Recently, concern over the proper manner in which to pay sports officials for school events has caused much confusion throughout the state. It is important to know the definition of each individual being paid prior to a check being issued, as their standing within the school district as a vendor or an employee will determine how these persons will receive their pay.

An employee that works at a sporting event should be paid through the payroll process, with the proper taxes and withholdings being considered. An employee is a person that the district would have behavioral and financial control over, as well as a continuing relationship, such as set hours and prohibition of doing work for others.

A person who works at a sporting event as an official and is not currently employed as a certified or support employee for the school district is an independent contractor (vendor), and should be paid accordingly. We do not feel this person meets the definition of an "employee" of the district.

In order for an official to be considered an independent contractor, the following conditions should be met:

• They should be paid a fixed fee per game.
  » This condition is met in public school districts.
• They should be allowed to select which game they will referee.
  » Officials can decide whether or not they want to work any particular game(s).
• The referees and umpires should be hired from an agency, with all those in agency with credentials and references. The employer would not provide training, but the agency would certify that the umpires and referees know all new rules each year.
  » Schools do not provide training for officials. The OSSAA normally handles all credentials and training of officials.
• Umpires and referees should furnish their own rulebooks, uniforms and necessary equipment.
  » Officials furnish these items on their own.

To consider every official an employee would be a recordkeeping nightmare, and seems to defeat the purpose of student activity funds. It would also be near impossible to have these "paychecks" prepared and printed in time for these visitors to receive payment at the event, since appropriated funds must be obligated and encumbered prior to services being rendered, and cannot be paid until such services are completed. Once these individuals are told they will not be paid until the next employee payday, we doubt seriously that they will ever agree to be an official for that district in the future. These individuals normally make around $50 per event. This amount of pay is simply not material enough to run through the payroll process.

It is our opinion that these individuals can be paid directly from the activity fund. We recommend that the officials sign the supporting documentation (non-commercial vendors claim, check stub, internal "sports official" invoice, etc.) to indicate that they did receive the check and the amount was correct.

Of course, this is just our opinion.

Many of the questions we have received in the last few years have related to equipment lease agreements and conduit financing through the use of a public trust issuing revenue bonds. Rosenstein, Fist & Ringold, Inc. have addressed the important legal issues related to these two areas of concern in their recent issue of Chalkboard. We appreciate the assistance of the firm for allowing us to reproduce this article for our clients:

Rosenstein, Fist & Ringold has previously advised our clients that we are now supplementing the legal representation which we offer our school districts by providing legal representation service, counsel and guidance in the area of tax exempt bond financing. In the course of our representation of clients, it has come to our attention that certain bond financing techniques being considered or used throughout the sate could be violative of Oklahoma law. This alert sets forth a financing technique which we believe has been used in Oklahoma and which arguably does not comply with Oklahoma law. This technique, referred to as "conduit financing" involves the use of a public trust and the issuance of revenue bonds to make improvements to school district property. The clearest way to present this extremely complex structure is to use an example.

Example

Set forth below, for illustrative purposes, is an example of the financing transaction which gives us concern.

1. School District desires to build a gymnasium for $2,000.000.

2. The School districts building fund is insufficient and its bonding capacity in the current year and over the next several years is only $400,000 per year due to the valuation of the property within its geographic boundaries and the outstanding indebtedness of the School District. Thus, even if the School District issued general obligation bonds to the maximum extent allowed by law, the money generated by the sale of its bonds will be far less than the amount needed to construct its gymnasium.

3. A public trust (either an existing trust or one created for the purpose) agrees to assist the school district by entering into a ground lease covering the construction site; building the gymnasium and subleasing the improved property back to the school district.

4. The public trust finances the construction cost by issuing revenue bonds. The issuance by the public trust of revenue bonds does not require a vote of the people and is not subject to Constitutional debt limits.

5. The School District, recognizing the value of the commitment by the public trust, leases its ground to the public trust so that the public trust now has a tract of land upon which it can construct the gymnasium.

6. The public trust subleases the ground back to the School District, along with the gymnasium on that ground, which the public trust has caused to be built. The cost of the project has been paid from the loan proceeds which the public trust received in connection with its sale of its revenue bonds.

