Oregon Advisory Opinions January 01, 1995: OP 8234

Collection: Oregon Attorney General Opinions
Date: Jan. 1, 1995

Advisory Opinion Text

No. 8234 February 16, 1995 Mr. Don Waggoner

Director

Audits Division

Office of the Secretary of State

FIRST QUESTION

Does the Secretary of State have a duty to audit school districts' receipt and expenditure of state funds?

ANSWER GIVEN

Yes.

SECOND QUESTION

If the answer to the first question is yes, who should pay for the cost of the audit?

ANSWER GIVEN The cost of the audit must be borne by the audited school district.

DISCUSSION

I. Introduction

Because the questions concern the auditing of school districts, we begin our discussion with a general description of the laws governing school districts and their funding. Article VIII, section 3, of the Oregon Constitution provides:

The Legislative Assembly shall provide by law for the establishment of a uniform, and general system of Common schools.

Thus, responsibility for the provision of public education is a state responsibility. See Monaghan v. School District No. 1, 211 Or 360, 373, 315 P2d 797 (1957); Grant v. Sch. Dist. No. 61, Baker County, 244 Or 131, 133, 415 P2d 165 (1966), cert den 385 US 1010, 87 S Ct 717, 17 L Ed2d 547 (1967). The legislature has satisfied this constitutional mandate by providing for the creation of local school districts that must offer certain minimum educational opportunities to children residing in the district. Olsen v. State ex rel Johnson, 276 Or 9, 27, 554 P2d 139 (1976). See ORS 330.005(1), 330.080.

Minimum requirements for the operation of schools are set out in state statute. See, e.g., ORS chapter 336, Conduct of Schools Generally; ORS chapter 339, School Attendance, Admission, Discipline; ORS chapter 337, Textbooks; and ORS chapter 329, Oregon Educational Act for the 21st Century. In addition, the legislature delegated to a state agency, the seven-member Board of Education (board), the responsibility for state-level

administration of education. See ORS 326.011 to 326.603. The board establishes statewide standards for public kindergartens and public elementary and secondary schools and also prescribes minimum courses of study that apply to all local school districts. ORS 326.05l(l)(a),(c); see OAR chapter 581, division 22.

Funding for school districts comes from a variety of governmental sources, including the local school district, the county, the state and the federal government. See, e.g., ORS chapter 328, Local Financing of Education; ORS chapter 327, State Financing of Elementary and Secondary Education; and ORS 327.615 to 327.635, Federal Aid to Education. The primary source of state funding for the schools is the State School Fund. ORS 327.008. This fund consists of money appropriated by the legislature from the state General Fund that is set aside for the purpose of financing basic education. ORS 327.008(1). State School Fund moneys are apportioned and paid to local school districts based on the distribution formula set out in ORS 327.013. See also OAR chapter 581, division 23.

State moneys are also provided to school districts from the Common School Fund. ORS 327.403 to 327.484. The Common School Fund is composed of the proceeds of the sales of certain state lands, as well as funds and proceeds of property that accrue to the state by escheat or forfeiture, the proceeds of all gifts, devises and bequests made to the state for common school purposes and moneys from several other sources. See ORS 327.405. Income from the Common School Fund may be used only to support and maintain the state's common schools. Or Const Art VIII, Sec. 2, 4; ORS 327.405. Common School Fund income is apportioned among the various counties in the state by the Oregon Division of State Lands in proportion to the number of children between the ages of four and 20. ORS 327.410. The counties in turn must apportion the funds among the school districts in the county, based on the districts' average daily membership. ORS 327.415, 327.420.

Additional examples of the sources of state funding for schools include receipts from federal forest reserves, ORS 294.060; grants for construction and maintenance of public school facilities, ORS 327.330; distribution of donated commodities, ORS 327.520; grants for special and compensatory education programs, ORS 327.023; and federal funds that flow through the state to the school districts, ORS 326.05l(2)(b).

II. The Secretary of State's Duty to Audit A. Constitutional Duty Article VI, section 2, of the Oregon Constitution provides in relevant part:

The Secretary of State * * * shall be by virtue of his office, Auditor of public Accounts, and shall perform such other duties as shall be assigned him by law.

