STATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
CHARLOTTE COUNTY SCHOOL DISTRICT,
Petitioner,
vs.
DEPARTMENT OF EDUCATION,
Respondent.
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) Case No. 10-7524
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RECOMMENDED ORDER
Pursuant to notice, a final hearing was held in this case on February 16 and 18, 2011, in Port Charlotte and Tallahassee, Florida, respectively, before Administrative Law Judge Elizabeth W. McArthur of the Division of Administrative Hearings.
APPEARANCES
For Petitioner: R. David Jackson, Esquire
Kevin S. Hennessy, Esquire Lewis, Longman & Walker, P.A. 1001 Third Avenue West, Suite 670
Bradenton, Florida 34205-7848
Edwin A. Steinmeyer, Esquire Lewis, Longman & Walker, P.A. 2600 Centennial Place, Suite 100
Tallahassee, Florida 32308-0572
For Respondent: Steven F. Ferst, Esquire
Jason M. Hand, Esquire
Florida Department of Education
325 West Gaines Street, Suite 1244 Tallahassee, Florida 32399-0400
STATEMENT OF THE ISSUES
The issues in this case are:
Whether computer software purchases by the Charlotte County School District (District or Petitioner) in fiscal year 2008-09, paid for with capital outlay millage funds or interest earned on capital outlay millage funds, were authorized equipment purchases under the version of section 1011.71(2)(d),
Florida Statutes (2008), existing at the time of the purchases;1
Whether interest earnings on capital outlay millage proceeds are subject to the same expenditure restrictions as the millage proceeds; and
Whether the Department of Education's (Department or Respondent) position that the District violated the expenditure restrictions in section 1011.71(2) is impermissibly based on an unadopted rule. See § 120.57(1)(e), Fla. Stat. (2010).
PRELIMINARY STATEMENT
Based on audit findings of the Florida Auditor General (Auditor General), the Department notified the District that the District had violated the expenditure restrictions in section 1011.71(2) and was required to take corrective action. The District requested an administrative hearing involving disputed issues of material fact, and the Department referred the matter to the Division of Administrative Hearings (DOAH).
The final hearing was initially set for November 1 and 2, 2010, and discovery ensued. On October 6, 2010, the Department filed a motion to relinquish jurisdiction, asserting that there were no disputed issues of material fact. The Department also served, and later filed, a motion for attorney's fees.2/ On October 11, 2010, the District moved to amend its petition to allege additional disputed issues of material fact and additional grounds, identified in discovery, for contesting the Department's initial determination. At the same time, Petitioner filed an agreed motion for continuance to allow the parties to conduct additional discovery, and the motion was granted. In a subsequent telephonic motion hearing, the undersigned denied Respondent's motion to relinquish jurisdiction and granted Petitioner's motion to amend its petition. The final hearing on the amended petition was rescheduled for February 16 and 18, 2011.
The parties entered into a pre-hearing stipulation in which they admitted certain facts, which are incorporated in the Findings of Fact below to the extent relevant. In addition, the parties agreed to the admissibility of certain documents denominated as joint exhibits.
At the final hearing, Joint Exhibits 1 through 13, 14a through 14o, 15, and 16 were received into evidence. Petitioner presented the testimony of Gregory Griner, the District's chief
financial officer (CFO). Petitioner's Exhibits 1 through 12, 14a through 14g, 15a through 15h, 16, and 17 were received into evidence. Respondent presented the testimony of two witnesses: Linda Champion, the Department's deputy commissioner for finance and operations, who was accepted as an expert in school board accounting and fiscal reporting; and Gregory Centers, the Auditor General's Office's audit manager over school boards.
Respondent's Exhibits 1 through 6 were received into evidence. Official recognition was taken of sections 1010.01 and 1011.09; section 236.25, Florida Statutes (1988 Supp.); and Florida Administrative Code Rules 6A-1.001, 6A-1.002, and 6A-1.004.
At the close of the hearing, the parties agreed to file their proposed recommended orders within 15 days after the filing of the transcript. The two-volume Transcript was filed on March 2 and 23, 2011, respectively. The parties timely filed their Proposed Recommended Orders, which have been considered in the preparation of this Recommended Order.
FINDINGS OF FACT
The District constitutes the unit for the control, organization, and administration of all public schools in Charlotte County, Florida.
The Department is an agency of the State of Florida responsible for ensuring a uniform, efficient, safe, secure, and high-quality system of free public schools that allows students
to obtain a high-quality education. The Department's responsibilities include administering the Florida K-20 Education Code (Education Code) set forth in chapters 1000 through 1013, Florida Statutes.
The Auditor General is appointed by the Legislature pursuant to Article III, section 2 of the Florida Constitution, and section 11.42, Florida Statutes, to audit public records as prescribed by law. The Auditor General's statutory responsibilities include conducting audits of the financial statements of district school boards.
In March 2010, the Auditor General issued its audit report on the District's financial statements for fiscal year 2008-09. The audit report, designated Report No. 2010-136, was entitled, "Financial, Operational, and Federal Single Audit for the Fiscal Year Ended June 30, 2009" (Auditor General Report).
Finding No. 1 of the Auditor General Report included a finding that purchases by the District of instructional computer software, software licenses, and Microsoft Office licenses (collectively, the disputed software purchases) were not "specifically included" as allowable uses of capital outlay millage funds under the provisions of section 1011.71(2), Florida Statutes (2009).3/ The Auditor General noted that District personnel had expressed their belief that these expenditures were allowable uses of capital outlay millage
proceeds under section 1011.71, but the Auditor General found that "[t]hese expenditures totaling $137,315 represent questioned costs."
The Auditor General's finding ended by recommending that the District "should document to the [Department] the allowability of the instructional software, software licenses, and Microsoft Office licenses, or these costs should be restored to the Capital Projects-Local Capital Improvement Fund."
