This document focuses on the division of assets and liabilities in the event of a possible breakup of LAUSD. The California Education Code actually contains a number of sections that address various aspects of this topic, and these statutes will therefore be an appropriate starting point for any legal and policy analysis in this regard.
As a practical matter, the division of assets and liabilities is typically addressed in the proposal for reorganization. Sometimes this topic provides grounds for rejection of the proposal -- if the projected division appears out of balance. In any event, if after an election there is still no agreement among the parties on this matter, the dispute is subject to binding arbitration.
I. IN GENERAL
A. The California Statutory Scheme
Under Title 2, Division 3, of the California Education Code,1 Chapter 3 focuses on Reorganization of School Districts Generally, and Chapter 4 focuses in on the process for the Reorganization of School Districts. Article 7 of Chapter 3 addresses the "Disposition of Records, Funds, Property, and Obligations When Reorganized,"2 and includes Section 35560, which provides a basic framework for addressing these issues. Article 8 of Chapter 3 then addresses "Bonded Indebtedness of School Districts."
Article 3 of Chapter 4 focuses on "Contents of Plans and Recommendations" for school district reorganizations. In addition to the Hayden Bill (Section 35730.1),3 it includes Section 35736, which addresses "Division of Property and Obligations," and Section 35738, which covers the "Method of Dividing the Bonded Indebtedness."
Since a breakup of LAUSD will most likely be considered a reorganization no matter how it occurs, this document assumes that the California statutory scheme applies. The text of these code sections and provisions is rarely determinative, however, since specific words and phrases are generally subject to varying interpretations.
B. Prospective Legislation
It must also be noted that although an analysis of breakup scenarios necessarily begins with existing laws, it should not end there. In the event of a breakup -- and particularly in the event of a breakup pursuant to a master plan -- there is no need to stop at the boundaries of current law. Reasonable legislation mandating new and creative approaches to existing problem areas will always remain a possibility.
C. Breakup Scenarios
As discussed in the accompanying document addressing employment issues, two broad categories of breakup scenarios have generally been deemed possible by members of both the education community and the legal community in California. Under one scenario, a master plan would be adopted which would result in a breakup. Any contingencies could be addressed through additional legislation, and possible sticking points could be worked through in advance. Under a second scenario, small municipalities or neighborhoods would break off, but a Los Angeles Unified School District would still remain in existence (similar to the breakup of the former Soviet Union). It appears that questions pertaining to the division of assets and liabilities may be resolved in very different ways depending on whether a master plan is adopted or whether smaller entities simply go off on their own.
For example, the framework for distributing assets and liabilities in California typically addresses a situation where a district that formerly owned the property or incurred the debts negotiates, agrees, or disagrees with a second district over particular items. A break-off fits more appropriately within this framework. If the district in its entirety breaks up pursuant to a master plan, there will apparently be no former district. In essence, the representatives of the new districts will have to negotiate and ultimately agree among each other.
II. BASIC PRINCIPLES FROM CASES AND STATUTES NATIONALLY
As disputes regarding the reorganization of school districts have arisen over the years, legislatures and courts across the U.S. have come to agree on a variety of basic principles addressing the division of assets and liabilities.
In general, legislatures are allowed to distribute assets and liabilities in any manner that does not affect existing contracts. The U.S. Constitution contains a clause prohibiting the impairment of contracts. Article I, Section 10 provides that "No State shall...pass any...Law impairing the Obligation of Contracts." The California Constitution has a similar provision, protecting contractual rights from being impaired at a subsequent time.4
In the absence of any specific statutory provision to the contrary, most courts have determined that real property remains under control of the district in which it is located after changes have been made.5 However, it must be noted that a district's real property has been deemed to be the property of the state, held in trust by the district for the state and used by the district to carry out the state function of providing educational opportunities for the children of the state.6
The courts have also determined that as a general rule even if property becomes part of a different district's geographical area after a reorganization, the original district remains liable for the payment of a debt incurred in connection with this property.7
With regard to the division of assets and liabilities, state statutes typically require that such a division be accomplished in an equitable manner.8 Relevant disputes in this area include a challenge to a Michigan statute requiring a district to pay the debts of a second district in proportion to the value of the property in the second district that had been attached to the first under a reorganization plan. The court held that this statute did not violate the U.S. Constitution's prohibition against the taking of property just compensation.9 However, courts have also ruled that states may provide that no indebtedness shall be imposed upon a district without a vote of electors.10
Finally, unless a state constitution provides otherwise, legislatures have almost unlimited authority to provide a formula for the division of both property and debts. For example, typical statutes provide that a designated agency such as a county board of education must distribute assets and liabilities in an equitable manner. Professor E. Edmund Reutter explains that what constitutes an equitable distribution would be a question of fact to be decided in each case.11
III. APPROACHING THE DIVISION OF ASSETS AND LIABILITIES UNDER THE CALIFORNIA EDUCATION CODE
A. Section 35560 Generally
The basic California framework for dividing assets and liabilities in the event of a school district reorganization is set forth in Section 35560, which provides:
B. Relevant Definitions
At the outset, the legal distinction between the terms "real property" and "personal property" should be noted.