As we have previously noted, the scope of the Secretary of State's duties under this constitutional provision have never been precisely defined by the courts. In prior opinions we have advised, and we here reaffirm, that this constitutional provision incorporated the territorial auditor powers of auditing claims and accounts as set out in the territorial statutes. 30 Op Atty Gen 361, 364 (1962). In determining the extent of the constitutional duties and powers of the Secretary of State as "Auditor of public Accounts," we therefore look

to the use of that term in the Oregon territorial laws in existence when the Oregon constitution was adopted. Id., see also Boyd v. Dunbar, 44 Or 380, 382, 75 P 965 (1904).

Under the territorial laws, it was the duty of the auditor:

1. To audit, adjust and settle all claims against the territory, payable out of the treasury, except only such claims as may be expressly required by law to be audited and settled by other officers or persons;

An Act to Regulate the Treasury Department, ch II, Sec. 3, passed January 16, 1854, Statutes of Oregon (1855) at 452-53.

Under the territorial laws, the interest earned on the territorial common school fund was to be divided annually among the school districts proportional to the number of children in each district, to be used for the support of common schools "and for no other use or purpose whatever." An Act Relating to Common Schools and School Lands, ch I, Sec. 1, passed January 31, 1855, Statutes of Oregon (1855) at 457-58. The right to these funds was a claim

against the territory, payable out of the territorial treasury, which the territorial auditor was required to "audit, adjust and settle." In auditing claims, the territorial auditor had the responsibility to examine and verify that the amounts were properly due, to adjust any differences and to "settle" or approve payment of the claim. See 44 Op Atty Gen 381, 384 (1985). In 1855, the territorial auditor carried out these responsibilities before payment of the funds (pre-audit); today, the Secretary of State performs his audit responsibilities after the expenditure of public funds (post-audit). See 46 Op Atty Gen 315, 321 n 2 (1989) (citing to 39 Op Atty Gen 698, 702 n 1 (1979)); see also ORS 293.505(2). However, the Secretary's duty remains the same: to determine that state funds are legally expended, i.e., that they are expended for the purposes for which they are appropriated and consistent with any legal restrictions on the use of the funds.

The only territorial funds designated for local school districts appears to have been the Common School Fund interest; other revenue for the operation of school districts was raised by the district or the county in which the district was situated. See An Act Relating to Common Schools and School Lands, ch I, Sec. 2, 3, ch III, Sec. 9, 15-18, passed January 31, 1855, Statutes of Oregon (1855) at 457-58, 463-64. Today, the state funds provided to school districts include not only interest earned on the Common School Fund, but also State School Funds and the other funds identified above. The mere fact that a particular type of funding did not exist under the territorial laws does not mean that the Secretary of State's constitutional audit authority does not extend to those funds. Rather, the Secretary of State has a constitutional duty to audit any claims against the state, unless the audit of the particular type of account was

required by law to be performed by someone other than the territorial auditor. We have found nothing in the territorial statutes that required the auditing or settling of the claims of a school district receiving territorial funds to be performed by anyone other than the territorial auditor. In summary, we conclude that under the territorial laws, the territorial auditor had the duty to audit all claims against the treasury that were payable out of the territorial treasury, unless that duty was by law expressly placed with some other officer or person. With respect to the claims of school districts, that duty was not placed elsewhere. Thus, we conclude that the Secretary of State, as auditor of public accounts, has a duty to audit any claims of school districts to state funds, either before or after the funds are paid, in order to determine that the expenditure of the state funds is lawful.

B. Statutory Duty

ORS 297.210 provides that the Secretary of State shall have the accounts and financial affairs of all * * * state-aided institutions * * * reviewed or audited not less often than once for each three-year period.

This statute does not require the Secretary of State to perform the audit himself, but only to ensure that such accounts are reviewed or audited at least once every three years.