The next step was for the Department to review the Auditor General Report. As described by the Department in an April 23, 2010, letter to the District, the Department "is responsible for reviewing reports of the Auditor General on audits of the school districts and following up on findings to determine what corrective action . . . is required to be taken."4/ With regard to the audit finding calling into question the disputed software purchases, the Department stated:
Computer software was not a listed use of Section 1011.71(2), F.S., until the 2009 Legislature amended Section 1011.71(2)(d), F.S., effective July 1, 2008, regarding computer software to include only, ". . . enterprise resource software applications that are classified as capital assets in accordance with definitions of the Governmental Accounting Standards Board, have a useful life of at least 5 years, and are used to support district-wide administration or state mandated reporting requirements." The items stated in the finding do not meet this definition.
The Department's April 23, 2010, letter informed the District that the District had violated the expenditure restrictions of section 1011.71 and that the District was required to restore $137,315 to the District's Local Capital Improvement Fund by June 30, 2010, or else the Department would impose a penalty of a dollar-for-dollar reduction of the District's allocation of state FEFP funds. This letter did not advise the District of its right to an administrative hearing to challenge the Department's determination.
The District wrote back to the Department on June 2, 2010, to point out, as had been explained to the Auditor General, that although the disputed software purchases were recorded in the Local Capital Improvement Fund, no actual ad valorem tax collections were used for the disputed purchases. Instead, the expenditures were made using interest earned on the tax collections. The District argued that the expenditure restrictions in section 1011.71(2) only applied to actual ad valorem tax dollars collected from District taxpayers and did not extend to interest earned on the tax proceeds.
The Department responded to the District in a June 18, 2010, letter. The Department rejected the District's argument for unrestricted interest and provided references to the authority relied on, including a 1988 Attorney General opinion concluding that interest earned by a school district on proceeds
from the tax levied, pursuant to the predecessor to section 1011.71(2), was subject to the same usage restrictions as the tax proceeds themselves. The Department reiterated that the District was required to take corrective action to avoid the penalty of reduced FEFP funding, but still provided no clear point of entry advising of the District's right to an administrative hearing.
On June 29, 2010, the District restored the questioned amount to its Local Capital Improvement Fund, but explicitly did so under protest and without waiving its rights to dispute the legal validity and factual accuracy of the Department's determination regarding the disputed software purchases. The District asked the Department to provide a clear point of entry so that the District could challenge the Department's determination in an administrative hearing.
In completing the financial transfer required by the Department, the District was adversely affected because the transfer converted general operating funds to more restricted funds limited in their use to specified categories of capital outlays, pursuant to the capital outlay millage statute. The transfer reduced the amount of general operating funds available for the District to spend, with a greater degree of flexibility, on educational programs or other expenditures.
On July 7, 2010, the Department wrote to the District to acknowledge that the District had taken the required corrective action. As requested, the Department provided notice in this letter of the District's right to petition for an administrative hearing pursuant to sections 120.569 and 120.57, Florida Statutes (2010).
On July 30, 2010, the District timely filed its Petition for Formal Administrative Hearing to challenge the Department's determination regarding the District's disputed software purchases. This petition generally challenged the determination of unauthorized expenditures and specifically raised the issue of whether interest earned on capital outlay millage proceeds levied, pursuant to section 1011.71(2), was subject to the same restrictions as the millage proceeds themselves. The petition alleged a disputed issue of material fact with regard to the source of funds used by the District for the disputed software purchases.
On August 13, 2010, the Department referred this matter to DOAH. The Department acknowledged that the District sought an administrative hearing pursuant to sections 120.569 and 120.57(1), and the Department asked DOAH to assign an Administrative Law Judge to conduct the requested hearing.
On October 11, 2010, the District sought leave to file an amended petition to set forth additional grounds identified
in discovery for challenging the Department's determination. The District was allowed to file its amended petition, which asserted disputed issues of material fact regarding the Department's prior practice and interpretation of section 1011.71(2), and how that statute had been applied to other
school districts using capital outlay millage funds for computer software purchases. The amended petition alleged that the Department had changed its interpretation of section 1011.71(2) in this regard and that the new interpretation that the Department was attempting to apply to the District constituted an unadopted rule.
Evolution of Section 1011.71(2)
To put this controversy into proper context, it is necessary to consider the statutory framework, as it has evolved, before moving on to a review of the Department's rules, interpretations, and prior practice applying the statute.
Section 1011.71 implements Article VII, section 9 of the Florida Constitution, by providing authority for school districts to levy ad valorem taxes. Subsection (2) of the statute gives school districts discretionary authority to levy ad valorem taxes against the taxable value in their districts for school purposes. The authorized amount of this tax has varied from time to time--it was two mills for many years, reduced to 1.75 mills in 2008, and reduced further to 1.5 mills
in 2009. This tax is commonly referred to as the "two-mill levy," still, even though it is no longer a two-mill levy.
The tax levied must not only be "for school purposes," but it must also be for the purpose of funding items categorized in the statute. In general, the categories involve capital outlays, such as new construction or remodeling projects, acquisition of school buses by purchase or lease, and, the category subject to much attention in this case, the "purchase, lease-purchase, or lease of new and replacement equipment" (the "equipment" category). § 1011.71(2)(d). That the authorized expenditures are, by and large, capital outlays, explains another commonly used description of this tax--"capital outlay millage"--even though section 1011.71(2) does not expressly limit expenditures to capital outlays or capital projects.
Section 1011.71 is frequently amended. It was amended multiple times in 2002; in 2003 and 2004; multiple times in 2006; in 2007, 2008, 2009, 2010, and, again, in 2011. Before the substantial reorganization, amendment, and renumbering of the Education Code in 2002, the same statute existed as section 236.25, Florida Statutes (2001), and its history shows similar frequent amendments.
However, the particular category of authorized expenditure at issue in this case--the "equipment" category--has been relatively stable over the years, until 2009, when it was
first amended in a special session in the beginning of the year and was amended again in 2010. Before 2009, the "equipment" category in section 1011.71(2)(d) remained essentially unchanged.
