Can a Tennessee school district spend its leftover education fund balance on recurring expenses, or only one-time costs?

Subject

Opinion No. 13-69, Local Education Agency's Dedicated Education Fund Balance, August 23, 2013

Plain-English summary

Rep. Jimmy Matlock and Sen. Randy McNally asked two related questions about how Tennessee school districts could spend leftover dedicated-education-fund balances above 3% of the annual budget.

Question 1 (recurring expenses). Could the excess balance be used for anything other than non-recurring expenses? Yes. Tenn. Code Ann. § 49-3-352(c), as it stood in 2013, allowed the excess to be "budgeted and expended for any education purposes," upon the LEA's recommendation. The prior version of the statute had restricted use to non-recurring items, but a 2005 amendment (Chapter 223 of the 2005 Public Acts) removed that limitation. The AG corrected a prior opinion (Op. 11-73) that had inadvertently quoted the old, pre-2005 language. The current rule was clear: recurring expenses were allowed.

Question 2 (Chapter 305 of 2013). Did Chapter 305 of the 2013 Public Acts change the answer? No. Chapter 305 added a new subdivision (3) to Tenn. Code Ann. § 49-3-314(c), creating an exception to the standard "maintenance of effort" rule. Under that exception, if a local government appropriated education funds for non-recurring expenses under a written agreement with the LEA (subject to DOE review), those funds were excluded from the maintenance-of-effort calculation in the following year. In plain terms, the local government could put money in for a one-time project without locking itself into that higher base for future years. Chapter 305 did not address recurring spending of accumulated balances under § 49-3-352(c), so it did not constrain the LEA's authority to spend the excess on recurring items.

Currency note

This opinion was issued in 2013. 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.

Tennessee school-finance law has been substantially restructured since 2013, including the move from the Basic Education Program to the Tennessee Investment in Student Achievement (TISA) formula in 2022. Maintenance-of-effort and fund-balance rules have been amended along the way. Anyone planning a specific budget action should pull the current statute text, current DOE rules, and the Comptroller's most recent guidance.

Background and statutory framework

The dedicated education fund. Tenn. Code Ann. § 49-3-352 established a special revenue account, the dedicated education fund, within the general fund of every LEA. All funds intended for LEA functions or expenses were appropriated to it, and an affirmative majority vote of the board was required to disburse from it. Subsection (b) was amended by Chapter 214 of the 2013 Public Acts, effective April 23, 2013.

The fund-balance rule. Tenn. Code Ann. § 49-3-352(c) provided that any unexpended balance carried forward, was available to offset revenue shortfalls or unforeseen expense increases. Any balance above 3% of budgeted annual operating expenses for the current year "may be budgeted and expended for any education purposes," upon the board of education's recommendation and the local legislative body's appropriation. In any fiscal year in which state-shared revenues to counties fell below 2002-2003 levels, the entire balance could be used without restrictions.

Pre-2005 rule. The original statute had allowed excess balance use only for "nonrecurring purposes" and forbade its use to fund recurring annual operating expenses. Chapter 223 of the 2005 Public Acts deleted that restriction.

Prior opinions. Tenn. Att'y Gen. Op. 04-098 (June 24, 2004) interpreted the original (pre-2005) statute. Tenn. Att'y Gen. Op. 11-73 (Oct. 13, 2011) recognized the post-2005 flexibility but inadvertently quoted the older restrictive language. The 2013 opinion clarified the discrepancy.

Chapter 305 of 2013 (maintenance-of-effort exception). New subdivision (c)(3) of Tenn. Code Ann. § 49-3-314 (effective April 29, 2013) provided that one-time appropriations under a written, DOE-reviewed agreement establishing the non-recurring use of funds would be excluded from the maintenance-of-effort base in § 49-3-315(a). The exception affected the local legislative body's ongoing funding obligation, not the LEA's ability to spend its existing balance.

Construction principle. Chapman v. DaVita, Inc., 380 S.W.3d 710, 714 (Tenn. 2012), quoting State v. Strode, 232 S.W.3d 1, 9 (Tenn. 2007), instructed courts to apply statutory language by its natural meaning, without "forced or subtle construction that would extend . . . the statute's meaning."

Common questions

Who actually decides how to spend the excess fund balance?

The LEA's board of education had to recommend the use. The local legislative body (the county commission or city council) then appropriated. Both steps were required. Neither body could spend the balance unilaterally.

