In Portsmouth this issue has become contested. Each year, all Virginia public school divisions are required to prepare an annual budget for operating their respective schools and the “locality” is obligated by statute to fund a portion of the budget. The above question arises at the end of each budget year. Because it is a crime for a school board to exceed its budget (malfeasance, Va. Code § 22.1-91) there will be some money remaining in the school division coffers at the end of the year in almost all cases. By law, all money provided by the locality that is “unexpended” at the end of the fiscal year reverts to the locality. Va. Code § 22.1-100. That seems simple enough. But is it?
Enter the concept of “encumbrances.” In its most simplistic form, an encumbrance works like this: A school division orders a school bus in March, all according to the budget, but the bus is not delivered until some after the fiscal year ends. If all the “unexpended” money at the end of the year has reverted to the locality, how does the school division pay for the bus when it arrives? If it uses funds from the next fiscal year, the funds will be unaccounted for in that year’s budget. If the school division budgeted for the bus again in that year, it would have budgeted twice for the same bus which simply tends to inflate budgets and cause a loss of accountability. What happens is that the school division will earmark or “encumber” funds equal to the bus contract amount and consider that the funds were spent under the proper budget year. Thus, from the school system perspective the funds for the bus are not “unexpended” and do not revert to the locality. This happens every year for salaries, paper, electrical gear and all other kinds of items needed to run the schools for which purchase orders are issued or contracts exist but for which the goods or services have not arrived by year end or the bill has not come due. It happens in school divisions all across the state.
This year, for whatever reason, the practice of encumbrances has come under fire in Portsmouth and it has created quite a stir and significant conflict. The school division takes the position that a large portion of the money remaining in its accounts was none-the-less expended. The city manager says all the money in the school accounts at the end of the fiscal year is “unexpended.” This year, the auditors had difficulty reconciling the balances for the school division with the balances for the city because both entities counted the “encumbrances” as their money.
There are no decisions of courts of record in Virginia on the definition of “unexpended”. There are no Attorney General Opinions directly on point. Under the concept of cash accounting the funds are clearly unexpended but under accrual principles the debts are accrued and are arguably expended. In all instances of which I am aware the locality and the school division have agreements, formal or informal, that provide for a working relationship between the two entities mostly dealing with the period of time after the year-end when the bill comes due. For instance, a period of 90 days may be deemed a reasonable time within which the previously contracted for debt must come due in order to satisfy the “encumbered” definition. But without such agreement all are left with the explicit terms of the statute which simply requires unexpended funds to revert to the locality. So, when are public schools funds expended?
There is a political component to this issue as well. If a school division is able to run its public schools in such a manner that it is able to save money from the amount the locality has already agreed to pay for school operations, why should the locality get the savings? Should the school division get to use the money it saved for things that directly benefit the school division? That is another topic altogether.