An additional limitation, external to the "equipment" category and the other authorized expenditure categories listed in section 1011.71(2), was imposed for a period of time before 2007, in what was then subsection (5) of the same statute. This additional limitation, in effect for a number of years until it was repealed in mid-2007, restricted expenditures of capital outlay millage proceeds for equipment and other categories listed in subsection (2) by imposing the additional requirement that the expenditure had to be "directly related to the delivery of student instruction[.]" See, e.g., §1011.71(5), Fla. Stat. (2005). Thus, while the "equipment" category remained unchanged in subsection (2), the additional restriction imposed for a time by subsection (5) limited authorized equipment expenditures to only those purchases of equipment that were directly related to the delivery of student instruction.
When the District went through its budget process in 2008 and when the District spent $105,815 later in 2008 for most of the disputed software purchases, the version of section 1011.71(2) on the books provided:
In addition to the maximum millage levy as provided in subsection (1), each school board may levy not more than 1.75 mills against the taxable value for school purposes for district schools, including charter schools at the discretion of the school board, to fund:
New construction and remodeling projects, as set forth in s. 1013.64(3)(b) and (6)(b) and included in the district's educational plant survey pursuant to s. 1013.31, without regard to prioritization, sites and site improvement or expansion to new sites, existing sites, auxiliary facilities, athletic facilities, or ancillary facilities.
Maintenance, renovation, and repair of existing school plants or of leased facilities to correct deficiencies pursuant to s. 1013.15(2).
The purchase, lease-purchase, or lease of school buses.
The purchase, lease-purchase, or lease of new and replacement equipment.
Payments for educational facilities and sites due under a lease-purchase agreement entered into by a district school board pursuant to s. 1003.02(1)(f) or
s. 1013.15(2), not exceeding, in the aggregate, an amount equal to three-fourths of the proceeds from the millage levied by a district school board pursuant to this subsection.
Payment of loans approved pursuant to ss. 1011.14 and 1011.15.
Payment of costs directly related to complying with state and federal environmental statutes, rules, and regulations governing school facilities.
Payment of costs of leasing relocatable educational facilities, of renting or leasing educational facilities and sites pursuant to s. 1013.15(2), or of renting or leasing buildings or space within existing buildings pursuant to
s. 1013.15(4).
Payment of the cost of school buses when a school district contracts with a private entity to provide student transportation services if the district meets the requirements of this paragraph.
The district's contract must require that the private entity purchase, lease- purchase, or lease, and operate and maintain, one or more school buses of a specific type and size that meet the requirements of s. 1006.25.
Each such school bus must be used for the daily transportation of public school students in the manner required by the school district.
Annual payment for each such school bus may not exceed 10 percent of the purchase price of the state pool bid.
The proposed expenditure of the funds for this purpose must have been included in the district school board's notice of proposed tax for school capital outlay as provided in s. 200.065(10).
Payment of the cost of the opening day collection for the library media center of a new school. (Emphasis added).
A special legislative session in the beginning of 2009 resulted in the passage of chapter 2009-3, Laws of Florida. This law included two sections pertinent to the "equipment"
category. In section 12, section 1011.71(2)(d) was amended as follows:
Effective July 1, 2008, the purchase, lease- purchase, or lease of new and replacement equipment, and enterprise resource software applications that are classified as capital assets in accordance with definitions of the Governmental Accounting Standards Board, have a useful life of at least 5 years, and are used to support district-wide administration or state mandated reporting requirements.
§ 12, Ch. 2009-3, Laws of Fla. In addition, section 16 of this special session law provided:
If the Commissioner of Education determines that a school district acted in good faith, he or she may waive the equal- dollar reduction [of FEFP funding] required in s. 1011.71(5), Florida Statutes, . . . for the audit findings for the 2006-2007 fiscal year related to the purchase of software.
This section shall take effect upon this act becoming a law, but only if the School Board of Miami-Dade County dismisses the lawsuit entitled “School Board of Miami- Dade County v. State of Florida Board of Education,” case number 09-00507CA20, which is pending in the Circuit Court of the Eleventh Judicial Circuit.
§ 16, Ch. 2009-3, Laws of Fla.
Chapter 2009-3 became law in late February 2009, prior to the District's expenditure of $31,500 on March 31, 2009, for the remainder of the disputed software purchases.
Meanwhile, in the 2009 regular session, section 1011.71(2)(d), as amended in the earlier special session, was not amended further. However, pertinent to that provision, the following language appeared in section 34 of chapter 2009-59, Laws of Florida:
If the Commissioner of Education determines that a school district acted in good faith, he or she may waive the equal-dollar reduction, required in s. 1011.71, Florida Statutes, for audit findings during the 2007-2008 fiscal year which were related to the purchase of software.
Chapter 2009-59 was adopted in May 2009, with an effective date of July 1, 2009.
In 2010, section 1011.71(2)(d) was again amended to provide:
The purchase, lease-purchase, or lease of new and replacement equipment; computer hardware, including electronic hardware and other hardware devices necessary for gaining access to or enhancing the use of electronic content and resources or to facilitate the access to and the use of a school district’s electronic learning management system pursuant to s. 1006.281, excluding software other than the operating system necessary to operate the hardware or device; and enterprise resource software applications that are classified as capital assets in accordance with definitions of the Governmental Accounting Standards Board, have a useful life of at least 5 years, and are used to support districtwide administration or state-mandated reporting requirements.
The 2010 amendment did not include any provision similar to the two 2009 laws that would apply a similar grace period or extend the prior laws' "good faith" provisions to audit findings for the 2008-2009 fiscal year related to computer software. See Ch. 2010-154, Laws of Fla.
Department's Rules, Interpretations, and Prior Practice
Like all school districts, the District is required to prepare and maintain its financial records and accounts in accordance with the uniform classification of accounts required to be promulgated by the Department in rules. § 1010.01, Fla. Stat.
The Department has established the requisite uniform system of accounts in a publication known as the "Red Book." The 2001 edition of the Red Book is the most recent version promulgated and incorporated by reference as a rule. Fla. Admin. Code R. 6A-1.001. The Red Book is generally consistent with generally accepted accounting principles and the accounting standards for government accounting adopted by the Government Accounting Standards Board.
