             TO BE PUBLISHED IN THE OFFICIAL REPORTS


                  OFFICE OF THE ATTORNEY GENERAL

                        State of California


                       JOHN K. VAN DE KAMP

                         Attorney General


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                              :

          OPINION             :         No. 88-302

                              :

             of               :         May 18, 1988

                              :

     JOHN K. VAN DE KAMP      :

       Attorney General       :

                              :

       CLAYTON P. ROCHE       :

   Deputy Attorney General    :

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          THE STATE ALLOCATION BOARD has requested the opinion of

this office on the following question:


          May a school district which sells or leases real property

pursuant to section 39360 of the Education Code transfer interest

earned on the proceeds received therefrom to the school district's

general fund without the approval of the State Allocation Board?



                            CONCLUSION


          A school district which sells or leases real property

pursuant to section 39360 of the Education Code may not transfer

interest earned on the proceeds received therefrom to the school

district's general fund without the approval of the State

Allocation Board.


                             ANALYSIS


          Section 39360 et seq. of the Education Code governs the

sale or lease of surplus real property of school districts.

Section 39360 provides that a "school district may sell any real

property belonging to the school district or may lease . . . [such]

real property . . . which is not or will not be needed by the

district for school classroom buildings at the time of delivery of

title or possession. . . ."


          Section 39363 of the Education Code places certain

restrictions on the use of the proceeds received from any such sale

or lease of real property. That section provides generally that

the funds "derived from the sale" and the "proceeds from a lease"

shall be used for certain capital outlay and maintenance costs, or

reserves therefor. The section, however, provides an exception and

permits "the proceeds" from the sale or lease to be deposited in

the district's general fund for any general fund purpose where the

district's governing board and the State Allocation Board find no

anticipated need for capital outlay or major deferred maintenance

projects for a five-year period of time.1


          The question presented for resolution herein involves

interest which may be earned on the proceeds of the sale or lease.

It is whether the interest may be transferred to the district's

general fund for any general fund purpose without the concurrence

of the State Allocation Board. Stated otherwise, is the interest

earned on the proceeds of the sale or lease subject to the same

restrictions as are the proceeds of the sale or lease themselves

set forth in section 39363 of the Education Code? We conclude that

it is.



     1
      Section 39363 provides in full:


         "The funds derived from the sale of surplus property

     shall be used for capital outlay or for costs of

     maintenance of school district property that the

     governing board of the school district determines will

     not recur within a five-year period. Proceeds from a

     lease of school district property with an option to

     purchase may be deposited into a restricted fund for the

     routine repair of district facilities, as defined by the

     State Allocation Board, for up to a five-year period. In

     addition, the proceeds may be deposited in the general

     fund of the district for any general fund purpose if the

     school district governing board and the State Allocation

     Board have determined that the district has no

     anticipated need for additional sites or building

     construction for the five-year period following such sale

     or lease, and the district has no major deferred

     maintenance requirements.


          "The proceeds may also be deposited into a special

     reserve fund for capital outlay, for costs of maintenance

     of school district property that the governing board

     determines will not recur within a five-year period, or

     for the future maintenance and renovation of school sites

     if the district governing board and the State Allocation

     Board have determined that the district has no

     anticipated   need   for   school   sites   or   building

     construction or major deferred maintenance projects for

     a five-year period following the sale or lease. Proceeds

     deposited in the special reserve fund shall not be

     available for general operating expenses as provided in

     Section 42842." 


                                2.                          88-302

          Initially, we examine the language of section 39363.

(Moyer v. Workmen's Comp. Appeals Board (1973) 10 Cal.3d 222, 230.)

The section first speaks in terms of the "funds derived from the

sale of surplus property."    It then speaks of the "proceeds from

a lease of school property."      Finally it lumps both of these

together as "the proceeds" for purpose of the restrictions as to

use. Giving the key words "derived" and "proceeds" their usual and

customary meaning, we note that "derived" is defined in Webster's

Third New International Dictionary (1961) as:


          "1.   formed or developed out of something else:

     DERIVATIVE: . . . ." (Id. at p. 608) 


     and "proceeds" is defined as:


          "1a: what is produced by or derived from something

     (as a sale, investment, levy, business) by way of total

     revenue: the total amount brought in: . . . ." (Id. at

     p. 1807.)


