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TO BE PUBLISHED IN THE OFFICIAL REPORTS
 

OFFICE OF THE ATTORNEY GENERAL
 

State of California
 

JOHN K. VAN DE KAMP
 

Attorney General
 

:
 

OPINION : No. 88-302
 

:


 of : May 18, 1988
 

:
 

JOHN K. VAN DE KAMP :


 Attorney General :
 

:


 CLAYTON P. ROCHE :


 Deputy Attorney General :
 

THE STATE ALLOCATION BOARD has requested the opinion of
 

this office on the following question:
 

May a school district which sells or leases real property
 

pursuant to section 39360 of the Education Code transfer interest
 

earned on the proceeds received therefrom to the school district's
 

general fund without the approval of the State Allocation Board?
 

CONCLUSION
 

A school district which sells or leases real property
 

pursuant to section 39360 of the Education Code may not transfer
 

interest earned on the proceeds received therefrom to the school
 

district's general fund without the approval of the State
 

Allocation Board.
 

ANALYSIS
 

Section 39360 et seq. of the Education Code governs the
 

sale or lease of surplus real property of school districts.
 

Section 39360 provides that a "school district may sell any real
 

property belonging to the school district or may lease . . . [such]
 

real property . . . which is not or will not be needed by the
 

district for school classroom buildings at the time of delivery of
 

title or possession. . . ."
 

Section 39363 of the Education Code places certain
 

restrictions on the use of the proceeds received from any such sale
 

or lease of real property. That section provides generally that
 

the funds "derived from the sale" and the "proceeds from a lease"
 

shall be used for certain capital outlay and maintenance costs, or
 
 

reserves therefor. The section, however, provides an exception and
 

permits "the proceeds" from the sale or lease to be deposited in
 

the district's general fund for any general fund purpose where the
 

district's governing board and the State Allocation Board find no
 

anticipated need for capital outlay or major deferred maintenance
 

projects for a five-year period of time.1
 

The question presented for resolution herein involves
 

interest which may be earned on the proceeds of the sale or lease.
 

It is whether the interest may be transferred to the district's
 

general fund for any general fund purpose without the concurrence
 

of the State Allocation Board. Stated otherwise, is the interest
 

earned on the proceeds of the sale or lease subject to the same
 

restrictions as are the proceeds of the sale or lease themselves
 

set forth in section 39363 of the Education Code? We conclude that
 

it is.
 

1

Section 39363 provides in full:


 "The funds derived from the sale of surplus property
 

shall be used for capital outlay or for costs of
 

maintenance of school district property that the
 

governing board of the school district determines will
 

not recur within a five-year period. Proceeds from a
 

lease of school district property with an option to
 

purchase may be deposited into a restricted fund for the
 

routine repair of district facilities, as defined by the
 

State Allocation Board, for up to a five-year period. In
 

addition, the proceeds may be deposited in the general
 

fund of the district for any general fund purpose if the
 

school district governing board and the State Allocation
 

Board have determined that the district has no
 

anticipated need for additional sites or building
 

construction for the five-year period following such sale
 

or lease, and the district has no major deferred
 

maintenance requirements.


 "The proceeds may also be deposited into a special
 

reserve fund for capital outlay, for costs of maintenance
 

of school district property that the governing board
 

determines will not recur within a five-year period, or
 

for the future maintenance and renovation of school sites
 

if the district governing board and the State Allocation
 

Board have determined that the district has no
 

anticipated need for school sites or building
 

construction or major deferred maintenance projects for
 

a five-year period following the sale or lease. Proceeds
 

deposited in the special reserve fund shall not be
 

available for general operating expenses as provided in
 

Section 42842." 


2. 88-302
 
Initially, we examine the language of section 39363.
 

(Moyer v. Workmen's Comp. Appeals Board (1973) 10 Cal.3d 222, 230.)
 

The section first speaks in terms of the "funds derived from the
 

sale of surplus property." It then speaks of the "proceeds from
 

a lease of school property." Finally it lumps both of these
 

together as "the proceeds" for purpose of the restrictions as to
 

use. Giving the key words "derived" and "proceeds" their usual and
 

customary meaning, we note that "derived" is defined in Webster's
 

Third New International Dictionary (1961) as:
 

"1. formed or developed out of something else:
 

DERIVATIVE: . . . ." (Id. at p. 608) 


and "proceeds" is defined as:
 

"1a: what is produced by or derived from something
 

(as a sale, investment, levy, business) by way of total
 

revenue: the total amount brought in: . . . ." (Id. at
 

p. 1807.)
 