What counts as a "recurring" versus "non-recurring" expense?

The statute didn't define those terms. Non-recurring expenses typically meant one-time items: textbook adoption, building roof, vehicle purchase, technology rollout. Recurring expenses meant items that repeat annually: salaries, utilities, transportation contracts. The labels mattered both for budgeting and, after Chapter 305 of 2013, for maintenance-of-effort calculations.

Why did the 2011 AG opinion get it wrong?

Op. 11-73 reached the right ultimate conclusion (the post-2005 statute allowed any educational purpose) but inadvertently included a block quote from Op. 04-098 that referenced the pre-2005 restrictive language. Anyone reading Op. 11-73 quickly could come away with the wrong impression. Op. 13-69 explicitly corrected this for the record.

What was the practical difference Chapter 305 made for local governments?

Before Chapter 305, a county that appropriated extra one-time money for, say, a new gym roof, risked having that elevated spending locked in as the new floor for next year's MOE calculation. Chapter 305 allowed counties to make one-time investments via a written agreement reviewed by DOE without that lock-in effect, encouraging more flexible local support.

Could the school board spend the excess on a teacher pay raise?

A teacher pay raise was a recurring expense. Under the post-2005 statute and Op. 13-69, the excess balance could be used for that purpose. But the practical caution was that one year's excess balance might not exist the next year, leaving the LEA holding a permanent pay obligation without recurring funding. The opinion did not address that practical risk.

Citations

Tenn. Code Ann. §§ 49-3-352, 49-3-352(c), 49-2-301(b)(1)(W), 49-3-314(c), 49-3-315(a). 2005 Tenn. Pub. Acts ch. 223; 2013 Tenn. Pub. Acts chs. 214, 305. Cases: Chapman v. DaVita, Inc., 380 S.W.3d 710, 714 (Tenn. 2012); State v. Strode, 232 S.W.3d 1, 9 (Tenn. 2007). Prior AG opinions: Op. 04-098 (June 24, 2004); Op. 11-73 (Oct. 13, 2011).

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2013/op13-069.pdf

Original opinion text

August 23, 2013

Opinion No. 13-69

Local Education Agency's Dedicated Education Fund Balance

QUESTIONS

1. Can the unexpended balance from a dedicated education fund in excess of the 3% threshold established by Tenn. Code Ann. § 49-3-352 be used for any purpose other than non-recurring expenses?

2. Does Chapter 305 of the 2013 Tennessee Public Acts affect the ability of a local education agency ("LEA") to use the fund balance referenced in question 1 for recurring expenses?

OPINIONS

1. The dedicated education fund balance in excess of 3% of the annual LEA budget can be used for any educational purpose with the consent of the LEA, including recurring or nonrecurring education expenses.

2. No.

ANALYSIS

1. A dedicated education fund is established and governed by Tenn. Code Ann. § 49-3-352 (subsection (b) of which was amended by Chapter 214 of the 2013 Tennessee Public Acts, effective April 23, 2013, 2013 Tenn. Pub. Acts ch. 214, § 5), which provides:

(a) There is established within the general fund of each LEA a special revenue account to be known as the dedicated education fund.

(b) All appropriations from all sources intended to fund any function or expense of the LEA shall be appropriated to this account and an affirmative vote by a majority of the membership of the board shall be required to disburse funds from the account. Money in the dedicated education fund shall be invested as provided by law.

(c) Any fund balance remaining unexpended at the end of a fiscal year in the general fund of the local public education system shall be carried forward into the subsequent fiscal year. The fund balance shall be available to offset shortfalls of budgeted revenues or, subject to § 49-2-301(b)(1)(W), shall be available to meet unforeseen increases in operating expenses. Any accumulated fund balance in excess of three percent (3%) of the budgeted annual operating expenses for the current fiscal year may be budgeted and expended for any education purposes, but must be recommended by the board of education prior to appropriation by the local legislative body. Notwithstanding the provisions of this section or any other law to the contrary, in any fiscal year in which state-shared revenues distributed to counties are reduced below the levels distributed to counties in the 2002-2003 fiscal year, any or all of the accumulated fund balance may be used for education purposes without restrictions; provided, however, that for the 2004-2005 fiscal year only, if an LEA submits to the department for approval a budget that contains the use of unrestricted accumulated funds under this subsection (c) and it is subsequently determined that state-shared revenues distributed to counties are equal to or greater than levels distributed to counties in the 2002-2003 fiscal year, the commissioner shall have the authority to approve the unrestricted use of the accumulated funds.