           These definitions speak of that which is formed,

developed out of or produced by something else which we will call

the source.    However, they provide little insight whether the

source must be immediate or includes more remote sources as well.

The definition of "derivative" is helpful on this point. It stated

in part: 


          ". . .2: made up of or marked by elements or

     qualities derived from something else (as from an

     ultimate source). . . ." (Id. at p. 608.)


          Use of the word "ultimate" in this definition indicates

that proceeds are "derived" from more remote as well as immediate

sources. We therefore construe the words "derived" and "proceeds"

in section 39363 to include the interest earned upon the proceeds

of the sale or lease as well as such proceeds themselves. 


          However, we need not rely solely on the words of the

statute.    We can rely upon the common law to support this

interpretation of section 39363 of the Education Code. It is the

settled common law rule that "interest is an accretion or increment

to the principal fund earning it, and unless lawfully separated

therefrom becomes a part thereof." (Pomona City School District v.

Payne (1935) 9 Cal.App.2d 510, 516. See also, e.g., Board of Law

Library Trustees v. Lowery (1945) 67 Cal.App.2d 480, 482; 71

Ops.Cal.Atty.Gen. (1988) (Op. No. 87-204, issued 3/9/88); 65

Ops.Cal.Atty.Gen. 588 (1982); 59 Ops.Cal.Atty.Gen. 43, 45-46

(1976); 49 Ops.Cal.Atty.Gen. 59, 61 (1967); 44 Ops.Cal.Atty.Gen.

58, 60 (1964); 38 Ops.Cal.Atty.Gen. 207, 210 (1961).) [T]he common

law of England is, except where modified by Constitution or statute

the rule of decision in this state." (Philpott v. Superior Court

(1934) 1 Cal.2d 512, 515, emphasis added; Civ. Code, § 22.2.) No


                                3.                          88-302

specific legislation has abrogated the common law rule with respect

to section 39363 of the Education Code and the application of

interest. From this it necessarily follows that interest on the

proceeds would be a part of the proceeds and would be subject to

the same restrictions as are the proceeds themselves.


          This office has so concluded in a number of analogous

situations. In 65 Ops.Cal.Atty.Gen. 588, supra, based upon both

the foregoing common law principles and "mere reasoned analysis" we

"concluded that interest or dividend income derived from the

investment of [election] campaign funds is subject to the same use

restrictions [prohibitions as to personal use] as are imposed upon

such funds" by the Elections Code. In 44 Ops.Cal.Atty.Gen. 58,

supra, this office concluded that interest earned on money in a

school district's bond sinking fund was subject to the same

restrictions as provided by statute for the sinking fund itself.

And in 38 Ops.Cal.Atty.Gen. 207, supra, we concluded that interest

on investments or deposits of "special gas tax street improvement

fund" money must be used only for highway purposes by a city by

reason of constitutional prohibitions and the general rule that

interest follows the principal.


          It has, however, been suggested for several reasons that

this general rule is not applicable to the question presented

herein. First of all, it has been pointed out that the Legislature

in a number of situations has specifically provided in the

Education Code that interest on certain funds shall be deposited in

the particular fund earning such interest. See Education Code,

sections 39602 (self-insured liability fund), 39605 (fire loss

fund), 89701 (CSU parking revenue fund), 89704 (CSU continuing

education revenue fund), 89725 (gifts, bequests and donations to

CSU). The basic argument is that the specific inclusion of such

directions in some statutes demonstrates a legislative intent to

exclude the same requirement in other statutes - specifically

herein, section 39363 of the Education Code. (Cf.         Safer v.

Superior Court (1975) 15 Cal.3d 230, 238.)      Or stated somewhat

differently, to conclude that section 39363 of the Education Code

requires that interest on the proceeds of the sale or lease of real

property be deposited with those funds and be subject to the same

restrictions would be tantamount to legislating by implication

(see, e.g., Krater v. City of Los Angeles (1982) 130 Cal.App.3d

839, 845: "[a]n intention to legislate by implication is not to be

presumed.")