For purposes of this opinion, we need not decide whether school districts are "state-aided" institutions because school districts are subject to the requirements of the Municipal Audits Law, ORS 297.405 through 297.555, which requires the Secretary of State to obtain periodic reports of the financial condition and operations of municipal corporations. ORS 297.405(5), 297.415 and 297.435(1). With certain exceptions, municipal corporations must have

their "accounts and fiscal affairs" audited annually, either by the Secretary of State or by an accountant. ORS 297.425, 297.435. The audit must comply with the minimum standards prescribed by the Secretary of State, in cooperation with the State Board of Accountancy and in consultation with the Oregon Society of Certified Public Accountants. ORS 297.465. The audit report must be filed with the Secretary of State and must be in the form prescribed by the Secretary, who may also require submission of the working papers and audit programs of the accountant. Id. Thus, any requirements imposed by ORS 297.210 also would be met by compliance with the Municipal Audits Law.

III. Payment Responsibility

The second question asks who must pay for audits performed by the Secretary of State. We base our answer on the following statutes. ORS 297.030 provides:

The audits, reviews or investigations authorized to be made by the Secretary of State may be assigned to the Division of Audits as a part of its functions and duties.

ORS 297.040 provides:

The costs and expenses of conducting audits authorized by ORS 297.030 shall be paid from whatever funds are appropriated by law for use in carrying out the provisions of the respective laws relating thereto. The costs and expenses shall be charged and billed to such funds or activities in the same manner as are costs and expenses charged and billed for audits, reviews, investigations and system installations to municipal corporations and the various state departments, boards and commissions.

ORS 297.030 and 297.040 would apply whenever the Secretary of State is performing his constitutional audit functions. Under these statutes, the costs and expenses of the Secretary of State's audits of school districts must be paid by the districts from the funds being audited. Alternatively, if a school district requests an audit by the Secretary of State under the Municipal Audits Law, ORS 297.425(5) requires that the Secretary's expenses and costs in conducting the audit be borne by the school district. See also ORS 297.495.

THEODORE R. KULONGOSKI Attorney General TRK:SMT:LRR

This list is not intended to be all inclusive.

As we noted in our 1962 opinion, the first reference to the "auditor of public accounts" is contained in the territorial statutes of the second session of the Oregon Territorial Legislature, convened at Oregon City on December 2, 1850. See An Act to Regulate the Treasury Department, Art I, Sec. 1, passed February 4, 1851, Territorial Laws (1851) at 263. These statutes set forth in detail the powers and duties of the territorial auditor.

Similar provisions are contained in An Act to Regulate the Treasury Department, passed January 16, 1854, Statutes of oregon (1855) at 451-57. Although these territorial laws were discussed in detail in our prior opinion, we set out the relevant portions here, for ease of reference.

Chapter I, section 1, of the 1854 Act established a treasury department that embraced the offices of the "territorial treasurer" and the "auditor of public accounts." Id. at 451-52. The general duties of the auditor were set forth in chapter II.

Section 1. The auditor of public accounts is declared to be the general accountant of the territory, and the keeper of all public account books, accounts, vouchers, documents, and all papers relating to the accounts and contracts of the territory, and its revenue, debt and fiscal affairs, not required by law to be placed in some other office, or kept by some other person.

Sec. 3 It shall be the duty of the auditor:

2. To draw all warrants upon the treasury for money, except only in cases otherwise expressly provided by law;

3. To express, in the body of every warrant which he may draw upon the treasury, the particular fund appropriated by law, out of which the same is to be paid;

11. To perform all such other duties as may be required by law.

Id. at 452-53. Chapter III of the 1855 Act contained, in relevant part, the following provisions:

Sec. 3. All persons having claims against the territory, shall exhibit the same, with the evidence in support thereof, to the auditor, to be audited, settled and allowed, within two years after such claim shall accrue, and not afterwards.

Sec. 6 In all cases of grants, salaries, pay and expenses ascertained and allowed by law, found due to individuals from the territory, when audited, the auditor shall draw warrants upon the treasury for the amount, in the form used in the treasury department; but in cases of unliquidated accounts and claims, the adjustment and payment of which are not provided by law, no warrant shall be drawn by the auditor or paid by the treasurer, unless the previous appropriation shall have been made by law for that purpose; nor shall the whole amount drawn for and paid under any one head, ever exceed the amount thus appropriated.

Id.at 454.

burrill's Law Dictionary, Vol I (1859) at 296-97, defines claim as a "right or title, actual or supposed, to a debt, privilege, or other thing in the possession of another." See also Abbott's Law dictionary, Vol I (1879) at 233.