These definitions speak of that which is formed,
 

developed out of or produced by something else which we will call
 

the source. However, they provide little insight whether the
 

source must be immediate or includes more remote sources as well.
 

The definition of "derivative" is helpful on this point. It stated
 

in part: 


". . .2: made up of or marked by elements or
 

qualities derived from something else (as from an
 

ultimate source). . . ." (Id. at p. 608.)
 

Use of the word "ultimate" in this definition indicates
 

that proceeds are "derived" from more remote as well as immediate
 

sources. We therefore construe the words "derived" and "proceeds"
 

in section 39363 to include the interest earned upon the proceeds
 

of the sale or lease as well as such proceeds themselves. 


However, we need not rely solely on the words of the
 

statute. We can rely upon the common law to support this
 

interpretation of section 39363 of the Education Code. It is the
 

settled common law rule that "interest is an accretion or increment
 

to the principal fund earning it, and unless lawfully separated
 

therefrom becomes a part thereof." (Pomona City School District v.
 

Payne (1935) 9 Cal.App.2d 510, 516. See also, e.g., Board of Law
 

Library Trustees v. Lowery (1945) 67 Cal.App.2d 480, 482; 71
 

Ops.Cal.Atty.Gen. (1988) (Op. No. 87-204, issued 3/9/88); 65
 

Ops.Cal.Atty.Gen. 588 (1982); 59 Ops.Cal.Atty.Gen. 43, 45-46
 

(1976); 49 Ops.Cal.Atty.Gen. 59, 61 (1967); 44 Ops.Cal.Atty.Gen.
 

58, 60 (1964); 38 Ops.Cal.Atty.Gen. 207, 210 (1961).) [T]he common
 

law of England is, except where modified by Constitution or statute
 

the rule of decision in this state." (Philpott v. Superior Court
 

(1934) 1 Cal.2d 512, 515, emphasis added; Civ. Code, § 22.2.) No
 

3. 88-302
 
specific legislation has abrogated the common law rule with respect
 

to section 39363 of the Education Code and the application of
 

interest. From this it necessarily follows that interest on the
 

proceeds would be a part of the proceeds and would be subject to
 

the same restrictions as are the proceeds themselves.
 

This office has so concluded in a number of analogous
 

situations. In 65 Ops.Cal.Atty.Gen. 588, supra, based upon both
 

the foregoing common law principles and "mere reasoned analysis" we
 

"concluded that interest or dividend income derived from the
 

investment of [election] campaign funds is subject to the same use
 

restrictions [prohibitions as to personal use] as are imposed upon
 

such funds" by the Elections Code. In 44 Ops.Cal.Atty.Gen. 58,
 

supra, this office concluded that interest earned on money in a
 

school district's bond sinking fund was subject to the same
 

restrictions as provided by statute for the sinking fund itself.
 

And in 38 Ops.Cal.Atty.Gen. 207, supra, we concluded that interest
 

on investments or deposits of "special gas tax street improvement
 

fund" money must be used only for highway purposes by a city by
 

reason of constitutional prohibitions and the general rule that
 

interest follows the principal.
 

It has, however, been suggested for several reasons that
 

this general rule is not applicable to the question presented
 

herein. First of all, it has been pointed out that the Legislature
 

in a number of situations has specifically provided in the
 

Education Code that interest on certain funds shall be deposited in
 

the particular fund earning such interest. See Education Code,
 

sections 39602 (self-insured liability fund), 39605 (fire loss
 

fund), 89701 (CSU parking revenue fund), 89704 (CSU continuing
 

education revenue fund), 89725 (gifts, bequests and donations to
 

CSU). The basic argument is that the specific inclusion of such
 

directions in some statutes demonstrates a legislative intent to
 

exclude the same requirement in other statutes - specifically
 

herein, section 39363 of the Education Code. (Cf. Safer v.
 

Superior Court (1975) 15 Cal.3d 230, 238.) Or stated somewhat
 

differently, to conclude that section 39363 of the Education Code
 

requires that interest on the proceeds of the sale or lease of real
 

property be deposited with those funds and be subject to the same
 

restrictions would be tantamount to legislating by implication
 

(see, e.g., Krater v. City of Los Angeles (1982) 130 Cal.App.3d
 

839, 845: "[a]n intention to legislate by implication is not to be
 

presumed.")
 