The accounting structure of the Red Book is premised on fund, revenue, and expenditure classifications, to which account code numbers are assigned for uniformity and ease of reporting.
The Red Book provides the following definition of a "fund":
A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.
The Red Book provides a "basic fund structure for Florida School districts [that] follows generally accepted accounting principles for governments." This fund structure utilizes three broad categories of funds: governmental funds, proprietary funds, and fiduciary funds. Within each fund category, there may be multiple funds established as needed to comport with the definition of "fund," that is, when it is appropriate to segregate financial resources for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.
The main fund type used by the District is the governmental fund. The District's governmental funds include a general fund, several debt service funds, and several capital projects funds.
The "general fund" (account code 100) is described in the Red Book as the fund used to account for all financial resources, except those required to be accounted for in another fund. Therefore, a variety of revenue sources are accounted for under the broad umbrella of the general fund.
The Red Book establishes account codes for a number of different debt service funds and capital projects funds. Germane to this case is capital projects fund 370, called the District or Local Capital Improvement Fund, for capital projects financed through the two-mill levy authorized by section
1011.71(2). Fund 370 is unique in that it is actually described by citation to the capital outlay millage statute (section 236.25(2), section 1011.71(2)'s predecessor, in effect when the Red Book was promulgated in 2001).
The Red Book also establishes revenue account codes used to identify revenue sources that are accounted for by fund. Revenue account code 3413 is used for capital outlay millage proceeds. As the two-mill levy is collected, the revenues are identified by the revenue account code (3413), and those revenues are accounted for in fund 370.
If capital outlay millage proceeds are not immediately spent, they are invested in some kind of interest-bearing vehicle. The resulting interest revenue would be assigned a different revenue account code than the revenue code used for
the tax proceeds to identify the revenue source as interest. Revenue account code 3430 is the umbrella code that can be used for all interest and profits on investments, or the more precise revenue codes with the same three-digit prefix can be used to pinpoint the revenue source more specifically. For example, revenue account code 3431 is specific to interest earnings on investments, while 3432 is for gain on sale of investments.
Therefore, interest earnings would be identified by revenue code 3430 or 3431.
While all interest earnings receive the same revenue codes (either 3430 or 3431), the interest must be recorded in and credited to the fund whose proceeds generated the interest. For example, interest earnings on revenues that are accounted for in the general fund are assigned an interest revenue code and recorded in the general fund. Interest earnings on capital outlay millage proceeds are assigned an interest revenue code and recorded in the Local Capital Improvement Fund, fund 370.
The Red Book also establishes account codes for expenditures. As with revenue sources, expenditures are assigned account codes and allocated to the fund from which the expenditure was made.
Expenditures are classified in the Red Book by object and function. Object classifications indicate the type of goods or services obtained as a result of a specific expenditure.
Function classifications indicate the overall purpose or objective of an expenditure (e.g., instruction).
The Red Book groups together series of object codes, with each series representing like kinds of expenditures. The 100s are used for salaries (account code 110 is for administrators; 120 is for classroom teachers, and so forth). The 200s are used for employee benefits; the 300s are used for purchased services; the 400s are used for energy services; the 500s are used for materials and supplies; the 600s are used for capital outlays; the 700s to 800s are used for "other expenses"; and the 900s are used for transfers between funds.
The Red Book gives the following description of capital outlay expenditures in the 600 object code series:
These are expenditures for land or existing buildings, improvements of grounds, construction of buildings, additions to buildings, remodeling of buildings, initial equipment, and additional equipment.
This description resembles the categories of authorized expenditures of capital outlay millage funds listed in section 1011.71(2).
The capital outlay object code titles in the 600 series, broken down by categories and subcategories, are as follows:
610 Library Books
620 Audio-Visual Materials (Non-Consumable) 621 Capitalized AV Materials
622 Noncapitalized AV Materials
630 Buildings and Fixed Equipment 640 Furniture, Fixtures and Equipment
641 Capitalized Furniture, Fixtures and Equipment
642 Noncapitalized Furniture, Fixtures and Equipment
643 Capitalized Computer Hardware 644 Noncapitalized Computer Hardware
650 | Motor Vehicles |
651 Buses | |
660 | 652 Other Motor Vehicles Land |
670 | Improvements Other Than Buildings |
680 | Remodeling and Renovations |
690 | Computer Software |
691 Capitalized Software
692 Noncapitalized Software
The Red Book contains a description of each capital outlay object code in the 600 series. Germane to this case--and a focal point for both parties--were the detailed descriptions given for object code 643 (capitalized computer hardware) and object code 690 (computer software). The Red Book describes these two categories as follows:
643 Capitalized Computer Hardware. A computer is a digital, electronic device capable of reading, processing and executing software designed for administrative and instructional uses. The term computer includes not only the main processing unit,
but also expansion cards, upgrade devices and peripherals such as: operating system software (ROM based), installable memory, processor upgrades, video boards, sound cards, network connectivity boards or cards, other expansion and upgrade devices, monitors, printers, scanners, internal and external hard drives, floppy disk drives, CD-ROM drives, plotters, modems, computer projection devices, adaptive hardware and other peripherals that attach to the main unit.
690 Computer Software. The set of programs and associated documentation used to control the operation of a computer. The two primary types of software are (1) systems software which includes operating systems, programming languages, and utility programs; and (2) application programs that are designed to perform tasks such as data base management, spreadsheet functions, instruction, and word processing.
Generally, when software is acquired with computer hardware for a single purchase price and relative value of the software is material to the total cost, it is necessary to allocate the acquisition cost to both the software and hardware in accordance with generally accepted accounting principles for lump-sum or basket purchases. However, systems software acquired in conjunction with computer hardware may be recorded as part of the equipment purchase (no allocation of cost to the software) when the software will not be removed, transferred, or in any way separated from the original hardware. In the event that software which was originally recorded as equipment is subsequently removed, transferred, or detached from the original hardware, it would be necessary to retroactively allocate a portion of the original cost, if material, to the software for proper recording of the removal or transfer. (Emphasis in original.)
