Can a Tennessee county commission tap a school district's leftover fund balance to set the school budget without the school board's sign-off?

Subject

Opinion No. 11-73, Dedicated Education Fund, October 13, 2011

Plain-English summary

The Tennessee Education Finance Act of 1977 creates a "dedicated education fund" inside each county's general fund. Money left over at the end of a school year stays in that account. Once the carried-over balance exceeds 3% of the school district's annual operating budget, the excess can be spent on any educational purpose, but the school board has to ask first.

Director Nixon at the Tennessee State Board of Education asked the AG whether a county legislative body can dip into that excess balance directly, without waiting for the local education agency (LEA) to recommend it. The answer was no, with one exception. The statute, Tenn. Code Ann. § 49-3-352(c), draws the line clearly: any excess above 3% "must be recommended by the board of education prior to appropriation by the local legislative body."

The exception is the state-shared-revenue trigger. If state-shared revenues distributed to counties fall below their 2002-2003 fiscal-year level, the statute lifts the LEA-recommendation requirement. In that scenario, the county legislative body can move any or all of the accumulated fund balance to education purposes on its own initiative.

The 3% floor is a hard reserve. It cannot be appropriated even with the LEA's blessing for the annual budget. The first call on the reserve is to cover budget shortfalls or unforeseen operating-cost spikes within the next fiscal year. The AG quoted from a prior opinion (Op. Tenn. Att'y Gen. No. 04-098) laying out the four operative rules: carry-forward of unspent funds; reserve to cover shortfalls and unforeseen costs; 3% floor with above-floor excess available for any educational purpose on LEA recommendation; and the state-shared-revenue trigger that lifts the recommendation requirement.

The second question, whether the county commission can act when the LEA does recommend the use, got a straight yes. That is what the statute contemplates.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Tennessee Education Finance Act has been amended several times since 2011. The Basic Education Program funding formula was replaced by Tennessee Investment in Student Achievement (TISA) in 2022, which changed how state funds flow to LEAs and may have affected related fund-balance rules. Verify the current text of § 49-3-352 before acting.

Background and statutory framework

The dedicated education fund. Tenn. Code Ann. § 49-3-352(a) creates within the general fund of each LEA a special revenue account known as the "dedicated education fund." § 49-3-352(b) directs that all appropriations from all sources to fund public education be deposited into the account and invested as provided by law.

The carry-forward rule. § 49-3-352(c) provides that any fund balance remaining unexpended at the end of a fiscal year in the general fund of the local public education system "shall be carried forward into the subsequent fiscal year." The balance is available to offset shortfalls of budgeted revenues or, subject to § 49-2-301(b)(1)(W), to meet unforeseen increases in operating expenses.

The 3% threshold. § 49-3-352(c) further provides that any accumulated fund balance "in excess of three percent (3%) of the budgeted annual operating expenses for the current fiscal year may be budgeted and expended for any education purposes, but must be recommended by the board of education prior to appropriation by the local legislative body."

The state-shared-revenue trigger. § 49-3-352(c) ends with: "Notwithstanding the provisions of this section or any other law to the contrary, in any fiscal year in which state-shared revenues distributed to counties are reduced below the levels distributed to counties in the 2002-2003 fiscal year, any or all of the accumulated fund balance may be used for education purposes without restrictions ..."

Prior AG guidance. Op. Tenn. Att'y Gen. No. 04-098 (June 24, 2004) laid out the four operative rules of § 49-3-352(c): carry-forward; reserve for shortfalls and unforeseen expenses; LEA-recommended expenditure of the excess over 3% for nonrecurring purposes; and the state-shared-revenue trigger lifting all of the above.

Common questions

Can the county legislative body appropriate the 3% reserve itself?

No. The reserve below the 3% threshold is held to offset shortfalls and unforeseen operating costs in the next fiscal year. Even with an LEA recommendation, this is not money the local legislative body can pull for the annual budget unless the state-shared-revenue trigger has been activated.

Does the LEA-recommendation requirement mean the school board controls how the money is spent?

The school board recommends. The local legislative body actually appropriates. So both have to agree. The school board cannot force the local legislative body to spend the excess; the local legislative body cannot use the excess for the annual budget unless the school board recommends it.

What triggers the state-shared-revenue override?

A reduction in state-shared revenues distributed to the county below the 2002-2003 fiscal year level. The trigger is measured against a specific baseline. If a county's state-shared revenue holds steady or grows above that 2002-2003 number, the override is not available.

Can the excess balance be used for recurring costs?