This first suggestion overlooks one crucial factor. The
 

rule that the interest follows the principal and becomes part of it
 

unless separated from it by statute, that is, the common law rule,
 

is applicable to section 39363 of the Education Code and
 

incorporated therein. No specific legislation has abrogated the
 

common law rule with respect to that section.
 

4. 88-302
 
A second suggestion which is made is that section 53647
 

of the Government Code changes this rule. That section is in what
 

was known as the Depository Act, now contained in section 53630 et
 

seq. of the Government Code. Historically, that act was enacted
 

pursuant to constitutional authorization to permit designated local
 

agencies to deposit their funds in state and national banks for
 

safekeeping. Also historically, school districts, which have
 

always been required by statute to deposit their funds with the
 

county treasurer, were unable to avail themselves of the benefits
 

of this act. (See now Ed. Code, § 41001.) This was explained
 

briefly in 30 Ops.Cal.Atty.Gen. 54, 55-56 (1957) as follows: 


"Education Code section 5002 [now § 41001] provides
 

that all money received or collected by a school district
 

shall be paid into the county treasury to be placed to
 

the credit of the proper fund of the school district.
 

The County treasurer acts as ex- officio treasurer for
 

the school district. The funds remain the property of
 

the school district but are held in the custody of the
 

county (Pomona City School District v. Payne (1935), 9
 

Cal.App.2d 510; see also Kennedy v. Miller (1893), 97
 

Cal. 429).
 

"Section 16 1/2 of Article XI of the Constitution,
 

which section provides for the deposit in banks of public
 

funds, was adopted in 1906. Prior to 1922, this section
 

provided for the deposit of public funds belonging to a
 

county or municipality. In 1922, this provision was
 

specifically amended so as to apply to moneys 'in the
 

custody of' as well as moneys belonging to any county or
 

municipality (see Pomona City School Dist. v. Payne,
 supra, at p. 513). In discussing the 1922 amendment the
 

court, in the Pomona case, stated there was no doubt but
 

that the amendment was designed to authorize the deposit
 

in local banks of moneys belonging to school districts.
 

It is to be noted that this purpose was accomplished by
 

the insertion of the phrase 'in the custody of' rather
 

than by enlarging the definition of those political
 

entities whose funds might be deposited in banks. . . ."
 

Accordingly, section 53647 of the Government Code provides:
 

"(a) Interest on all money deposited belongs to, and
 

shall be paid quarterly into the general fund of, the
 

local agency represented by the officer making the
 

deposit, unless otherwise directed by law.
 

"(b) Notwithstanding the provisions of subdivision
 

(a), and except as otherwise directed by law, if the
 

governing body of the local agency represented by the
 

officer making the deposit so directs, such interest
 

5. 88-302
 
 

shall be paid to the fund which contains the principal on
 

which the interest accrued."
 

Subdivision (a) of the section is essentially derived
 

from the original Depository Act. Subdivision (b) was added in
 

1978 (Stats. 1978, ch. 126). It is urged that subdivision (a) of
 

this section would direct that any interest on school district
 

funds earned on the proceeds of the sale or lease of surplus real
 

property should go into the district's general fund despite
 

restrictions in section 39363 as to the proceeds themselves.2
 

Section 53647 of the Government Code has been the subject
 

of a number of cases and opinions of this office. As to case law,
 

none of the cases have been concerned with whether interest should
 

be credited to an agency's special fund as opposed to that agency's
 

general fund. The case law has been concerned with attempts by the
 

county to claim such interest where it has been acting as "exofficio treasurer" of another agency's funds. Pomona City School
 

District v. Payne, supra, 9 Cal.App.2d 510, the seminal case with
 

respect to the common law rule on interest following the principal,
 

was the first of these cases. The court there held that under such
 

common law principles the school district was the "local agency
 

represented by" the county treasurer, not the county, and
 

accordingly the county had no claim to interest on such funds.
 

Further case law has also prevented the county from claiming a
 

windfall of interest on other entities' deposits, (see Metropolitan
 

Water District v. Adams (1948) 32 Cal.2d 620 (interest on security
 

deposit lodged with court in condemnation action); Fresno Fire
 

Fighters v. Jernagan (1986) 177 Cal.App.3d 403 (interest on funds
 

deposited with court); Redevelopment Agency v. Goodman (1975) 53
 

Cal.App.3d 424 (interest on condemnation judgment paid into court
 

pending appeal); Ostley v. Safer (1957) 147 Cal.App.2d 671
 

(interest on money interpleaded with court); Board of Law Library
 

Trustees v. Lowery, supra, (interest on law library funds). 