The Department's position is that even before the "equipment" category in section 1011.71(2)(d) was amended in 2009 and 2010 to ultimately specify which computer-related purchases are included and which are excluded, the Red Book's detailed descriptions of computer hardware and computer software made clear to school districts that only certain kinds of computer-related purchases can be considered "equipment"--only computer hardware and operating systems software purchased with the hardware and treated by the school district as part of a single equipment purchase. Therefore, according to the Department's witness, the Department's consistent position has been that purchases of computer hardware are allowable under the "equipment" category and that purchases of operating systems software along with computer hardware, when those software purchases are treated as part of the equipment purchase, are allowable under the "equipment" category in section 1011.71(2)(d). However, according to the Department's witness, purchases of application software, whether used for instruction or for administration, were never allowable under the "equipment" category in section 1011.71(2)(d) until the 2009 Legislature created a limited authorization for enterprise resource software applications. In addition, according to the Department's witness, purchases of systems software not made at the same time as purchases of the computer hardware or systems
software purchased at the same time as computer hardware, but not treated as part of a single equipment purchase under account code 643, were not allowable under the "equipment" category in section 1011.71(2)(d). This, according to the Department, was always clear from the Red Book descriptions of account codes 643 and 690.
The District counters the Department's explanation of how the Red Book categories define the contours of permissible capital outlay millage expenditures for computer-related "equipment" by pointing out that it was the Department's choice to adopt object code 690 for computer software as part of the 600 capital outlay series. The District points to the Red Book's description of the entire 600 series of capital outlays to broadly include expenditures for land, building construction, renovation, and equipment, strikingly similar to the categories in section 1011.71(2). The District makes a good point.
The Department's response to the District's good point is that the account codes in the Red Book, including those in the 600 "capital outlay" series, apply across-the-board to all kinds of funds, revenues, and expenditures and not just to section 1011.71(2). While true enough, the Department's counterpoint is inconsistent with its original point that the Red Book account descriptions have provided the necessary guidance all along, and well before the 2009 and 2010
legislative changes, to put school districts on notice as to which computer-related expenditures are permissible using capital outlay millage funds.
The District reasonably understood computer software purchases to be permissible under the pre-2009 version of section 1011.71(2), in part, because the Red Book itself classified computer software, account code 690, as part of the 600 series of "capital outlay" expenditures. Looking at the Red Book's description of the types of expenditures provided for in the 600 series, the only expenditure category that computer software could possibly fall under is "equipment."
The District's reasonable impression that computer software purchases were permissible expenditures under section 1011.71(2)(d) was reinforced by the way the Department used the Red Book account codes in Department-created forms that school districts are required to use to annually report their summary budgets and their actual financial results to the Department.
Each year, school districts prepare their budgets, going through a local process by which tentative budgets are first adopted and then aired publicly through notice and hearings, before the budgets are finalized. After the budgets are finalized through the local process, school districts are required to prepare and electronically transmit their summary budgets to the Department on an electronic spreadsheet form
created by the Department. The Department's summary budget form, designated Form ESE-139, is promulgated as a rule. Fla. Admin. Code R. 6A-1.002(3).
The summary budget form utilizes the Red Book account codes to summarize a district's planned revenues, by revenue code, allocated to the appropriate funds, by fund code, in which those revenues must be recorded. The summary budget form similarly uses the Red Book account codes to summarize a district's planned expenditures, by object code, allocated to the appropriate funds from which those expenditures will be made.
Section VII of the summary budget form shows the budgeted revenues and expenditures for capital projects funds. The columns of this section are labeled for each capital projects fund account code set forth in the Red Book. For example, the column for fund 370 is labeled in the Department's form as "370 Cap Improvements Sect 1011.71(2) FS." There are two parts to the rows of the capital projects section: the first part lists revenues by revenue code and title; the second part lists expenditures by object code and title.
The District presented evidence that it utilized the Department-prepared summary budget form ESE 139 to annually report its summary budget to the Department. In the capital projects section of each annual summary budget from 2005-06
through 2008-09, the District reported its estimated capital outlay millage revenue in the box where the row labeled for revenue code 3413 (District Local Capital Improvement Tax) meets the column for "[fund] 370 Cap Improvements Sect 1011.71(2), FS." And in the second part of the capital projects section of each annual summary budget from 2005-06 through 2008-09, the District reported its budgeted expenditures for computer software in the box where the row labeled for object code 690, computer software, meets the column "370 Cap Improvements Sect 1011.71(2), FS." Thus, the District's annual summary budgets, which were prepared on the Department's form and submitted to the Department each August in 2005, 2006, 2007, and 2008, plainly announced the District's plans to spend capital outlay millage proceeds (revenue source 3413, in fund 370) on computer software (capital outlay object code 690, from fund 370).
The Department does not dispute that it created the summary budget form and labeled the rows and columns that allowed the District to budget capital outlay millage funds for planned expenditures of computer software. The Department's own form provides a specific row for school districts to budget expenditures for computer software (capital outlay object
code 690). That row carries across to meet with a specific column labeled by the Department, "[Fund] 370 Cap Improvements Sect 1011.71(2) FS." Nor does the Department dispute that the
District has reported annually for years that it planned to purchase computer software (object code 690) using revenues in fund 370, the local capital improvement fund specifically designated for section 1011.71(2) proceeds.
The Department contends that it does not scrutinize these summary budget forms to ensure compliance with expenditure restrictions. That may be true, even though, by rule, the Department is required to "review" school district budgets.
Fla. Admin. Code R. 6A-1.004 ("Commissioner to Review Budgets. The Commissioner shall establish procedures and prepare plans so that the budget is reviewed by authorized representatives in his or her office."). However, the Department's failure to actually review school district summary budgets does not mean that school districts are aware that the Department does not conduct reviews as its rule requires. Moreover, the Department's failure to review summary budgets in any meaningful way does take away from the fact that the Department created and labeled the summary budget form in a way that represented to school districts permissible categories of expenditures from capital outlay millage proceeds.
