July 29, 2014
Final Reports
San Mateo Courts - Civil Grand Jury

2001 Final Report:

Laguna Salada Asset Management Foundation

Summary | Background | Findings | Recommendations | Responses

Summary:

The Laguna Salada Union School District (District) determined that it would have surplus school buildings and sites. The District established the Laguna Salada Asset Management Foundation (Foundation) to which it would sell surplus school property. The Foundation would then invest the proceeds in any way it chose, including equity investments.

Based on the opinion of the State of California Department of General Services and the Legislative Counsel of California, the Grand Jury finds that such sale of surplus school property to a non-profit foundation is illegal and that the District should rescind its plan.

Issue: Is it lawful for the Laguna Salada Union School District (District) to transfer surplus school property to the Laguna Salada Asset Management Foundation (Foundation), which may then sell or lease the property and use the proceeds without restriction, including investments in the stock market?

Background:

The District determined that, due to declining enrollment, it would have surplus school property. The District sought professional recommendations regarding the value and best use of this excess property.

On May 26, 1999, the State of California Department of General Services (DGS) sent a memorandum to "All School Districts and County Superintendents of Schools" that outlined the appropriate use of property sale proceeds. This memorandum (attached) references Education Code sections 14462 and 14463, which state that proceeds of surplus property be used for capital outlay purposes.

The District, contrary to the DGS memorandum, subsequently created the non-profit Laguna Salada Asset Management Foundation. The Foundation's board of directors consists of three members of the District board, two members appointed by the District Board, and one non-voting member, the District Superintendent. The District's strategy is to transfer surplus property to the Foundation and let the Foundation sell the property and invest the proceeds in any way it chooses. The Foundation would then transfer funds to the District so that it could spend them free of any statutory constraint.

Findings:

The 2001-2002 Grand Jury investigation focused on the legality of this scheme described above. The Grand Jury interviewed District board members, sought a legal opinion issued by the Legislative Counsel of California, and reviewed the applicable law.

The District holds title to its school properties as trustee for the state of California. If the District sells or leases surplus property, it is required by state law (Government Code sections 17462 and 17463 and Education Code sections 54220, 17230, 17455, and 17485) to use the proceeds for capital outlay, e.g., the acquisition of additional sites, building construction or major deferred maintenance. Alternatively, the District could deposit the proceeds in its general fund, which would then be invested in compliance with government guidelines.

Although the District is restricted by statute in its use of any property sale proceeds, the Foundation is not subject to the same laws and would be free to invest in any venture it chose. District board members readily acknowledged that the Foundation was specifically established to circumvent these legal requirements. The District does not want to be restricted in its use of such proceeds, so it sought to subvert the requirements of the law by transferring surplus school property to the Foundation. The transfer of school property, which was originally paid for by taxpayers, into a private foundation is a blatant violation of the law.

On January 11, 2002, the Legislative Counsel specifically addressed these facts and issued an opinion (attached) that school assets could not be transferred to private foundations and the proceeds used for non-prescribed purposes. The District, although holding legal title, acts as a trustee for the state, which has a beneficial interest in the property. The law clearly and specifically outlines the requirements and exceptions to those requirements for transfer, sale or leaseback of state property.

The Grand Jury concurs with Legislative Counsel of California and the Department of General Services. Although it is lawful for the school district to create a foundation for purposes of raising funds for specific needs, a school district is prohibited from transferring district assets to a private foundation to achieve those purposes.

Recommendations:


The Laguna Salada Union School District should comply with state law and not transfer school property to the Laguna Salada Asset Management Foundation and should rescind any completed transfers.

Response

Laguna Salada Union School District
Response to the 2001-2002 San Mateo County Civil Grand Jury Report
Laguna Salada Asset Management Foundation

Response: The Laguna Salada Union School District Board of Trustees disagrees in part with the finding. In particular, the tone taken toward the school district in the report, which utilizes words such as "scheme", "subvert" and "blatant" to describe the efforts of this Board decries the Board's sole focus to use every available resource to further the educational mission of our district. We also believe that the legislative counsel's opinion is based on incomplete facts. The Laguna Salada Union School District has received opinions from two different law firms, and it is the Board of Trustees' understanding that there has been no case law limiting a district's ability to utilize its assets in this way. However, the Board acknowledges that this is a grey area in the law. Thus, it is important to note that: (1) the district has and continues to follow advice from counsel on this matter, (2) no property has been transferred into the Foundation, and (3) the Board intends to follow Education Code and per the resolution adopted July 31, 2002 will not implement deceased attorney Godino's plan at this time in order to give the governing Board further opportunity to study the matter.

The Laguna Salada Union School District Board of Trustees regrets that the funding provided by the State of California is so inadequate as to prompt a district to investigate alternatives to be able to fully fund a strong educational program for the students in that particular district. In San Mateo County alone, the disparity between districts is extreme. Due to funding differences developed by the state legislature, neighboring school districts receive up to $500 or more per child per year than the Laguna Salada Union School District. This disparity is the cause for a responsible school board that has broad powers to address the needs of students to investigate alternative funding options.

In a perfect world, each school district in the State of California would receive sufficient funding to provide an outstanding educational program for every child in its district. Even in our not so perfect world, many state legislators and governors have found ways to support education to such a degree that the children in their states receive twice as much funding every year to support their educational endeavors than the State of California finds itself able to legislate.

It may turn our that there will be some restrictions on the way the Laguna Salada Union School District Board of Trustees can manage the sale of school property for the educational purposes in the district. That would be a shame. Every penny that is not available to support excellent facilities and excellent programs in a flexible and meaningful manner is a limitation that is unneeded. Rather than focusing on one district's attempt to address its financial needs for educational excellence, the Laguna Salada Union School District Board of Trustees suggests the Grand Jury focus on the inequities of funding throughout the State of California - not to have less for any district, but to make the State of California in the top 10% of funding per student in the United States. That goal is where all people should be focusing their attention.


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