Although the foregoing cases which were decided in the
 

context of what is now subdivision (a) of section 53647 of the
 

Government Code were not required to rule upon whether a particular
 

accrual of interest was to be credited to the general fund or a
 

special fund of the agency for which the county treasurer was
 

acting, we believe these cases are still of significance to us
 

herein. These cases either relied upon the common law rule that
 

2

We note parenthetically that although school district funds
 

must be deposited with the county treasurer, that district boards
 

have been authorized since 1951 to make direct investments of its
 

monies. Accordingly, these investments could draw interest
 

directly without the intervention of the county treasurer. (See
 

Ed. Code, § 41015, and discussion in 44 Ops.Cal.Atty.Gen. 58, 62,
 

supra.) Section 53647 would not appear to be applicable to that
 

interest. 


6. 88-302
 
interest follows the principal and becomes a part thereof, or
 

considered prior cases which did rely upon that rule as
 

controlling. Furthermore, where the accrual of interest was to a
 

particular source of funds as in all the cases involving court
 

deposits, the appellate court did not concern itself with whether
 

the interest should be credited to some "general fund" but instead
 

had the interest follow the fund. In essence the appellate court
 

was concluding that under section 53647 the law "otherwise
 

directed" where the interest was to be deposited. Such interest
 

accrued not to the court for its general benefit, but to the owner
 

of the fund. 


Likewise, with respect to section 39363 of the Education
 

Code, the law has "otherwise directed" where interest on the
 

proceeds of the sale or lease of surplus real property is to be
 

deposited. As we demonstrated at the outset herein, both the
 

wording of the section itself and the common law rule direct that
 

the interest is to be deposited to the principal fund, that is, to
 

the proceeds of the sale or lease of the property.
 

At least one opinion of this office supports this
 

conclusion, and is directly in point with respect to now
 

subdivision (a) of section 53647 of the Government Code. Where
 

possible, this office has relied upon legislative direction as to
 

which fund interest should be credited. (See generally 59
 

Ops.Cal.Atty.Gen. 43, 46, supra, (direction implied from statutory
 

scheme as well as common-law rule); 49 Ops.Cal.Atty. Gen. 59,
 

supra, (direction implied from statutory scheme); 44
 

Ops.Cal.Atty.Gen. 58, supra, (questions one and two: interest
 

controlled by specific constitutional or statutory provision); 38
 

Ops.Cal.Atty.Gen. 207, supra, (direction controlled by
 

constitutional mandate). However, in question number three of 44
 

Ops.Cal.Atty.Gen. 58, supra, this office was presented with the
 

question where the interest on sinking fund monies earmarked to
 

retire school district funds bonds should be credited. Although
 

the interest on the proceeds of the bonds themselves was
 

specifically directed by statute to be credited to the sinking fund
 

itself, the law was silent as to interest on that fund. We
 

concluded that such interest was restricted to the same use as the
 

sinking fund despite the provisions of, inter alia, section 53647.
 

We stated that the rule that the interest follows the fund was
 

applicable and thus could be "used for no purpose other than the
 

payment of principal and interest on the district's bonds." (Id.
 

at p. 64.) We reasoned:
 

"(a) Applicability of Government Code sections 53635
 

and 53647.
 

Government Code section 53635 reads:
 

'So far as possible, all money belonging to, or in
 

the custody of, a local agency, including money paid to
 

7. 88-302
 
the treasurer or other official to pay the principal,
 

interest, or penalties of bonds, shall be deposited for
 

safekeeping in state or national banks in the State
 

selected by the treasurer or other official having the
 

legal custody of the money.' 


"Section 53635, like section 53647 which provides
 

for the placing of interest in the general fund, had its
 

origin in the Public Deposit Act of 1933 and is in the
 

same article of the Government Code (Article 2 of Title
 

5 of Division 2) and it may be assumed that as to some
 

types of entities it is proper to place interest earned
 

on sinking fund money in the entities' general funds. If
 

sections 53635 and 53647 stood alone they might be
 

controlling. Insofar as school districts are concerned
 

the two Government Code sections do not stand alone and
 

they must be read in conjunction with other portions of
 

the law touching upon the same subject. The Public
 

Deposit Act and the Government Code sections which
 

superseded it are statutes of general application
 

governing the investment of the several different types
 

of funds belonging to the various public entities that
 

exist in this state. Education Code section 21102, on
 

the other hand, is a statute of limited application, it
 

is concerned only with school districts and then only
 

with a particular type of fund belonging to the
 

districts. It is the recognized rule that a special
 

statute dealing expressly with a particular subject is
 

controlling over a general statute covering the same
 

matter. See 45 Cal.Jur.2d Statutes sections 119, 120 and
 

cases cited therein. That portion of Government section
 

53647 which directs the placing of interest on deposits
 

made by the county treasurer in the general fund is then
 

modified or superseded insofar as school district
 

deposits are concerned by the restriction found in
 

Education Code section 22101 that sinking fund money can
 

be used for no purpose other than the payment of interest
 

and principal on district bonds." ( Id. at p. 64;
 

emphases added.)
 