Real property is defined as "land, and generally whatever is erected or growing upon or affixed to land."12
Personal property is defined as "everything that is the subject of ownership, not coming under denomination of real estate."13 The term is generally applied to "property of a personal or movable nature, as opposed to property of a local or immovable character (such as land or houses)."14
In addition, fixtures are defined as items that have been so affixed to land that they have ceased being personal property and have become part of the realty.
C. Real Property and Public School Districts
As a general rule, real property in local public school districts is purchased and/or built with state funds, and is not even perceived as being an asset of a particular district.15 Instead, the real property is seen as comprising public lands and public buildings, and the districts are viewed as holding the property as trustees for the public.16
Subdivision (a) of Section 35560 focuses on the property in a district and appears to indicate that in the event of a reorganization, all real and personal property normally situated within particular geographic boundaries shall become the property of the district in which the real property is located. Thus, in the event of either a breakup pursuant to a master plan or a break-off of a small portion from the larger district, the key measuring devices would be the land and the physical structures. If Eagle Rock, for example, became a separate district under either a breakup or a break-off, all LAUSD lands and physical structures located in Eagle Rock...and all personal property normally situated on these lands and within these structures would conceivably become the property of the new Eagle Rock District.
The analysis appears to be simple with regard to real property, which is not movable. However, in the event of personal property, it may be unclear whether or not particular items are "normally situated" in a particular geographic territory.
D. The Process for Division of Assets & Liabilities
Three options exist for addressing the division of assets and liabilities in breakup or break-off proposals:
Subdivision (b) of Section 35560 suggests a pro rata division of personal property, funds, and obligations (other than the personal property normally situated in a particular geographic location and other than bonded indebtedness) based on "assessed valuation" of the "part of the former district" which is included in the new district. However, almost no district reorganization follows this approach any more, because after Serrano v. Priest17 and Proposition 13 the assessed valuation of property no longer reflects a district's actual income. A division of assets and liabilities based on such a formula would invariably result in an inequitable distribution.18
Thus, in assessing the various options available for such a division, Option 1 is rarely employed, and Options 2 and 3 present the only realistic approaches today. Under Option 2, which is rooted in policy and not in law, assets and liabilities other than the real property within a district are divided based on how many students typically attend specific schools within particular geographic boundaries. This division is based on ratios of ADA and is linked to "norm days" at local educational institutions.19
Option 3, based on Education Code Section 35736, entails the preparation of a full plan based on statutory guidelines, as follows:
As a practical matter, both the county offices of education and the State Board of Education have the authority to amend proposals. Negotiations between old and new districts pursuant to reorganization proposals can take place before and/or after the proposals are presented. Under Option 3, for example, a plan is presented based on negotiations done in advance, but negotiations often do take place between parties after a proposal has been submitted.
If there is no agreement between the parties, the Education Code mandates binding arbitration. Section 35565 provides, in pertinent part, that "[i]f a dispute arises between the governing boards of the districts concerning the division of funds, property, or obligations, a board of arbitrators shall be appointed which shall resolve the dispute." However, there is no requirement that all matters be resolved before a new district begins operating.
IV. DIVISION OF ASSETS: ANALYSIS OF SPECIFIC TOPIC AREAS
A. Central Office Administrative Sites
Section 35560 (a) provides that "the real property...shall be the property of the district in which the real property is located." A question arises as to whether this provision applies to the land and buildings that comprise a district's central administrative offices, warehouses, and clearinghouses.
Traditionally, unclear statutes are interpreted by looking at the plain meaning of the language, the purpose of the legislation, the context, and/or the published legislative history. Based on the plain meaning of Section 35560 (a), the real property would simply move with the district, and whichever district was fortunate enough under either a breakup or a break-off to find this property within its geographic boundaries would get to keep it as a trustee for the people of the state. However, such an approach may produce an inequitable result under traditional common law principles. In addition, this result may be inconsistent with the purpose of the statute, which may simply be addressing the transfer of local school sites and may not have been intended to cover central offices at all.
