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In a recent case, Albert Bates et al., v. Poway Unified School District 83 Cal.App.5th 907 (hereafter Poway), restricts the uses to which reimbursements for school facilities projects under the Leroy F. Greene Act (“Greene Act”) can be put.  The court clarified that when local bond funding has been used to pay for a project, subsequent Greene Act reimbursements for the state’s share of the project must be used either 1) to retire local bonds, or 2) for uses permitted by the local bond measure.  Those funds may not be used for other high priority capital outlays, though project savings may.  Poway is the second case in recent months interpreting the Greene Act’s project savings provision, and the third in recent years.

State funding for California public school facilities projects is governed by the Greene Act and by regulations adopted by the State Allocation Board (“SAB”).  The SAB administers California’s School Facility Program (“SFP”) through the Office of Public School Construction (“OPSC”), distributing funds to eligible school districts throughout California.

In 2014, Poway Unified School District (“District”) filed an application for Greene Act funding to assist with construction of an elementary school (“Project”).  However, the SFP’s funds had by that time been completely depleted.  The District carried out the Project with funding from multiple Community Facilities Districts (“CFDs”) and was placed on a waiting list for reimbursement. The District was reimbursed in 2019 when additional SFP funding became available.

The District decided to use only $6,226,407.68 of its $27,672,293 reimbursement for the state’s share of the Project to retire CFD bonds.  The District allotted the rest of the reimbursement funds to other high priority capital projects.

Two homeowners who resided in one of the CFDs sued.  They argued that California Code of Regulations, title 2, section 1859.90.5 requires districts to use SFP reimbursement funds to retire local bonds or for other uses permitted by the local bond. They further argued that only funds derived from project savings could be used for other capital projects.  Since the District had not achieved any such savings, the District was not permitted to spend the SFP reimbursement on other capital projects.  The trial court rejected these arguments, and the homeowners appealed.

The Court of Appeal ruled in favor of the homeowners, holding that California Code of Regulations, title 2, section 1859.90.5 requires that reimbursement funds be used in one of three ways:

 (a) Toward retiring the local bonds; and/or

(b) Toward uses permitted by the local bond, or

(c) For any high priority capital outlay expenditure in the district as permitted in Education Code Section 17070.63(c).

 The court determined that this meant districts could only use reimbursement funds for capital expenditures when permitted by Education Code section 17070.63, subdivision (c), which provides:

Any savings achieved by the district’s efficient and prudent expenditure of these funds shall be retained by the district in the county fund for expenditure by the district for other high priority capital outlay purposes.

Since section 17070.63, subdivision (c) permits savings to be used for other high priority capital outlay purposes, the court determined that reimbursement funds could be used for capital purposes only when they constitute project savings.  The court reasoned that since SFP funds received during an ongoing project cannot be used for other capital purposes unless there are savings, reimbursement funding should be subject to the same rule.  The court rejected the District’s contentions about contrary legislative intent, as well as disputed claims that OPSC had advised the District it could spend the funds on capital projects.

The Poway case follows on the heels of San Bernardino City Unified School Dist. v. State Allocation Bd. (2022) 79 Cal. App. 5th 12 (hereafter San Bernadino), which was decided in May.  The court in San Bernadino rejected SAB’s efforts to enforce its regulation requiring that districts return project savings to SAB on a project that had received SFP hardship funds.  The court found that Education Code section 17070.63, subdivision (c) unequivocally provided that project savings could be retained by districts.  The court invalidated SAB’s regulation as inconsistent with section 17070.63.

In fact, this was not the first time the SAB had been overruled in seeking the return of project savings. In Santa Ana Unified School Dist. v. State Allocation Bd. (2016) Cal. Super. LEXIS 44462 (hereafter Santa Ana), the court interpreted section 17070.63, subdivision (c) as barring SAB from demanding the return of overcrowding relief grant funding on a project that had achieved savings.

Taken together, the Poway, San Bernadino, and Santa Ana cases offer two powerful lessons for school districts.  First, if a statute’s literal wording is unambiguous, that wording will generally govern the statute’s interpretation, absent some contrary purpose readily apparent in the statute.  The District in Poway, and the SAB in San Bernadino and Santa Ana, lost in large part because they adopted statutory interpretations inconsistent with statutory language, basing their interpretations instead on nebulous conceptions of statutory intent and purpose.  In interpreting Greene Act statutes and SAB regulations, it is important for school districts to adhere to statutory language, unless there is clear evidence a literal interpretation of the statute would fly in the face of the larger statutory purposes.

Second, while OPSC is a vitally important resource and partner for school districts on construction projects, districts should not turn to OPSC for legal advice.  Helping districts interpret complicated statutory provisions and regulations is not OPSC’s responsibility.

For more information about the Poway case or state funding requirements under the Greene Act, contact the authors of this article or your regular Tao Rossini counsel.

By:

Barry Nutovic 

and

Jeremy K. Brust