The 2004 AG opinion (No. 04-098) framed the third rule as allowing the excess to be "budgeted and expended for nonrecurring purposes." The text of § 49-3-352(c) says "for any education purposes." The narrower reading would limit it to one-time capital, technology, or program costs; the broader reading would permit recurring use. Local counsel should consult current text.

Does this opinion apply to municipal school districts?

The statute speaks to LEAs and local legislative bodies generally. The mechanism applies wherever a local public education system has a general fund and an annual operating budget. The specific actors will differ for municipal districts.

Citations

• Tenn. Code Ann. § 49-3-352
• Tenn. Code Ann. § 49-3-352(c)
• Tenn. Code Ann. § 49-2-301(b)(1)(W)
• Op. Tenn. Att'y Gen. No. 04-098 (June 24, 2004)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-073.pdf

Original opinion text

October 13, 2011
Opinion No. 11-73
Dedicated Education Fund

QUESTIONS

1. May a local legislative body appropriate funds from a local education fund balance, as identified in Tennessee Code Annotated § 49-3-352(c), to establish its annual budget for the school system, absent an initial recommendation by the Local Education Agency ("LEA")?

2. If the answer to Question 1 is no, may the local legislative body do so upon the recommendation of the LEA?

OPINIONS

1. No, unless state-shared revenues distributed to counties are reduced below the 2002-2003 fiscal year level.

2. Yes. Tennessee Code Annotated § 49-3-352(c) provides that, upon the LEA's recommendation, the local legislative body may budget and expend remaining local education fund balances (above 3% of the annual budgeted LEA expenses) for any educational purposes.

ANALYSIS

The control and disposition of excess funds in an LEA's General Fund at the end of a fiscal year is specifically addressed in the Tennessee Education Finance Act of 1977, which provides in pertinent part:

(a) There is established within the general fund of each LEA a special revenue account to be known as the dedicated education fund.

(b) All appropriations from all sources to fund public education will be deposited into this account. Money in the dedicated education fund shall be invested as provided by law.

(c) Any fund balance remaining unexpended at the end of a fiscal year in the general fund of the local public education system shall be carried forward into the subsequent fiscal year. The fund balance shall be available to offset shortfalls of budgeted revenues or, subject to § 49-2-301(b)(1)(W), shall be available to meet unforeseen increases in operating expenses. Any accumulated fund balance in excess of three percent (3%) of the budgeted annual operating expenses for the current fiscal year may be budgeted and expended for any education purposes, but must be recommended by the board of education prior to appropriation by the local legislative body. Notwithstanding the provisions of this section or any other law to the contrary, in any fiscal year in which state-shared revenues distributed to counties are reduced below the levels distributed to counties in the 2002-2003 fiscal year, any or all of the accumulated fund balance may be used for education purposes without restrictions ...

Tenn. Code Ann. § 49-3-352 (emphasis added).

This Office has previously addressed in a prior opinion the use of accumulated school fund balances under this statute, stating:

In this statute are four rules on the use of accumulated school fund balances. First, if a school board does not spend the entire amount appropriated for its budget within a fiscal year, the money left over must be carried forward to the next fiscal year. These funds do not revert to local or state government. These funds remain in the school fund, thus creating the "accumulated fund balance." Second, the school board may use these funds to offset shortfalls of budgeted revenues or, within the budget process, to meet unforeseen increases in operating expenses. Third, the statute allows the excess of the accumulated fund balance over (3%) to be budgeted and expended for nonrecurring purposes. Implied in this third rule is a requirement that at least 3% of the accumulated fund balance be held in reserve. Fourth, the statute lifts the restrictions of all the preceding rules if the amount of the local government's state-shared revenues declines below the level of the 2002-03 fiscal year. If the local governing body receives less state-shared revenue, all or part of the accumulated fund balance may be used for any educational purpose.

Tenn. Op. Att'y Gen. No. 04-098 (June 24, 2004).

Accordingly, under this statutory framework, any accumulated fund balance up to 3% of the annual LEA operating budget must remain in the general fund of an LEA to be used exclusively to offset shortfalls of revenue or unexpected expenses during the subsequent fiscal year. The amount of any accumulated fund balance exceeding 3% of the annual LEA operating budget may be used by the local legislative body for any educational purpose if so recommended by the LEA prior to appropriation by the local legislative body. However, should state-shared revenues distributed to counties fall below the 2002-2003 level, then the local legislative body may use any or all of the accumulated fund balance for any educational purpose without the recommendation of the LEA.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

ADAM B. FUTRELL
Assistant Attorney General

Requested by:
Executive Director Gary Nixon
Tennessee State Board of Education
710 James Robertson Parkway
9th Floor, Andrew Johnson Tower
Nashville, TN 37243-1050