Absent any relevant legislative history that might be determinative, central office sites would most appropriately become the subject of negotiation between parties. If a municipality or neighborhood breaks off, then arguably the central office sites should remain with LAUSD, and any regional offices located within the municipality's or neighborhood's geographical boundaries should go to the new district. If a district-wide breakup occurs, the division apparently becomes trickier, but a master plan would conceivably address issues such as this in an equitable fashion.
B. Personal Property of District Located at Central Administrative Offices
A related problem area is the disposition of items located at central administrative offices. In addition to furniture, computers, xerox machines, telecommunications devices, and other office machines, this would include material in clearinghouses, supply warehouses, and textbook storage facilities.
While the analysis set forth in Part IV-A above would arguably be equally applicable to the personal property under the "normally situated" language of Section 35560 (a) -- which provides that all personal property normally situated at a site would move with the real property -- a stronger case could be made here for an equitable division of at least the textbooks, supplies, and instructional materials among all the schools within the original boundaries of LAUSD.
C. Personal Property Located at School Sites
As discussed above, Section 35560 (a) provides that "the real property and personal property and fixtures normally situated thereat shall be the property of the district in which the real property is located."
In addition to fixtures, items of personal property such as furniture, computers, xerox machines, telecommunications devices, office machines, school supplies, and instructional materials would appear to fall within the description set forth in Section 35560 (a), since they would seem to be "normally situated" at the local school site. These items would therefore stay with the real property in any reorganization.
However, there may be items of personal property that are currently located at local school sites but have only been there a short time and may be on loan from the district. These items would certainly be the subject of negotiation, since they may not be considered as "normally situated" at the school site, and thus would not necessarily fit within the meaning of this statutory provision.
D. Mobile Assets
Personal property of a district -- such as buses, delivery vehicles, and other items of a similar nature that rarely stay one place -- may present unique problems.
It can be argued that mobile assets fall appropriately under the "normally situated" personal property language of Section 35560 (a), and that they should be transferred to the district that takes over the land where they normally park. Yet they may park in different locations at different times, and/or they may serve different areas of the community at different times. Arguably, "normally situated" might not even be construed as referring to a parking space, but to an area where the mobile assets are currently being used. A further complication could result under this analysis if the vehicles are typically employed in geographical areas that come under the control of more than one district.
Under a second approach, however, the mobile assets could be treated as "other property" under Section 35560 (b), and could therefore be divided as per Option 2 or Option 3 discussed above in Part III-D. This approach is likely to result in a more equitable distribution of assets, and thus would appear to be more consistent with common law principles in this area.
E. Other Financial Assets
The distribution of other financial assets would follow the same patterns set forth above. If a statutory provision specifically refers to the category items, then that statutory provision controls. If no relevant statute applies, then only the general framework of Section 35560 would apply. Subject to any statutory limitations or mandates, assets would typically be divided according to one of the Options described in Part III-D. General common law principles may also apply on a case-by-case basis.
Savings and investments, for example, would logically be divided equitably according to one of the formulas described in Part III-D. Division of student body funds, however, are subject to specific limitations as set forth by statute. Section 35564 provides in pertinent part that in the event of a reorganization...
3. Funds Derived from Sale of School Bonds
Allocation of assets derived from the sale of school bonds is also specifically addressed by the California Education Code, which sets forth limitations on how the money may be used. Section 35561 provides that any funds derived from the sale of school bonds "issued by the former district" shall be used in one of two ways:
The statute, however, does provide an exception if the bonded indebtedness is assumed by the new district. In that case, "the funds may be used in any area of the new district for the purposes for which the bonds were originally voted."21
F. Entitlements to Federal Program Money
Finally, an area that is completely unsettled in this regard is the area of federal entitlements. These are the categorical funds that come to districts for use only in specific federal programs. Typically, as a prerequisite for receipt of these funds, districts must provide evidence of eligibility, student numbers, and program compliance.
These federal programs, which range from aid to the poor to specific educational programs addressing particular segments of the school population, often bring in significant sums of money to a district in any given year.
