Question: One of our principals purchased some gift cards as the Student of the Month incentive, and charged it to General Fund. Is the purchase allowable? Also, along with the gift cards, there were Jonas Brothers CDs purchased for the same purpose. Are these CDs considered educational appropriate?

Response:  In the absence of a statute granting public local educational agencies (LEAs) the legal authority to make a special expenditure (i.e., for food, clothing, awards, etc.), the legality of any expenditure is determined by the "gift of public funds" provision in the California Constitution, Article 16, section 6. This constitutional provision prohibits making any gift of public money to any individual (including public employees), corporation, or other government agency. It states, " . . . the Legislature shall have no . . . power to make any gift, or authorize the making of any gift, of any public money or thing of value to any individual . . . whatever . . ."

Expenditures of school funds must be for a direct and primary public purpose to avoid being a gift. An approved public purpose must be within the scope of a school district's jurisdiction and purpose, which does not extend to purposes such as aid to the indigent and the like, or the promotion of social welfare, though these may be lawful public purposes for other agencies.

On the other hand, it is also well established that expenditures of public funds which involve a benefit to private persons (including public employees) are not gifts within the meaning of the California Constitution if those funds are expended for a public purpose. This means that public funds may be expended only if a direct and substantial public purpose is served by the expenditure and private individuals are benefited only incidentally to the promotion of the public purpose. To justify the expenditure of public funds, a LEA's governing board must determine that the expenditure will benefit the education of students within its schools. Expenditures that most directly and tangibly benefit students' education are more likely justified. Expenditures driven by personal motives are not justified even if they have been a long standing local custom or are based on benevolent feelings.

If the LEA's governing board has determined that a particular type of expenditure serves a public purpose, courts will almost always defer to that finding. Thus if the district has a board policy stating that specific items are allowable (e.g. scholarships or donations), there is more certainty that the expenditure might be considered allowable. Unless such a policy exists, examples of items that would be usually considered a gift of public funds include flowers, candy, advertisements for private award ceremonies, and donations to charity.

In your specific question, if your governing board has adopted a policy allowing awards to students and staff, these MAY be allowable expenditures. Education Code section 44015 authorizes awards to employees for exceptional contributions and to students for excellence. If items are intended as some form of employee or student award, it also requires the governing board to adopt rules and regulations concerning such awards. Such awards shall not exceed $200 unless a larger award is expressly approved by the governing board. Awards to community members are not considered authorized.

The governing board of a school district may make awards to employees who do any of the following:

- Propose procedures or ideas that thereafter are adopted and effectuated, and that result in eliminating or reducing district expenditures or improving operations.

- Perform special acts or special services in the public interest.

- By their superior accomplishments, make exceptional contributions to the efficiency, economy, or other improvement in the operations of the school district.

As stated earlier, the governing board of a school district may also make awards to pupils for excellence.  There are not further stipulations in Code on what "excellence" is defined as.

Thus, if a governing board adopts rules and regulations prior to any awards being made, a district or ASB can recognize superior accomplishments of any employee or student within the guidelines and provisions contained in the applicable district policies, rules and/or regulations. In the absence of applicable policies, rules and/or regulations, no district official can make the award and no one can legitimately purchase the award. Life transition events such as birthdays, weddings, funerals, holidays and other similar circumstances can happen to anyone and so cannot be considered superior accomplishments, or merit an award.

Awards are often signified by letters of commendation, board resolutions, trophies, certificates, plaques, medals, badges, pins and the like, but may also be in the form of a gift certificate or a scholarship, within the statutory monetary limits and subject to IRS reporting requirements. The board may also approve an expenditure for flowers or candy as part of an award, which is appropriate only if the school district's board policy on awards complies with the education code and IRS regulations. So, the gift cards and CDs purchased may be considered educationally appropriate depending on board policy and its stipulations.  We can't decide that for you, unfortunately. It really comes down to board policy.

Mugs, cards and similar items given to promote good will or positive relations between either the district and its employees or between staff and students, are not considered awards. The expenditure of public funds to promote positive employer-employee and/or staff-student relations does not serve a direct and/or substantial public purpose, so would likely violate the gift of public funds provisions contained in the California Constitution.

IRS publication 15b provides guidance to employers regarding how to report awards paid to employees for outstanding work or safety achievement. IRS publication 525 provides guidance to employees regarding how to report awards received.

Generally, cash or cash equivalent awards to employees must be reported as taxable income. If the award is provided in the form of goods or services, the fair market value of the award is reportable. Tangible personal property awards (other than cash, gift certificates, other cash equivalents or certain intangible property) for certain service or safety achievements are excludable up to certain amounts. Length of service and safety achievements are specific categories of awards that are not applicable to ASB situations and are further defined within IRS publication 15b. Refer to the IRS publications for more information on the topic of employee awards and reporting of the awards for tax purposes.

10/23/09