Okla. Districts’ Use of Tax-Exempt

By Lonnie Harp — February 20, 1991 4 min read

An Oklahoma program designed to help school districts cover temporary budget deficits is facing a grand-jury probe in the wake of reports that many schools are cashing in on the program by exaggerating their projected shortfalls.

Critics charge that the way the five-year-old program is being used by some districts amounts to an abuse of a federal tax benefit and a source of enrichment for a small group of outside financial advisers. Oklahoma’s cash-management program--that state’s version of the tax-anticipation notes commonly used by state and local governments--was created to provide a buffer for school districts against deficit spending in the months before local property-tax revenue is collected.

But state officials are scrutinizing the program after an investigation by The Oklahoman newspaper of Oklahoma City reported this month that many schools are using the program’s tax-exempt bonds as an investment tool.

The state attorney general plans to impanel a multicounty grand jury to investigate the program, and Superintendent of Public Instruction Sandy Garrett is “quite concerned” about the recent reports, according to a spokesman.

Since 1986, when the latest incarnation of the program was launched, participation has jumped from 29 districts in 1987 to 272 this year, with bond-sales volume rising to about $524 million. Because of their brief duration, the bonds can be issued by districts without voter approval.

Districts are able to earn extra income from the program by first de4claring a higher-than-expected shortfall. That amount can then be taken out in one-year bonds, which pay interest of about 7.85 percent. The bond proceeds, in turn, are being invested in a Japanese bank, where they earn about 9 percent interest.

School officials can draw from the principal to make up for shortfalls during the year, but pay that money back when local property-tax revenues exceed district spending, and continue accumulating interest.

In Oklahoma City, where the>schools reported an anticipated $25-million cash shortage for the bond program, interest income totaled more than $280,000 last year. Most other districts reported more modest gains, however. Records show that school officials in Dover, for exam ple, borrowed against a reported $290,000 shortfall and made more than $3,400 in interest.

While providing the intended bud get cushion for most districts, the pro gram last year also generated more than $3.7 million in interest for par ticipants, the newspaper reported.

Financial firms and the underL writer that organized and promoted the program have also reported hef ty profits. Over the past three years, about 22 banks, lawyers, and financial firms have made a total of more than $16 million in administrative fees and commissions, The Oklaho man reported. The bonds’ under writer, Stifel, Nicolaus & Company, made nearly $7 million.

The Oklahoma State School Board Association, which has encouraged its members to participate in the pro gram, has received more than $300,000 over the past three years from Stifel to endorse its trust, which has a near-monopoly on the program.

Bob Mooneyham, executive direc tor of the school-board group, said the program has been judged unfairly. It has aided schools, he argued, adding that the newspaper’s investigation reflects what he considers a contempt for public education.

“It has not gone awry. It has been a very beneficial program,” Mr. Mooneyham said. “It has permitted local school districts to have the ad vantage of placing materials in their classroom at the beginning of the school year,” rather than having to wait until winter, when tax revL enues roll in.

The program operates largely un der the honor system, since no state oversight is involved in verifying lo cal shortfall projections. Mr. MoonH eyham said a earlier version of the program proved unpopular because of a strong state role.

While Stifel’s prospectus assures officials that the program operates in accordance with the federal tax code, education officials are quick to warn that tax- and revenue-antici pation programs--which have gained popularity as states clamp down on how much money agencies can carry from one budget year to the next--were not designed to make a profit for participants.

“They should be a last resort, and I would suggest that in most inL stances they are,” said Kate Herber, legislative counsel for the National School Boards Association. “I don’t think most people approach that process lightly.”

Federal tax law requires that be fore public agencies can tap into hort-term loans or bonds, they hould have exhausted all of their ''rainy day” funds, Ms. Herber said. Regulations also provide that agen cies that use the loans to avoid a defi cit must give any interest profits to the federal government, she said. In a December news release, Mr. Mooneyham described the Oklaho ma cash-management program as an ideal cure for tough fiscal times.

“Oklahoma school districts have found at least one solution to help their financial conditions without increasing taxes,” the release said. Mr. Mooneyham said last week that the program had helped districts by sparing them the deficit spending that would be required without such assistance. Moreover, he said, the participants and organizers are confi dent that they have met federal laws in administering the program.

“As for ample oversight, it is gov erned by numerous laws,” he said. “What we would like for them to do is go ahead and get the grand-jury in vestigation under way and let the program stand the acid test, and then we can go on with the program.”

“I guess what we’re really inolved in is a philosophical differ ence,” he continued, focusing criti cism on The Oklahoman. “We’re omoting quality education in Ok lahoma through every legal finan cial opportunity possible. I’m not sure what their mission is.”

A version of this article appeared in the February 20, 1991 edition of Education Week as Okla. Districts’ Use of Tax-Exempt