In 1855, the statutes did not clearly identify how these funds were to be paid out. When the Oregon Constitution was adopted in 1857, it provided for distribution of the income from the Common School Fund "among the several counties" of the state in proportion to the number of children between the ages of four and 20. Or Const Art VIII, Sec. 4. It was not until 1866 that the law identified who had the responsibility to divide the Common School Fund income among the counties. An Act to Further Provide for the Sale of School Lands, and to Distribute the Income of the Common School Fund, Sec. 5, approved October 24, 1866, oregon Laws (1866) at 27, 30. The fact that the funds were not actually distributed during the tenure of the territorial auditor does not affect our conclusion that the territorial auditor had authority to audit such claims.

We note that early reports by the territorial auditor to the Legislative Assembly included accountings of the condition of the Common School Fund. See, e.g., Report to the Honorable the Legislative Assembly of the Territory of Oregon by B.F. Bonham, Territorial Auditor, house journal (Terr.) (1856-57), Appendix at 15, 21. These early reports also contained accountings of claims paid to school superintendents. See, e.g., Report to the Honorable the Legislative Assembly of Oregon Territory by William h. Willson, Territorial Auditor, journals of the house and council (Terr.) (1852-53), Appendix at 15, 19 and 21.

For an example of the types of claims that the territorial laws authorized to be audited and settled by a person other than the territorial auditor, see An Act to Provide for Settling Cay use War Claims, Sec.3,6 and 7, passed August 31, 1849, Statutes of Oregon (1851) at 270-72, and Report of the Commissioner on Cayuse war claims, Journals of House and Council (Terr.) (1852-53), Appendix at 23-26.

In addition to the requirements of the Municipal Audits Law, school district audits are governed by ORS 328.465. That statute requires common and union high school district boards to obtain an annual audit of the district books and accounts, either by contract with the administrative office of the county in which the administrative office of the school is located, or by contract with an accountant. ORS 328.465(1), (2) and (3). ORS 328.465 does not require the Secretary of State to audit a school district.

In prior opinions, we have advised that the Secretary of State has exclusive authority as the auditor of public accounts and that neither the Legislative Assembly, nor any entity subject to the Secretary of State's audit authority, may act in a manner that would compromise the Secretary of State's constitutional duty to audit public accounts. 30 Op Atty Gen 361 (1962); 39 Op Atty Gen 698, 699 (1979); 44 Op Atty Gen 73, 74 (1984). Nevertheless, the accounts and fiscal affairs of a school district or other municipal corporation may contain funds that are not subject to audit by the Secretary of State, although the Secretary of State may determine in the first instance what funds the Secretary needs to audit in order to properly track the expenditure of state funds. See 39 Op Atty Gen at 701. And, as a general rule, municipal corporations have the inherent right to have their books and accounts audited at any time that the governing body may deem it necessary. Miles v. City of Baker, 152 Or 87, 92, 51 P2d 1047 (1935). Thus, to the extent that a school district audit under either the Municipal Audits Law or ORS 328.465 does not interfere with the Secretary of State's constitutional audit authority, we find no conflict between the constitutional duty of the Secretary of State to audit state funds received by school districts and the statutory provisions governing school district audits.

The audit required by the Municipal Audits Law is not limited to the state funds. The "accounts" to be audited include:

all books, papers, files, letters and records of any nature or in any form used in conducting the affairs of the municipal corporation or in recording the transactions thereof.

ORS 297.405(2). The "fiscal affairs" to be audited include:

all activities of any nature giving rise to or resulting from financial transactions, including compliance with legal requirements applicable to the operation of a municipal corporation.

ORS 297.405(4). See also ORS 297.425(6).

ORS 297.230 requires the Division of Audits to estimate in advance the expenses that it will incur during a biennium in performing audits under ORS 297.030. ORS 297.230(1). Each public body is charged its "share of such expenses for periods within the biennium and in sufficient amounts to provide reasonable cash operating requirements for the Division of Audits within the biennial period," must pay that amount to the credit of the Division of Audits Account and must charge the payment as an administrative expense from its available funds or appropriations. ORS 297.230(1). If the amount of the estimated payment is more or less than the actual expenses for the biennium for any public body, the difference is taken into account in determining succeeding estimates. Id.