Accordingly, in 44 Ops.Cal.Atty.Gen. 58, 64, supra, we
 

pointed out that subdivision (a) of section 53647 allocates the
 

interest as between the proper entities. Whether such interest
 

should be credited to the general fund or a special fund of the
 

proper agency depends upon the source of the funds and restrictions
 

which have been placed on the use of those funds.
 

That this conclusion is correct with respect to the
 

proceeds of the sale or lease of real property by a school district
 

pursuant to section 39363 is evident when one considers that a
 

school district may, pursuant to section 41015 of the Education
 

Code, make direct investments of its funds which are not needed
 

8. 88-302
 
 

for the immediate requirements of the district. (See fn. 2,
 

ante.)3 As to such funds, section 53647 would not come into play.
 

Under the normal common law rule, interest would accrue to the
 

principal and be subject to the section 39363 restrictions as to
 

use. If our conclusion is incorrect as to the proper application
 

of section 53647 of the Government Code, we would have the
 

anomalous result that interest on funds directly invested by the
 

school district would accrue to the special fund and be subject to
 

the section 39363 restrictions under common law principles, but
 

interest on funds deposited with the county treasurer would accrue
 

to the district's general fund and would not be subject to such
 

restrictions.
 

In so concluding we have not overlooked possible contrary
 

inference which might be drawn from subdivision (b) of section
 

53647 of the Government Code. We would, however, point out that
 

subdivision (b) is only applicable if credit of interest is not
 

"otherwise directed by law." Furthermore, given the uncertainty
 

which may arise from statutes such as section 39363 of the
 

Education Code, it provides county treasurers and accountants a
 

vehicle to avoid such uncertainty. It permits them to bypass
 

subdivision (a) of section 53647 of the Government Code by
 

obtaining a direction from the governing body of the applicable
 

local agency to deposit interest directly into the fund which
 

contains the principal.
 

This conclusion is consistent with the legislative
 

history of Assembly Bill 2367, 1977-78 Regular Session, which
 

became chapter 126, Statutes of 1978, and enacted subdivision (b)
 

of section 53647 of the Government Code. Such history demonstrates
 

that the bill was introduced because of the concerns of the
 

treasurer of a single county that he did not have the 


authority to credit interest earned from special funds directly to
 

those accounts, but had to first credit the interest to the special
 

districts general fund and then transfer the funds to the special
 

funds. (See Enrolled Bill Report, of A.B. 2376, dated March 9,
 

1978). Significantly for our purposes the legislative history also
 

points out as follows in the Assembly Committee on Local Government
 

Bill Analysis, dated March 7, 1978:
 

3

Section 41015 of the Education Code provides:


 "The governing board of any school district or any
 

county office of education which has funds in a special
 

reserve fund of the district or county office of
 

education or any surplus moneys not required for the
 

immediate necessities of the district or county office of
 

education, is hereby authorized to invest all or any part
 

of the funds in any of the investments specified in
 

Section 16430 or 53601 of the Government Code."
 

9. 88-302
 
"(Note: Where The Use Of Money Is Specifically
 

Restricted By Law-- I.E. Gas Tax funds, or Bond Funds-­

Interest Earned On Such Money Is Credited To The Fund
 

Upon Which The Interest Is Earned Rather Than Being
 

Credited To The General Fund)"
 

In short, the legislative history acknowledged that subdivision (b)
 

was still qualified by the phrase in subdivision (a) of section
 

53647 of the Government Code that interest should be credited to a
 

special district's general fund only if not "otherwise directed by
 

law." This is the case herein.
 

Accordingly, it is concluded that a school district which
 

sells or leases real property pursuant to section 39360 of the
 

Education Code may not transfer interest earned on the proceeds
 

received therefrom to the district's general fund without the
 

approval of the State Allocation Board. 


* * * *
 

10. 88-302