          This first suggestion overlooks one crucial factor. The

rule that the interest follows the principal and becomes part of it

unless separated from it by statute, that is, the common law rule,

is applicable to section 39363 of the Education Code and

incorporated therein. No specific legislation has abrogated the

common law rule with respect to that section.




                                4.                          88-302

          A second suggestion which is made is that section 53647

of the Government Code changes this rule. That section is in what

was known as the Depository Act, now contained in section 53630 et

seq. of the Government Code. Historically, that act was enacted

pursuant to constitutional authorization to permit designated local

agencies to deposit their funds in state and national banks for

safekeeping.    Also historically, school districts, which have

always been required by statute to deposit their funds with the

county treasurer, were unable to avail themselves of the benefits

of this act. (See now Ed. Code, § 41001.) This was explained

briefly in 30 Ops.Cal.Atty.Gen. 54, 55-56 (1957) as follows: 


          "Education Code section 5002 [now § 41001] provides

     that all money received or collected by a school district

     shall be paid into the county treasury to be placed to

     the credit of the proper fund of the school district.

     The County treasurer acts as ex- officio treasurer for

     the school district. The funds remain the property of

     the school district but are held in the custody of the

     county (Pomona City School District v. Payne (1935), 9

     Cal.App.2d 510; see also Kennedy v. Miller (1893), 97

     Cal. 429).


          "Section 16 1/2 of Article XI of the Constitution,

     which section provides for the deposit in banks of public

     funds, was adopted in 1906. Prior to 1922, this section

     provided for the deposit of public funds belonging to a

     county or municipality.    In 1922, this provision was

     specifically amended so as to apply to moneys 'in the

     custody of' as well as moneys belonging to any county or

     municipality (see Pomona City School Dist. v. Payne,

     supra, at p. 513). In discussing the 1922 amendment the

     court, in the Pomona case, stated there was no doubt but

     that the amendment was designed to authorize the deposit

     in local banks of moneys belonging to school districts.

     It is to be noted that this purpose was accomplished by

     the insertion of the phrase 'in the custody of' rather

     than by enlarging the definition of those political

     entities whose funds might be deposited in banks. . . ."


Accordingly, section 53647 of the Government Code provides:


          "(a) Interest on all money deposited belongs to, and

     shall be paid quarterly into the general fund of, the

     local agency represented by the officer making the

     deposit, unless otherwise directed by law.


          "(b) Notwithstanding the provisions of subdivision

     (a), and except as otherwise directed by law, if the

     governing body of the local agency represented by the

     officer making the deposit so directs, such interest



                                5.                          88-302

     shall be paid to the fund which contains the principal on

     which the interest accrued."


          Subdivision (a) of the section is essentially derived

from the original Depository Act. Subdivision (b) was added in

1978 (Stats. 1978, ch. 126). It is urged that subdivision (a) of

this section would direct that any interest on school district

funds earned on the proceeds of the sale or lease of surplus real

property should go into the district's general fund despite

restrictions in section 39363 as to the proceeds themselves.2


          Section 53647 of the Government Code has been the subject

of a number of cases and opinions of this office. As to case law,

none of the cases have been concerned with whether interest should

be credited to an agency's special fund as opposed to that agency's

general fund. The case law has been concerned with attemptsby the

county to claim such interest where it has been acting as "ex­
officio treasurer" of another agency's funds. Pomona City School

District v. Payne, supra, 9 Cal.App.2d 510, the seminal case with

respect to the common law rule on interest following the principal,

was the first of these cases. The court there held that under such

common law principles the school district was the "local agency

represented by" the county treasurer, not the county, and

accordingly the county had no claim to interest on such funds.

Further case law has also prevented the county from claiming a

windfall of interest on other entities' deposits, (see Metropolitan

Water District v. Adams (1948) 32 Cal.2d 620 (interest on security

deposit lodged with court in condemnation action); Fresno Fire

Fighters v. Jernagan (1986) 177 Cal.App.3d 403 (interest on funds

deposited with court); Redevelopment Agency v. Goodman (1975) 53

Cal.App.3d 424 (interest on condemnation judgment paid into court

pending appeal); Ostley v. Safer (1957) 147 Cal.App.2d 671

(interest on money interpleaded with court); Board of Law Library

Trustees v. Lowery, supra, (interest on law library funds). 


