Why're you hitting yourself? (Capping in Seattle, part 2)
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This week I’m following up on my post about the special education cap law in Washington State and its role in the budget crisis there. I made a tiktok that went a little viral (at least for school finance videos) and the comments are an astounding record of the budget crises happening all over the country, but also the deep care and feeling that people have about schools and money.
In any case, when I was looking at the Seattle situation I found something else interesting that I wanted to write about.
There’s a $27.5 million interfund “loan from CPF” in the 2024 monthly budget and mention of the “King County Pool net earned interest rate” that caught my eye.
This loan isn’t irrelevant for the district’s financial situation since it’s listed in the liabilities column for the year. The CPF means “capital program fund” and the “interfund loan” is when the district lends itself money across its funds. In this case, it owes itself $27.5 million.
Are they counting this money as part of the overall shortfall? If so, why? Will the district need new revenue to replace the capital funds money? Or does it just owe itself that money, in which case does it really need to be included in the shortfall? Doesn’t that inflate the severity of the situation?
In the law permitting the district to lend itself the money across funds (in this case from the capital program fund to the general fund), all it says is “transfers between budget classes may be made by the school district's chief administrative officer or finance officer, subject to such restrictions as may be imposed by the school district board of directors.”
People on the ground may want to check this carefully, but there’s nothing I can find in the law about school funds that mentions interfund loans.
On the other hand, the manual for public school district accounting in Washington State states:
An interfund loan is considered to be a temporary loan of moneys between one district fund and another. An interfund loan is not considered to be an investment. As a temporary loan, it is to be completely liquidated in less than one year from the date of issuance.
So there’s some pressure from the accountants to play this interfund loan in a particularly punitive way, telling the district to pay it back within a year. This harshness brings us to an answer about that county interest rate thing. The accounting manual says that an interfund loan has to bear interest, how to determine what that interest rate should be, and where that interest should go:
Interest shall be paid by the borrowing fund to the loaning fund and shall be at a rate not less than the warrant interest rate in the county in which the school district is considered to be located. The interest shall be a revenue of the loaning fund and an expenditure of the borrowing fund. Interest earned cannot be transferred to another fund.
First, stepping back, it’s wild that the school district, when it lends to itself, has to pay itself interest out of one account and to another account, even if the first account needs that money, and, second, that the rate has to be pegged to the Fed’s base rates at the county level. Like, why does this loan need to be interest-bearing at all?
It matters, because 4.3% of 27.5 million is nearly $1.2 million lost from the general fund on top of the principal. Plus, given inflation, at the rate from 2023, the district would’ve only had to pay $866,000 in interest before. Inflation in this case took more than $350,000. How many salaries is that? Of course, the fed lowered rates, which should push the county rate down, goes so the the district might save a bit of money, but still, the whole thing feels wrong.
It’s like a “why are you hitting yourself” moment when a bully holds your hand in their hand and hits you with it. In the law on interfund loans, it doesn’t say there has to be interest paid at all, just in the accounting handbook, and what’s more, the terms of these loans can be set by the board.
So, legally speaking, it’s actually up to the district board how and when to do these transfers. And if the capital fund is doing alright—which I hear it is, and numbers back from the budget back that up—then why couldn’t the district liquidate this a bit later or perhaps in installments if they wanted to do that? And why couldn’t the board of directors stipulate that there won’t be any interest on the loan? Organizers could make these demands.
You might say the district shouldn’t have to pay the interfund loan back at all. And like, yeah, that’s true. While I get that not paying it back looks bad (you don’t want an appearance of ‘corruption’ or something), but I think an installment plan at zero interest would save the district millions of dollars and it looks to me like they have the legal authority to structure the loan however they choose.