Unlike the other areas discussed above, it is not clear that this program money can be divided by state agencies or by negotiations between the parties. Indeed, it is likely that each new district -- and any remaining district -- would be required to negotiate with the particular federal agency responsible for monitoring and disbursing these funds. As a part of this process, the district(s) would have to present evidence justifying their requests for federal money.22
V. DIVISION OF LIABILITIES: ANALYSIS OF SPECIFIC TOPIC AREAS
As a general rule, the procedure for division of liabilities is the same as the procedure for division of assets. In addition, the same legal and policy considerations apply. Some divisions are specifically controlled by statute, at least to some degree. Other areas are subject only to general statutory provisions regarding distribution of assets and liabilities, and to the three options for division described above (Assessed Valuation, Ratio of Enrollment/ Attendance, or Petition under Section 35736). In addition, basic common law principles from case decisions across the country over the years typically apply.
A. Bonded Indebtedness
Of all the specific topic areas discussed in this document, none can come close to matching the amount of statutory language that has been set forth to address the division of bonded indebtedness in the event of a school district reorganization. Indeed, an entire Article in Chapter 3 (Title 2, Division 3) of the California Education Code focuses on "Bonded Indebtedness of School Districts."23 This statutory scheme, however, only applies to "the reallocation of bonded indebtedness of a school district on general obligation bonds" when either...
The following is a brief overview of relevant provisions in this statutory scheme.25
Section 35572 sets forth a formula for limiting the transfer of territory from one district "having any outstanding bonded indebtedness" to another district based on an analysis of assessed valuation.26 And Section 35574 addresses the interplay between the State School Building Aid Law of 1952 and the amount of outstanding bonded indebtedness of a divided district.27
Section 35575 focuses on reorganizations whereby "territory is taken from one school district and annexed to another, and the area transferred contains no public school property or buildings." Under this statute, "the territory shall drop any liability for outstanding bonded indebtedness in the district of which it was formerly a part and shall automatically assume its proportionate share of the outstanding bonded indebtedness of the district of which it becomes a part.28 While this statute would not likely be applicable in the event of a break-off, it could certainly come into play in the event of a district-wide breakup pursuant to a master plan.
Section 35576, on the other hand, is the flip side of Section 35575. It addresses circumstances whereby "territory is taken from one district and annexed to, or included in, another district or a new district by any procedure and the area transferred" does contain "public school buildings or property."29
Section 35577 provides a method for dividing unsold bonds between two or more districts,30 and Section 35578 sets forth conditions for the sale and distribution of the proceeds of such bonds.31
In addition to the above statutes, Section 35738 addresses the division of bonded indebtedness under Option 3 for the distribution of assets and liabilities described above in Part III-D. Under Section 35738, plans and recommendations for such a distribution...
B. Medical Benefits & Retirement Income
District obligations with regard to medical benefits and retirement income are discussed at length in the briefing document addressing employment issues. The following is a brief summary of key points that would be applicable within the context of a distribution of assets and liabilities.
Districts should expect to continue the current level of medical coverage for its certificated employees. Hospital, medical, dental, and vision care benefits are currently included for certificated employees in the 1995-1998 LAUSD-UTLA Collective Bargaining Agreement. Thus, as per the Hayden Bill, any new district created by either a breakup or a break-off must apparently adhere to this agreement...at least in the immediate future.
Districts should probably expect to continue medical coverage for retirees indefinitely. Not only are prospective medical benefits for retirees included in the 1995-1998 LAUSD-UTLA Collective Bargaining Agreement, but Section 35730.1 (i) of the Hayden Bill explicitly requires "recognition of existing retiree health, dental, and vision care benefits." It would then seem that both current teachers and retirees are protected in this regard, although certain features of this legal structure make these protections less than airtight.32
An issue that must be addressed with regard to the division of liabilities, however, is how to apportion payment of medical benefits for retirees among the various districts that may exist after a breakup or break-off. With existing employees, the answer is arguably simpler, since from an equity perspective it would appear that a district could logically agree to pay the premiums for its employees. However, with regard to retirees, the answer may be found in the general statutory language of Section 35560 (b), and in the various options for dividing assets and liabilities that are set forth in Part III-D above. An equitable distribution of these obligations would seem to be appropriately resolved through negotiations between the respective school districts.
As discussed in the employment issues document, it is reasonable to assume that both existing retirees and current educators whose retirement rights are vested would be protected under the Prohibition against Impairment of Contracts found in the United States Constitution.33
Issues relating to the division of responsibilities in an equitable manner are likely to arise in a variety of possible scenarios. For example, under a break-off scenario, both the old and the new districts might be expected to share financial responsibilities with regard to a teacher's prospective retirement income. And under a breakup pursuant to a master plan, if LAUSD as we know it disappears, at least one new district will undoubtedly be expected to carry out the former district's financial obligations with regard to current retirees.