          Although the foregoing cases which were decided in the

context of what is now subdivision (a) of section 53647 of the

Government Code were not required to rule upon whether a particular

accrual of interest was to be credited to the general fund or a

special fund of the agency for which the county treasurer was

acting, we believe these cases are still of significance to us

herein. These cases either relied upon the common law rule that


     2
      We note parenthetically that although school district funds

must be deposited with the county treasurer, that district boards

have been authorized since 1951 to make direct investments of its

monies.    Accordingly, these investments could draw interest

directly without the intervention of the county treasurer. (See

Ed. Code, § 41015, and discussion in 44 Ops.Cal.Atty.Gen. 58, 62,

supra.) Section 53647 would not appear to be applicable to that

interest. 


                                6.                          88-302

interest follows the principal and becomes a part thereof, or

considered prior cases which did rely upon that rule as

controlling. Furthermore, where the accrual of interest was to a

particular source of funds as in all the cases involving court

deposits, the appellate court did not concern itself with whether

the interest should be credited to some "general fund" but instead

had the interest follow the fund. In essence the appellate court

was concluding that under section 53647 the law "otherwise

directed" where the interest was to be deposited. Such interest

accrued not to the court for its general benefit, but to the owner

of the fund. 


           Likewise, with respect to section 39363 of the Education

Code, the law has "otherwise directed" where interest on the

proceeds of the sale or lease of surplus real property is to be

deposited.    As we demonstrated at the outset herein, both the

wording of the section itself and the common law rule direct that

the interest is to be deposited to the principal fund, that is, to

the proceeds of the sale or lease of the property.


          At least one opinion of this office supports this

conclusion, and is directly in point with respect to now

subdivision (a) of section 53647 of the Government Code. Where

possible, this office has relied upon legislative direction as to

which fund interest should be credited.         (See generally 59

Ops.Cal.Atty.Gen. 43, 46, supra, (direction implied from statutory

scheme as well as common-law rule); 49 Ops.Cal.Atty. Gen. 59,

supra,   (direction    implied   from    statutory   scheme);    44

Ops.Cal.Atty.Gen. 58, supra, (questions one and two: interest

controlled by specific constitutional or statutory provision); 38

Ops.Cal.Atty.Gen.   207,    supra,    (direction   controlled    by

constitutional mandate). However, in question number three of 44

Ops.Cal.Atty.Gen. 58, supra, this office was presented with the

question where the interest on sinking fund monies earmarked to

retire school district funds bonds should be credited. Although

the interest on the proceeds of the bonds themselves was

specifically directed by statute to be credited to the sinking fund

itself, the law was silent as to interest on that fund.          We

concluded that such interest was restricted to the same use as the

sinking fund despite the provisions of, inter alia, section 53647.

We stated that the rule that the interest follows the fund was

applicable and thus could be "used for no purpose other than the

payment of principal and interest on the district's bonds." (Id.

at p. 64.) We reasoned:


          "(a) Applicability of Government Code sections 53635

     and 53647.


          Government Code section 53635 reads:


          'So far as possible, all money belonging to, or in

     the custody of, a local agency, including money paid to


                                7.                          88-302

     the treasurer or other official to pay the principal,

     interest, or penalties of bonds, shall be deposited for

     safekeeping in state or national banks in the State

     selected by the treasurer or other official having the

     legal custody of the money.' 


          "Section 53635, like section 53647 which provides

     for the placing of interest in the general fund, had its

     origin in the Public Deposit Act of 1933 and is in the

     same article of the Government Code (Article 2 of Title

     5 of Division 2) and it may be assumed that as to some

     types of entities it is proper to place interest earned

     on sinking fund money in the entities' general funds. If

     sections 53635 and 53647 stood alone they might be

     controlling. Insofar as school districts are concerned

     the two Government Code sections do not stand alone and

     they must be read in conjunction with other portions of

     the law touching upon the same subject.       The Public

     Deposit Act and the Government Code sections which

     superseded it are statutes of general application

     governing the investment of the several different types

     of funds belonging to the various public entities that

     exist in this state. Education Code section 21102, on

     the other hand, is a statute of limited application, it

     is concerned only with school districts and then only

     with a particular type of fund belonging to the

     districts.   It is the recognized rule that a special

     statute dealing expressly with a particular subject is

     controlling over a general statute covering the same

     matter. See 45 Cal.Jur.2d Statutes sections 119, 120 and

     cases cited therein. That portion of Government section

     53647 which directs the placing of interest on deposits

     made by the county treasurer in the general fund is then

     modified or superseded insofar as school district

     deposits are concerned by the restriction found in

     Education Code section 22101 that sinking fund money can

     be used for no purpose other than the payment of interest

     and principal on district bonds." ( Id. at p. 64;