7. The school district will be required to pay sufficient rent to the public trust to repay the principal and interest due under the trust's revenue bonds.

8. As a result, the School District proposes a general obligation bond issue whereby it will issue general obligation bonds in the amount of $400,000 per year serially to "construct, acquire and equip a gymnasium."

9. The School District's general obligation bond referendum passes. The money received by the School District as a result of the School District's bond issue is being used to pay rent to the public trust under the School District's sublease with the public trust.

The Problem

We have been advised that some school districts are considering or have already entered into conduit financings where the installments of rent are paid through the issuance of the school district's general obligations bonds approved by the voters, to be issued annually as bonding capacity permits for the purpose of "constructing, acquiring and equipping a gymnasium."

The fundamental problem with this structure is that the proceeds which the School District received from the issuance of its general obligation bonds may not be used to make payments under its sublease pursuant to which it subleases the gymnasium from the public trust. The conduit financial of the public trust is not the problem.

Article X, Section 26(a), of the Oklahoma Constitution allows school districts to issue bonds, subject to financial limitations and voter approval, for the purpose of acquiring or improving school sites, constructing, repairing, remodeling or equipping buildings, or acquiring school furniture, fixtures or equipment. The Oklahoma Constitution does not allow school districts to issue bonded indebtedness for the purpose of paying lease payments. The Oklahoma School Code authorizes school districts to rent property or lease-purchase property provided that the lease payments must be made out of appropriations for the applicable, current fiscal year. The rule is clear: if lease payments are made by a school district, they must be made from annual appropriations and the obligation to make payments may not extend beyond the current fiscal year. Bond proceeds may not be used to make lease payments.

Additionally, with one exception that is noted below, general obligation bond proceeds may not be used to acquire title to building, fixtures of equipment that is financed by the school district through a "lease-purchase" agreement. A lease-purchase agreement is an agreement pursuant to which (a) the school district is obligated to pay annual lease installments consisting of principal and interest, (b) the school district may terminate the lease if the necessary funds are not appropriated for a fiscal year, and (c) the school district attains title and receives a bill of sale to he assets after it has made all lease payments. The critical aspect of a lease-purchase agreement is that the school district has the right to terminate the lease-purchase agreement at the end of any fiscal year and "walk away from the deal" by returning the property that it was leasing, and without any further liability to the lessor. The only time that the proceeds of general obligation bonds of a school district can be used to acquire property being financed through a lease-purchase agreement is when the bond proceeds pay the full principal amount owed under the lease-purchase agreement resulting in a transfer of title to the property to the school district. In this manner, the school district has acquired property; not merely paid an installment payment.

On November 13, 2002, the Attorney General issued Opinion No. 2002-43 concerning the use of general obligation bonds to make annual installment payments under a lease-purchase agreement for the purpose of acquiring buildings or equipment. Summarily, the Attorney General concluded that:

The bonds, if issued, must be used to "acquire" school building sites, fixtures or equipment or other facilities.

It is possible to use bond proceeds to accelerate the acquisition of property. However, the property must consist of personal property or equipment which can be severed from the real estate without damage to the property itself or to the building. You may not simply allocate a portion of the purchase price or construction cost to components separate and apart from the building itself.

While not addressed in Attorney General Opinion No. 2002-43, we have an additional concern with respect to the structure specified in the example and its possible violation of the Oklahoma Bond Issue Proceeds Act (Act"). The purpose of the Act is to assure the citizens of Oklahoma that the proceeds of the bond issues which they have approved will be expended form the purposes of projects approved by them. Even in its most favorable light, it is at lease questionable as to whether a general obligation bond proposal in which the electorate is requested to approve the issuance by the School District of its general obligation bonds to construct and acquire a gymnasium and its equipment" provides sufficient notice to the electorate that the proceeds will be used to pay rent or acquisition payments under an annually terminable sublease agreement with a public trust. Any member of the board of education, who knowingly violates the provisions of the Act, shall forfeit his office.