An approach to the division of liabilities in this regard would likely be similar to that discussed above with regard to medical benefits for retirees. Negotiations between the respective districts would be based on the general statutory language of Section 35560 (b) and the various options for dividing assets and liabilities that are set forth in Part III-D of this document.
C. Other Debts: Secured v. Unsecured
As discussed above, the general rule with regard to debts is that they must be divided equitably, and are subject to negotiations between the parties under one of three options: assessed valuation, ratio of enrollment/attendance, or petition under the full requirements of Education Code Section 35736. However, with regard to secured debts, an additional principle must be noted.
Secured debts are those supported or backed by security or collateral. The basic rule for secured debts under both common law and general policy principles is that in the event of a district reorganization, the debt is assigned to the district which takes the property that has been used as the security or collateral.
Unsecured debts, on the other hand, are subject only to the general rules for division of assets and liabilities described above. They could typically be the subject of negotiations without preconditions.
D. Other Contractual Obligations
An analysis of the distribution of liabilities in the event of a district reorganization would not be complete without a brief examination of other contractual obligations.
Typically, school districts enter into a range of contracts with educators, companies, and other independent contractors. These contracts might range from agreements with the superintendent to a service contract for computer maintenance.
A breakup pursuant to a master plan might play out very differently in this regard than a break-off. Under a break-off, a Los Angeles Unified School District would remain, and would likely be expected to honor its contracts -- unless the terms of the contract focused specifically on the area that broke off. Under a district-wide breakup, however, it is likely that some contracts would have to be renegotiated and that others would be excused, subject to basic principles of contract law.
While a detailed analysis of contract law is beyond the scope of this document, some general principles should be noted. The law recognizes the fact that circumstances can change, and therefore dictates that performance of a contract can be excused under certain conditions. For example, as a general rule, performance of a contract will be excused when it has been made impossible or highly impracticable.34 In addition, where the subject matter of the contract or the specified means for performance is destroyed or becomes nonexistent after the contract has been entered into, without fault of the promisor, the promisor's duty is discharged by impossibility of performance.35
Thus, if LAUSD disappears as a result of a breakup pursuant to a master plan, the district can argue that its duty to perform has been discharged under the principles of changed circumstances. Promisees, however, would not always be without rights. A superintendent should probably not expect his or her position to continue if the district breaks up, since the subject matter of the contract has become nonexistent. A computer maintenance company, however, could conceivably argue that the subject matter of the contract (i.e. the computers) is still in existence, and that therefore the new district(s) would still be obligated under the terms of the agreements. Thus each contract would have to be examined, and the results are likely to vary depending on the nature of the agreement and the character of the changed circumstances.
VI. CONCLUSION
The division of assets and liabilities in the event of an LAUSD breakup or break-off is in many ways a much simpler area of analysis than the other topics covered by these briefing documents. An exploration of relevant laws, policies, and procedures reveals a process that is built upon principles of equity, encourages negotiation between parties, and typically avoids litigation by providing for binding arbitration if districts cannot agree.
As an initial step, the California statutory scheme looks at whether the property at issue constitutes real property or personal property. If it is real property, or personal property normally situated at the real property site, then it generally goes with the district that takes possession of the particular geographical area. An exception to this rule may arise, however, for central administrative office facilities and for mobile assets such as buses or service vehicles.
All other assets, and all liabilities, would typically be subject to distribution based on the common law principle that division must occur in an equitable manner. Three options for accomplishing such a division are available in California in the event of a district reorganization.
There will be cases, however, where the distribution of specific types of assets and liabilities is explicitly addressed by the California Education Code. To the extent that this is the case, these statutes would control.
On a case-by-case basis, differences in the process and in the relevant legal and policy framework may occur depending on whether the district in its entirety is reorganized pursuant to a master plan or whether small portions of the district actually break-off. Indeed, most of the rules described above are based on circumstances where assets and liabilities are divided between an original district and one or more other districts, and thus this document would probably be seen as more directly applicable in the more likely event of a break-off. However, the basic underlying principles are the same whether a breakup or a break-off occurs.
Finally, it must be noted that in the event of a breakup pursuant to a master plan, district officials can address any problem areas in advance and in fact seek relevant legislative changes as needed.
In the end, County Offices of Education and the State Board of Education will want to see reorganization proposals that divides assets and liabilities in an equitable manner. Parties are encouraged to work together in this regard, and a model for resolving disputes in other areas appears to be firmly in place.
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UCLA Graduate School of Education & Information Studies