     emphases added.)


          Accordingly, in 44 Ops.Cal.Atty.Gen. 58, 64, supra, we

pointed out that subdivision (a) of section 53647 allocates the

interest as between the proper entities. Whether such interest

should be credited to the general fund or a special fund of the

proper agency depends upon the source of the funds and restrictions

which have been placed on the use of those funds.


          That this conclusion is correct with respect to the

proceeds of the sale or lease of real property by a school district

pursuant to section 39363 is evident when one considers that a

school district may, pursuant to section 41015 of the Education

Code, make direct investments of its funds which are not needed


                                8.                          88-302

for the immediate requirements of the district.       (See fn. 2,

ante.)3 As to such funds, section 53647 would not come into play.

Under the normal common law rule, interest would accrue to the

principal and be subject to the section 39363 restrictions as to

use. If our conclusion is incorrect as to the proper application

of section 53647 of the Government Code, we would have the

anomalous result that interest on funds directly invested by the

school district would accrue to the special fund and be subject to

the section 39363 restrictions under common law principles, but

interest on funds deposited with the county treasurer would accrue

to the district's general fund and would not be subject to such

restrictions.


          In so concluding we have not overlooked possible contrary

inference which might be drawn from subdivision (b) of section

53647 of the Government Code. We would, however, point out that

subdivision (b) is only applicable if credit of interest is not

"otherwise directed by law." Furthermore, given the uncertainty

which may arise from statutes such as section 39363 of the

Education Code, it provides county treasurers and accountants a

vehicle to avoid such uncertainty.      It permits them to bypass

subdivision (a) of section 53647 of the Government Code by

obtaining a direction from the governing body of the applicable

local agency to deposit interest directly into the fund which

contains the principal.


          This conclusion is consistent with the legislative

history of Assembly Bill 2367, 1977-78 Regular Session, which

became chapter 126, Statutes of 1978, and enacted subdivision (b)

of section 53647 of the Government Code. Such history demonstrates

that the bill was introduced because of the concerns of the

treasurer of a single county that he did not have the 

authority to credit interest earned from special funds directly to

those accounts, but had to first credit the interest to the special

districts general fund and then transfer the funds to the special

funds.   (See Enrolled Bill Report, of A.B. 2376, dated March 9,

1978). Significantly for our purposes the legislative history also

points out as follows in the Assembly Committee on Local Government

Bill Analysis, dated March 7, 1978:



     3
      Section 41015 of the Education Code provides:


          "The governing board of any school district or any

     county office of education which has funds in a special

     reserve fund of the district or county office of

     education or any surplus moneys not required for the

     immediate necessities of the district or county office of

     education, is hereby authorized to invest all or any part

     of the funds in any of the investments specified in

     Section 16430 or 53601 of the Government Code."


                                9.                          88-302

          "(Note:   Where The Use Of Money Is Specifically

     Restricted By Law-- I.E. Gas Tax funds, or Bond Funds-­
     Interest Earned On Such Money Is Credited To The Fund

     Upon Which The Interest Is Earned Rather Than Being

     Credited To The General Fund)"


In short, the legislative history acknowledged that subdivision (b)

was still qualified by the phrase in subdivision (a) of section

53647 of the Government Code that interest should be credited to a

special district's general fund only if not "otherwise directed by

law." This is the case herein.


          Accordingly, it is concluded that a school district which

sells or leases real property pursuant to section 39360 of the

Education Code may not transfer interest earned on the proceeds

received therefrom to the district's general fund without the

approval of the State Allocation Board. 


                            *   *   *   *





                                10.                         88-302