The primary concern of Rosenstein, Fist & Ringold is, and always has been, that of sound legal advice to the boards of education which we represent. We urge all school district administrators and board members to exercise caution with respect to this financing technique. We remain available to assist school districts in developing legal general obligations bond issues, and we are also available to evaluate the legal risk attributable to overly aggressive or overly creative bond issues.

Copyright 2006 Rosenstein, Fist & Ringold
Eric P. Nelson and Jerry Zimmerman are both members of the National Association of Bond Lawyers, and may be reached at ericn@rfrlaw.com and jerryz@rfrlaw.com.

Treasurer and Encumbrance Clerk Training

As most of you are aware, the passing of Senate Bill 668 made it a requirement for every current treasurer and encumbrance clerk to complete at least 12 hours of training in school district finance before July 1, 2007. Further, any treasurer or encumbrance clerk employed after July 1, 2007 must complete 12 hours of training within nine months of employment in that position. And finally, every treasurer and encumbrance clerk must complete 12 hours of training every three years in addition to the above.

There have been many questions raised regarding these new requirements, and many people have been told to "ask your auditor". While these requirements are a good idea, we really had nothing to do with this idea, and therefore we had no idea that the responsibility would fall upon us to regulate and administer this new law. However, since we seem to be the end of the line, here is how we plan to handle it, based upon your questions.

1. How far back can we apply hours already obtained to meet the 12 hour requirement due on July 1, 2007?

There is no language regarding a start date for this first requirement deadline, and many of you have already taken many courses and classes that could satisfy the 12 hour rule. Since the general timeframe for each 12 hour requirement seems to be three years, it is our opinion that this should apply also when counting backward, meaning: The 12 hours required by July 1, 2007 should be obtained between July 1, 2004 and July 1, 2007.

2. What kind of courses or conferences will count towards the 12 hour requirement?

It would be best to obtain these hours in the general area of your position. The law states that both positions should complete "12 hours of instruction on school finance laws of this state, accounting, ethics and the duties and responsibilities of a school district (treasurer/encumbrance clerk)". This definition leaves a pretty broad area that a person could use to satisfy this requirement. Our opinion is that any school finance meeting or conference attended could be counted toward these hours. We do not feel that software training meets this definition, but any kind of OCAS training or meeting, ASBO, Oklahoma Center for School Business Management workshops, OSSBA, CCOSA or Oklahoma Schools Advisory Council meeting probably would. It is important that you save all supporting documentation you received when attending these types of meetings.

3. I work as a treasurer/encumbrance clerk at more than one school district, do I need to obtain the 12 hours every three years for each different school district?

It is our opinion that you need to obtain 12 hours of appropriate training every three years, but this does not need to be done for every school district if you are employed at more than one. Simply keep the documentation of hours on hand for review by each school's auditor.

4. How and when will this information be audited?

We will begin to request and examine this information during the 2005-06 audit work. This will give us enough time to assure the appropriate hours were obtained and, if not, give the client enough time to meet the required hours by July 1, 2007.

5. I have additional questions. What should I do?

Feel free to contact us by phone, e-mail, or discuss this issue with us when we are visiting your site. We will be happy to give you our opinion, since that is all we really have to work with at this time.

The Legislature actually did some good this past spring. Many of these new additions or changes are very beneficial to your office. Here is a couple of bills and what they mean:

Senate Bill No. 531
This was basically an amendment to our current state aid formula law. The area it addressed was in the area of allowable fund balance (or carryover, if you prefer). The bill increased the percentage amounts that are allowed to be carried over by some of the larger school districts. The changes are as follows:

Also, the bill states that the carryover penalty (reduction of state aid) for exceeding these amounts must be exceeded for two consecutive years before it is assessed. That's great news for you districts burdened with a large fund balance.

Senate Bill No. 668
This was the main 'public finance' bill passed this spring. It covers several categories and amendments regarding school business. We recommend you download a copy of this bill and read the detail of each section. A summary of each section is as follows:

Special thanks is given to Jim McGoodwin from the State Auditors and Inspector's Office and the School Task Force Committee that met all year and recommended these new laws and amendments.