This Office has interpreted the impact of Tenn. Code Ann. § 49-3-352(c) on two occasions. In 2004, this Office opined that this statute allows the balance of the accumulated fund over 3% "to be budgeted and expended for nonrecurring purposes." Tenn. Att'y Gen. Op. 04-098 at 3 (June 24, 2004) (emphasis added). After the issuance of this opinion, the General Assembly amended Tenn. Code Ann. § 49-3-352(c) to its current language. See 2005 Tenn. Pub. Acts ch. 223 (hereinafter "Chapter 223"). Chapter 223 deleted the prior language that the accumulated fund balance in the dedicated education fund in excess of 3% of annual operating expenses "may be budgeted and expended for nonrecurring purposes but shall not be used to satisfy appropriation requirements for recurring annual operating expenses." Compare Chapter 223, § 1 with Tenn. Code Ann. § 49-3-352(c) (2002). Accordingly, the restriction that such funds could be used only for nonrecurring expenses was eliminated. See Chapter 223, § 1; Tenn. Code Ann. § 49-3-352(c).

This Office, in a 2011 opinion, discussed the effect of the new language of Tenn. Code Ann. § 49-3-352(c), recognizing that "upon the LEA's recommendation, the local legislative body may budget and expend remaining local education fund balances (above 3% of the annual budgeted LEA expenses) for any educational purposes." Tenn. Att'y Gen. Op. 11-73 (Oct. 13, 2011). Opinion 11-73, in discussing the questions presented, quoted prior Opinion 04-098 to generally illustrate the four basic steps the statute establishes for the use of accumulated school fund balances. See Tenn. Att'y Gen. Op. 11-73 at 2. This quote contained a reference to the prior language of Tenn. Code Ann. § 49-3-352(c), which as mentioned above limited the use of the excess of the accumulated fund balance over 3% to nonrecurring purposes. Id. In 2005 Chapter 223 removed the restriction requiring the accumulated fund balance over 3% to be used for nonrecurring purposes. As Opinion 11-73 states, the local legislative body may now budget and expend the excess dedicated education fund balance (above 3% of the annual budgeted LEA expenses) for any educational purposes (including recurring and nonrecurring expenses), upon the LEA's recommendation. Id.

2. Chapter 305 of the 2013 Tennessee Public Acts adds a new subdivision (3) to Tenn. Code Ann. § 49-3-314(c), providing:

Notwithstanding any other law to the contrary, if in any fiscal year a local government appropriates funds for education for non-recurring expenditures evidenced by a written agreement with the LEA establishing the non-recurring use of the funds, such funds shall be excluded from this maintenance of local funding requirement and from any apportionment requirement under [Tenn. Code Ann.] § 49–3–315(a). Before any such agreement takes effect, it shall be subject to review by the department [of education] to ensure the non-recurring nature of the expenditures.

2013 Tenn. Pub. Acts 305, § 1. This provision became effective April 29, 2013. Id., § 2. This provision creates by its terms an exception to the general obligation of local legislative bodies to maintain their level of education funding "effort" from year to year as established by Tenn. Code Ann. § 49-3-315(a). Thus, any education funds expended on nonrecurring expenses in a given year as defined by Chapter 305 are excluded from the maintenance of effort calculation for the local legislative body in the following year. This provision allows a local legislative body, in agreement with an LEA, to make a one-time expenditure of education funds for non-recurring expenses without obligating itself to make an expenditure at the same level in the next fiscal year. This provision does not address, or have any effect on, the ability of an LEA and a local legislative body to use excess funds for recurring expenses pursuant to Tenn. Code Ann. § 49-3-352(c). See Chapman v. DaVita, Inc., 380. S.W.3d 710, 714 (Tenn. 2012) (quoting State v. Strode, 232 S.W.3d 1, 9 (Tenn. 2007)) (stating a court's role in interpreting a statute is to apply "the natural and ordinary meaning of the statutory language within the context of the entire statute without any forced or subtle construction that would extend . . . the statute's meaning").

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

ADAM B. FUTRELL
Assistant Attorney General

Requested by:

The Honorable Jimmy Matlock
State Representative
219 War Memorial Building
Nashville, TN 37243

The Honorable Randy McNally
State Senator
307 War Memorial Building
Nashville, TN 37243