The District was not alone in taking the Department up on the invitation in Form ESE 139 to budget for computer software expenditures using capital outlay millage proceeds collected pursuant to section 1011.71(2). The District
presented evidence of summary budgets submitted annually by other school districts, from 2001-02 through 2008-09, in which other school districts budgeted for expenditures in the box where the row provided for object code 690 (computer software) meets the column provided for fund 370, the Local Capital Improvements Fund used for proceeds of the section 1011.71(2) two-mill levy.
The Department contends that the fact that summary budgets of other school districts show planned expenditures of capital outlay millage funds from fund 370 for computer software under object code 690, does not establish that those school districts planned unauthorized expenditures. Instead, the Department argues that it is possible that all of the budgeted expenditures for computer software using code 690 might have been for allowable systems software, and not for unauthorized application software.
However, this argument ignores the testimony of the Department's own witness that capital outlay millage proceeds could only be used to purchase systems software when that software was purchased together with computer hardware and allocated by the school district to a single purchase of equipment. The Red Book would require that a single purchase of computer hardware with systems software be assigned object
code 643, not object code 690. In other words, according to the
Department's witness, capital outlay millage proceeds can only be used to purchase systems software classified under object code 643; capital outlay millage proceeds could not be used for system software if the school district did not elect to treat the software purchase as part of the computer hardware equipment purchase. And yet, the Department's own form was created to allow school districts to budget for such expenditures.
In addition, the Department's contention was contradicted by the testimony of the Department's own witness, designated as an expert in school board accounting and fiscal reporting, that as a practical matter, account code 690 is used for application software and not for systems software.
Ms. Champion testified that as far as she is aware, districts purchasing systems software, at the same time as they purchase computer hardware, choose to treat the software purchase as part of a single purchase of equipment under object code 643, rather than to separately allocate the costs between the computer hardware (code 643) and the systems software (code 690):
Q: My question is, if the operating software is to be part of the hardware, that's contemplated under object code 643; correct?
A: Yes. . . .
Q: Under 690 you testified that there is a distinction set out there for application programs and -- it says systems software or operating software?
A: That's true.
Q: So why would systems software or operating software have to be addressed under 690 if it's covered under 643?
A: I believe that--again, this is allowing operating software that's purchased in conjunction with hardware to be considered equipment, or there is the option to allocate costs on that initial purchase between the operating software and the hardware if the district chose to do that. I'm not aware of a district ever having done that . . .
Q: Is it the department's position that if operating software was being purchased independently of computer hardware, it could be purchased using the section 1011.71(2) levy?
A: I don't believe it could be . . . Q: It could be or couldn't be?
A: Could not be.
Q: Okay. And why is that?
A: Operating software is considered, when purchased with the hardware, is considered equipment, in essence, and therefore, meets the allowability for use of the 1011.71(2) funds, because that is specifically authorized in that statute.
A: Then why have a separate object code for computer software here?
Q: Well, we do have an object code for application software, and that's I think, it's used for application software. (Emphasis added.)
Tr. 287-289.
Even if the Department's position was that capital outlay millage expenditures for systems software classified under object code 690 is permissible, while such expenditures for applications software is not permissible, the fact remains that the Department chose to create the Red Book expenditure categories, and the Department chose how those expenditure categories are used in the summary budget form. If the Department's budget form allows school districts to budget for expenditures of capital outlay millage proceeds for computer software (object code 690), as it does, then the Department has communicated to the school districts that such expenditures, for the software described in object code 690, are permissible. If only some of those purchases were permissible (i.e., systems software, the type which the Department's witness admitted is not as a practical matter reported under expenditure code 690), then the Department should not have grouped both kinds of software under the same object code. If the Department required a breakdown of computer software purchases by type of software to determine whether an expenditure was a permissible use of capital outlay millage funds, then the Department's account codes and forms needed to provide that breakdown to avoid the misimpression otherwise created.
The District also presented evidence that after the close of each fiscal year, it is required to prepare its
financial reports showing the actual results for the year, with statements of revenues, expenditures, and changes in fund balance, by fund, on a Department-prepared form to transmit to the Department for its review. This form, designated Department form ESE 348 and promulgated in rule 6A-1.0071(2), is similar to the summary budget form, but with even greater detail. The similarity is that the financial report form was created by the Department to provide, in the capital projects section, specific rows with account codes and titles, including account code 690 for computer software; that specific row carries across to meet up with a column labeled by the Department as "[Fund] 370 Cap.
Improvements Sec. 1011.71(2)."
The District put into evidence its actual ESE 348 reports to the Department for each year from 2005-06 through 2008-09. Each year, the District's completed ESE 348 forms reported to the Department that the District had used capital outlay millage funds from fund 370 to purchase computer software (object code 690).
Just as with the summary budget form, the Department does not dispute that it created financial reporting form
ESE 348 with labeled rows and columns that allow school districts, including the District, to report expenditures of capital outlay millage funds to purchase computer software. However, just as with the summary budget form, the Department
contends that it does not scrutinize these financial reports to ensure compliance with expenditure restrictions.
The District also presented evidence that other school districts annually reported on their forms ESE 348 that they had purchased computer software, designated under object code 690, using section 1011.71(2) capital outlay millage proceeds from fund 370. The Department downplayed the significance of this pattern in the same manner as for the summary budgets.
The Department offered no explanation for why its own forms were created to allow school districts to fill in capital outlay millage fund columns to report budgeted and actual expenditures for computer software, if that was not a permissible use of capital outlay millage funds. If the Department wanted to make clear to school districts that certain categories of expenditures were not allowed under a certain fund, it could have blocked off those expenditure codes from being a permissible entry under the particular fund.
