When a Georgia school district or county collects an Education SPLOST or special county SPLOST and the money sits in an interest-bearing account before being spent, who gets the interest and what can it be used for?

Plain-English summary

The State Auditor asked whether the interest earned on Educational Purpose Sales Tax (Education SPLOST) and Special County 1% Sales and Use Tax (SPLOST) proceeds, while sitting in a separate account waiting to be spent, has to be used for the same purposes as the tax itself or whether it could be diverted to general operating funds. The Georgia Constitution and the SPLOST statute (O.C.G.A. § 48-8-121(a)(1)) require both kinds of taxes to be used "exclusively for the purpose or purposes specified in the resolution or ordinance" authorizing the tax, with proceeds kept in a separate, non-commingled account. The AG held that those rules, combined with the long-standing common-law principle that "interest follows principal," mean any interest earned on the account is part of the tax fund and must be used for the same dedicated purpose.

Currency note

This opinion was issued in 2001. 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.

Historical context

Education SPLOST sits in Article VIII, Section VI, Paragraph IV of the Georgia Constitution. The proceeds must be used for capital outlay projects for educational purposes or to retire general obligation debt previously issued for capital outlay projects of the school system. The local board of education's authorizing resolution and the ballot question must each describe the specific projects to be funded or the specific debt to be retired. The Constitution requires the Education SPLOST to "correspond to and be levied in the same manner as the special county tax."

The Special County SPLOST is in O.C.G.A. § 48-8-121(a)(1), which sets up the two-part rule: (1) proceeds must be used "exclusively for the purpose or purposes specified in the resolution or ordinance calling for the imposition of the tax," and (2) proceeds must be kept in a separate account, not commingled with other county funds. If general obligation debt is issued in conjunction with the SPLOST, that debt is "payable first from the separate account" holding the SPLOST proceeds.

The AG read the separate-account requirement as the legislature's structural commitment that everything in the account, including investment earnings, is dedicated to the tax's stated purpose. The "interest follows principal" rule, traced back to mid-eighteenth-century English common law and reaffirmed by the Supreme Court in Phillips v. Washington Legal Foundation (1998) and Webb's Fabulous Pharmacies, Inc. v. Beckwith (1980), confirms that interest is an incident of ownership of the fund. Several state courts had applied the same rule to government accounts: Grand Rapids Public Schools (Michigan), Laramie County School District (Wyoming), and Marshall v. Commonwealth (Kentucky, holding that interest on school tax funds had to be paid to school districts, not used for the sheriff/tax collector's office).

The AG also pointed to a previous Georgia AG opinion, 1984 Op. Att'y Gen. 84-6, which had read the constitutional motor-fuel tax dedication ("all money derived from motor fuel taxes") to include interest on motor-fuel revenues. The same logic applied to SPLOST proceeds.

The bottom line was clean. Counties and school districts could not divert SPLOST account interest to general operating funds. They had to spend the interest on the same dedicated capital projects (or the same debt service) as the underlying tax proceeds.

For county finance directors at the time

A county collecting a special county SPLOST had to keep the proceeds in a separate, non-commingled account, and any interest earned on that account flowed back into the SPLOST fund and could be spent only on the tax's specified purposes. Routine cash management practice (sweeping county accounts into investment pools and allocating interest pro-rata) had to be designed to ensure that the SPLOST fund's share of investment earnings stayed in the SPLOST fund.

For school district CFOs at the time

The same rule applied to Education SPLOST. The interest belonged to the project list (or to the debt-service fund for SPLOST-backed bonds), not to the general operating fund of the school system.

For bond counsel structuring SPLOST-backed debt at the time

The opinion strengthened the priority position of bondholders. SPLOST-backed general obligation bonds are payable first from the separate SPLOST account, and the interest in that account is part of the dedicated security. Bond covenants could and should reflect this allocation.

For state auditors at the time

Audit work plans needed to confirm not only that SPLOST principal was used for stated purposes but also that interest was being credited correctly to the SPLOST fund and spent for the same dedicated purposes.

Common questions

Q: What does "interest follows principal" mean?
A: It is a common-law rule that interest earned on a fund is part of the fund itself, owned by whoever owns the principal. Applied to a dedicated SPLOST account, it means interest belongs to the SPLOST fund and can only be spent on the same dedicated purposes.

Q: Does this apply to investment earnings beyond bank account interest?
A: The opinion's reasoning goes beyond simple bank-account interest to capture any investment return on the account. Webb's Fabulous Pharmacies and Phillips both treat "interest" broadly as the earnings of a fund.

Q: What if the county's general account earns interest pooled with SPLOST money?
A: The statute (O.C.G.A. § 48-8-121(a)(1)) requires that SPLOST proceeds not be commingled with other county funds. The county should keep the SPLOST account separate to begin with. If commingling has occurred and is unavoidable, allocation methods that credit the SPLOST fund with its share of pooled investment earnings would be consistent with the AG's reading.

Q: Does this mean the county loses access to the float?
A: Yes, in the sense that the county cannot use SPLOST account interest for general purposes. It can use the float to fund the same SPLOST capital projects sooner or to reduce SPLOST-backed debt service.

Background and statutory framework

Education SPLOST and special county SPLOST are both 1% sales and use taxes authorized by referendum, with a list of specific capital outlay projects (or debt to retire) named in the authorizing resolution and on the ballot. The constitutional and statutory framework is structured to make those proceeds purpose-specific and not fungible with general operating funds. The separate-account requirement and the rule against commingling are the structural mechanisms that enforce the purpose dedication.

The "interest follows principal" doctrine has been applied to a variety of dedicated funds. Trust beneficiaries get the interest on trust funds. Dedicated tax accounts get the interest on the tax accounts. Escrow holders receive the interest on the escrow when the underlying ownership belongs to a particular party. In each case, the interest is treated as an incident of the principal ownership.

