund. In B u sse v. C ity o f G o ld en , 73 P.3d 660 (Colo. 2003), the Colorado Supreme Court dealt with a case concerning the utilization o f voter-approved m u n icip a l bond moneys. The court held that while the city could validly make “expenditures incidental to [the voter-approved] purpose,” it could not use bond moneys in a way that would “materially depart from the [voter-approved]

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purpose o f a bond measured’ 73 P.3d at 665-66. This reasoning is equally applicable here, and reinforces the conclusion that not only the BRF moneys themselves, but all investment earnings thereon must be devoted to the voter-approved purpose. When voters approve a bond issuance, as those questions are customarily formulated,3 the electorate would expect that all moneys associated with the BRF will be used to pay bonded indebtedness, rather than being utilized for general fund purposes.

CONCLUSION
For the above-stated reasons, investment interest earned on BRF moneys must be used solely for BRF purposes. Therefore, a district may not contract to have such investment earnings credited to its general fund. Issued this 13lh day o f March, 2006.

ag*aeam

VA>J , -..
W. SUTHERS
rado Attorney General

J Similar to the typical ballot language at issue here, the municipal bond measure in B u sse specified that the investment earnings on the bond proceeds could be spent without regard to constitutional (TABOR) limitations and those o f any other law. 73 P.3d at 661 n. 1.

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