The District also presented evidence that as part of the required annual local budget process, the District complies with "Truth in Millage" (TRIM) requirements to locally publish notices of the District's plans to levy the capital outlay ad valorem tax on the assessed value within the district. The notices are prepared in a required format, using large print, with a description of how the District is planning to spend the
tax proceeds, by category of planned expenditure. The District presented evidence that each year in late July, the District followed the TRIM requirements by publishing the required notices of its plans to levy and use capital outlay millage proceeds. Each of these annual notices, back to July 2000, informed the District taxpayers that the District planned to levy the two-mill tax to use for specified categories of purchases, including the following category and subcategories:
New and Replacement Equipment:
Furniture and equipment for school and ancillary locations
Computer software for school and ancillary locations
The Department accurately points out that the TRIM requirements and the details of the required notices are administered and overseen by a different state agency: the Department of Revenue. However, the District is required to submit its TRIM notices to the Department along with its summary budgets each year, and there is no mistaking the parallel between the categories of expenditures shown on the TRIM notices and the categories of permissible expenditures in section 1011.71(2). With the enlarged print required to meet TRIM notice specifications, anyone glancing at the District's notices would see that the District was under the impression that computer software was a permissible item to purchase using
capital outlay millage proceeds, as the District annually informed the District taxpayers. Indeed, the District's usage of "equipment" as a broad umbrella category, which includes a narrower subcategory of "furniture and equipment," as well as the subcategory "computer software," parallels the Department's own Red Book account codes in the 600 series.
Other evidence, besides summary budget and financial reporting, confirmed that the District was not alone in its understanding that expenditures for computer software described in object code 690 were permissible capital outlay expenditures for equipment pursuant to section 1011.71(2)(d). The view shared by other districts was shown by submittals in evidence from school districts seeking to qualify for the "good faith" provisions in the 2009 legislation. These "good faith" provisions allowed the Department to waive the penalty of reduced FEFP funding for school districts acting in good faith regarding "computer software" expenditures flagged by the Auditor General in audits for the 2006-07 and 2007-08 fiscal years.5/
For example, in February 2008, the Auditor General issued an audit report for the Duval County District School Board (Duval) for the 2006-07 fiscal year. An audit finding questioned Duval's purchase of "instructional software" using capital outlay millage proceeds. Just as in the audit at issue
in this case, the Auditor General pointed out that "instruction software is not specifically included as an allowable use of capital outlay millage proceeds." Duval initially responded to the Department's demand for corrective action by transferring the amount spent on instructional software from the district's general operating account to the Local Capital Improvement Fund
(370) to replenish that fund. However, after the 2009 legislative special session, the school district wrote to the Department on March 13, 2009, to request permission to transfer the money back from the Local Capital Improvement Fund to the operating account, under the "good faith" waiver provision. Duval asserted that it acted in "good faith" using capital outlay millage funds to purchase instructional software, "as it had done in previous fiscal years." Duval pointed to the support for its actions in the Red Book:
[I]n 1991, when the [Department] created a separate "object code" for software, it was coded in the 600 series. The 600 object series, as defined by Red Book, is titled Capital Outlay. Furthermore, the District's determination that software is equipment is evidenced by a specific line item in its annual TRIM notice under how it will spend Capital Outlay funds. The District has included software in its TRIM notice since 1995.
The Department agreed that Duval demonstrated good faith in treating its instructional software purchase as equipment. Accordingly, the Department authorized the re-transfer of funds
back from the operating account to Capital Improvement Fund 370 and waived the penalty of reduced FEFP funding.
As another example, the School District of Lee County (Lee) sought and received a "good faith" waiver to allow its expenditure of capital outlay millage funds for enterprise resource planning (ERP) software applications during fiscal year 2007-08, which was the fiscal year preceding the effective date of the 2009 specific statutory authorization for such expenditures. Lee demonstrated its good faith to the Department's satisfaction with the following in a letter dated June 19, 2009:
When we made the purchase of the ERP software from capital outlay millage funds, we believed that we were acting within the statute. Our financial departments conferred with our board attorney, our bond attorney, and other districts across the state that had use the same funding source for similar projects. All were of the opinion the expenditure was allowed by statute. In addition, our capital outlay millage advertisement (required by law) and our Five Year work plan had the purchase of the software listed in each, as we were confident that our purchase was lawful and acceptable.
We were quite surprised at the auditor's findings. We acted in good faith, as we believed our expenditures were compliant with the law.
Again, the Department agreed, and pursuant to the "'good faith' rationale cited in" Lee's letter, the Department waived the penalty of reduced FEFP funding.
The Department contends that the "equipment" category was always clear in section 1011.71(2)(d) and was always consistently applied by the Auditor General and by the Department, even before the series of amendments in 2009 and 2010 to delineate what was permissible and what was not permissible. This effort to establish clarity and consistency by the Department and the Auditor General failed.
At times, the witnesses for the Department and the Auditor General tried to support the proposition that they have always interpreted and applied the capital outlay expenditure statute in a simple and straightforward manner: if something was not "specifically" listed in the statute, it was not allowed. That simple assertion was simply not true.
For example, both witnesses for the Department and the Auditor General admit that they have always considered computer hardware purchases to be an allowable use of capital outlay millage proceeds, even though the capital outlay millage statute never specifically listed computer hardware until 2010. The Department considers computer hardware to be equipment, consistent with its Red Book accounting that treats computer hardware as a subcategory of equipment, or more accurately, as a
subcategory of the account called "furniture, fixtures, and equipment." Indeed, furniture is another example of an item that is not specifically listed in the statute, but is considered authorized under the "equipment" category. In short, because the undefined statutory term "equipment" has a broad common meaning, it is necessary to interpret the specifically listed item to determine which specific items are equipment and which are not. See testimony of Department's witness, paragraph 59, supra ("Operating software . . . when purchased
with computer hardware, is considered equipment, in essence, and therefore meets the allowability for use of 1011.71(2) funds, because that is specifically authorized by statute.") (Emphasis added).
The Department's witness made clear that through its practice, the Department has made a number of distinctions, based on such issues as functionality and usage, to determine if items are equipment or not. Yet, before the 2009 and 2010 amendments, these distinctions were not hinted at in the statute. For example, as explained above, the Department has always considered certain computer systems software to be equipment on the rationale that such software is necessary to make the equipment functional. If functionality were the actual test, one could certainly quibble with how far that logic goes for computer-related items. Is a computer really functional
without application software that enables a computer to be used for spreadsheets or word processing or electronic mail or anything else computers are actually used for? Would such application software be considered necessary to make the computer functional as a practical matter? But putting that debate to the side, the real point is that this test is a very different test than the "specifically-listed" test given lip service by both the Department and the Auditor General's witness.