Citations and references

Constitutional and statutory:
- Ga. Const., Art. VIII, Sec. VI, Para. IV (Education SPLOST)
- O.C.G.A. § 48-8-141 (Education SPLOST corresponds to county SPLOST)
- O.C.G.A. § 48-8-121 (special county SPLOST proceeds use; separate account)
- O.C.G.A. § 48-8-111(f)(2) (general obligation debt funded from SPLOST)
- O.C.G.A. § 1-3-1(a) (statutory construction)

Cases:
- Phillips v. Washington Legal Found., 524 U.S. 156 (1998)
- Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980)
- Grand Rapids Pub. Sch. v. City of Grand Rapids, 381 N.W.2d 783 (Mich. App. 1985)
- Board of County Comm'rs v. Laramie County Sch. Dist. No. One, 884 P.2d 946 (Wyo. 1994)
- Marshall v. Commonwealth, 20 S.W.3d 478 (Ky. Ct. App. 2000)

Prior AG opinions:
- 1984 Op. Att'y Gen. 84-6 (motor fuel tax interest)
- 1999 Op. Att'y Gen. 99-11

Source

• Landing page: https://law.georgia.gov/opinions/2001-3

Original opinion text

You have asked if interest earned on educational purpose sales taxes (the "education tax") or on special county one percent sales and use taxes (the "special county tax") is required to be used exclusively for the purpose or purposes specified in the resolution or ordinance calling for imposition of the respective tax. An answer to your question involves a review of the provisions of the Constitution and the statutes authorizing the education tax and the special county tax in order to ascertain the legislative intent and purpose in enacting the law. O.C.G.A. § 1-3-1(a); 1999 Op. Att'y Gen. 99-11. The education tax is authorized by Paragraph IV of Section VI of Article VIII of the Georgia Constitution. The proceeds of the education tax must be used for capital outlay projects for educational purposes or to retire previously incurred general obligation debt issued for capital outlay projects of the school system. GA. CONST. Art. VIII, Sec. VI, Para. IV(b). The resolution adopted by the local board of education calling for imposition of the tax and the ballot question submitted to the voters in the subsequent referendum must each describe the specific capital outlay projects to be funded or the specific debt to be retired. GA. CONST. Art. VIII, Sec. VI, Para. IV(c)(1). The Constitution requires that the education tax shall correspond to and be levied in the same manner as the special county tax. GA. CONST. Art. VIII, Sec. VI, Para. IV(a). See also O.C.G.A. § 48-8-141 (Supp. 2000). The special county tax is authorized by Part 1 of Article 3 of Chapter 8 of Title 48 of the Official Code of Georgia Annotated. Under O.C.G.A. § 48-8-121(a)(1) (Supp. 2000), the proceeds of the tax must be used and accounted for in accordance with a limitation expressed in two parts. First, proceeds of the tax must be used by the county exclusively for the purpose or purposes specified in the resolution or ordinance calling for the imposition of the tax. Second, the county is required to keep the proceeds in an account separate from other county funds, and such proceeds must not in any manner be commingled with other funds of the county. O.C.G.A. § 48-8-121(a)(1) (Supp. 2000). See also O.C.G.A. §§ 48-8-111(f)(2) (Supp. 2000) and 48-8-121(c) (Supp. 2000) (if general obligation debt is issued in conjunction with the special county tax, then such debt "shall be payable first from the separate account in which are placed the proceeds" of the special county tax). The two-part limitation set forth at O.C.G.A. § 48-8-121(a)(1) applies to both the education tax and the special county tax. See GA. CONST. Art. VIII, Sec. VI, Para. IV(a) and O.C.G.A.§ 48-8-141 (Supp. 2000). The requirement of a separate account and the mandate that the proceeds placed in the account not be commingled with other funds, as set forth in the second part of the statutory limitation, demonstrate a legislative intent that all money in the account, including any interest, is dedicated for the purposes specified in the involved resolution or ordinance, as required by the first part of the statutory limitation. This determination of legislative intent is consistent with the general rule that "interest follows principal." See Phillips v. Washington Legal Found., 524 U.S. 156, 165 (1998) ("[t]he rule that 'interest follows principal' has been established under English common law since at least the mid-1700's"). Under the "interest follows principal" rule, interest earned on public funds is an incident of principal and becomes a part of the account fund. See Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 164 (1980) ("[t]he earnings of a fund are incidents of ownership of the fund itself"); Grand Rapids Pub. Sch. v. City of Grand Rapids, 381 N.W. 2d 783, 785 (Mich. App. 1985) ("in absence of a clear statutory provision to the contrary, the general principle is that interest on public funds designated for a specific purpose follows those funds"); Board of County Comm'rs v. Laramie County Sch. Dist. No. One, 884 P.2d 946, 954 (Wyo. 1994) ("interest is an accretion or increment to the fund earning such interest and follows those funds") and Marshall v. Commonwealth, 20 S.W.3d 478 (Ky. Ct. App. 2000) (interest earned on school tax funds placed in interest bearing accounts must be paid to county school districts, rather than used for sheriff/tax collector's office expenses). See also 1984 Op. Att'y Gen. 84-6 (under Article III, Section IX, Paragraph VI(b) of the Georgia Constitution, which appropriates an amount equal to all money derived from motor fuel taxes for the immediately preceding fiscal year for roads and bridges, the language "all money derived from motor fuel taxes" includes interest on motor fuel revenues). Consequently, interest earned on education taxes and on special county taxes becomes part of the tax proceeds in the account fund, which fund is required to be used exclusively for the purpose or purposes specified in the resolution or ordinance calling for imposition of the respective tax. Prepared by: DANIEL M. FORMBY Deputy Attorney General