Indeed, the evidence showed that both the Auditor General and the Department were inconsistent in how broadly or narrowly they interpreted "equipment" as used in section 1011.71(2)(d) before the 2009 statutory amendment.
The unrebutted testimony of the District's CFO was that school districts have been purchasing computer software since the mid-1990s to keep up with technology and the use of that technology for districts' information management and state reporting requirements. That testimony was corroborated by the Duval "good faith" letter quoted in paragraph 69 above. However, the earliest example in evidence of an Auditor General Report questioning a computer-related expenditure from capital outlay millage funds was for Highlands County District School Board (Highlands) for its fiscal year 2002-03. At that time, section 1011.71(5) contained the additional restriction that
expenditures of capital outlay millage proceeds for equipment and other items listed in (2), had to be directly related to the delivery of student instruction. The Auditor General questioned a number of capital outlay millage expenditures, because they were for "purposes not directly related to the delivery of student instruction." The audit finding listed the questioned expenditures under the heading "Expenditures Not Directly Related to Student Instruction." One expenditure category listed in this table was "MIS Computers (hardware and software) and Other Equipment" (emphasis added). The Auditor General's witness confirmed that the only reason this expenditure category was questioned was because Highlands did not document that these capital outlay millage purchases were directly related to student instruction.
The Department reviewed the Auditor General's Report and issued a letter to Highlands to require additional documentation or corrective action. Regarding the questioned purchases of "MIS Computer (hardware and software) and Other Equipment" totaling $103,480.47, the Department stated:
The information provided is not adequate to make a determination on this item. While the purchases were detailed, their use in providing delivery of instruction is unknown. Some portion of these expenditures probably could be identified with delivery of instruction as required by the statute versus ineligible expenditures for
administrative and support uses. (Emphasis added.)
The Department did not suggest that the purchase of computer software would be ineligible in any event, even if the software was purchased for student instruction. Thus, the implication of Respondent's determination on Highlands' 2003 Audit Report was that computer software purchases would be authorized expenditures if used in the delivery of student instruction, but would be unauthorized expenditures if used for administration and support.
The Department's witness attempted to explain the Highlands audit finding and action thereon as only addressing the failure of the cited expenditures to pass the new "directly related to student instruction" test then in place in section 1011.71(5) and that those expenditures would still have to pass the test of whether they were authorized equipment purchases under section 1011.71(2)(d). The Department's attempted explanation is not credible. Neither the Auditor General Report, nor the Department, in addressing the Highlands 2003 expenditures, raised the threshold question of whether the questioned expenditures would have been unauthorized under the "equipment" category regardless of whether they were for student instruction. Indeed, the Auditor General's audit report described the category of questioned expenditures as being for
"MIS Computers (hardware and software) and Other Equipment" (emphasis added), suggesting that at least in March 2004, in the context of addressing allowable capital outlay millage expenditures, the Auditor General considered computer hardware and software to be types of equipment. The Department agreed with the Auditor General's finding that questioned only whether the expenditures were directly related to the delivery of student instruction.
No evidence was presented of any audit finding questioning computer-related purchases for the next three fiscal years, ending in 2004, 2005, and 2006, despite evidence that such purchases were being budgeted and made from capital outlay millage proceeds by the District and other school districts and reported to the Department both before and after the expenditures occurred. The next documented example of an Auditor General Report questioning a school district's computer- related expenditures of capital outlay millage proceeds was not until the Miami-Dade County District School Board (Miami-Dade) Audit Report for fiscal year ended June 30, 2007. In this report, as for Highlands four years earlier, the Auditor General's findings stated that Miami-Dade's use of capital outlay millage funds to purchase computer software for Informational Technology Services did not appear allowable as the purchase of equipment directly related to the delivery of
student instruction as required by section 1011.71(5)(a), Florida Statutes (2006). The report also noted that section 1011.71(5) had been repealed, effective June 19, 2007, which was after the questioned expenditures occurred.
The Department's witness acknowledged that the computer software purchased by Miami-Dade was enterprise resource software applications intended for district-wide use and that it was Miami-Dade's vigorous opposition to the disallowance and vigorous lobbying campaign that were instrumental in the passage in the 2009 special session of the amendment to section 1011.71(2)(d) to expressly add authorization for the purchase of enterprise resource software applications. This fact is further confirmed by the legislative grace period that would, in effect, allow computer software purchases questioned in audit findings for fiscal year 2006-07, which grace period would only take effect after Miami-Dade dismissed its lawsuit against the Department. §§ 12, 13,
Ch. 2009-3, Laws of Fla.
The Department asserts that the amended section 1011.71(2)(d), resulting from the 2009 special legislative session, contained a completely new category of authorized expenditure, one that had not been previously authorized under the general "equipment" category. However, in a 2000 legal opinion interpreting a related statute, the Department approved
a proposal by St. John's County School District (St. John's) to get a loan to finance the purchase of a computer system and related components, because the described purchase "constitutes a purchase of equipment for educational purposes" pursuant to section 237.161(1), Florida Statutes (2000).
The statute interpreted in the 2000 legal opinion, section 237.161(1), was renumbered section 1011.14(1) as part of the 2002 Education Code reorganization. Then and now, this statute authorized a school district to obtain loans for certain expenditures, similar to the list of authorized expenditures in section 1011.71(2), such as for construction of educational facilities or the purchase of school buses, land, or equipment for educational purposes. The relationship between these two statutes is that capital outlay millage proceeds may be used, pursuant to section 1011.71(2)(f), to repay loans approved pursuant to what is now section 1011.14.
By liberally construing the Education Code (as required, then and now, by section 1000.01(2) and its predecessor), the Department's general counsel was able to conclude that the purchase of the computer system and related components, including enterprise resource software,6/ software licenses, and computer hardware constituted the purchase of equipment for educational purposes for which St. John's could obtain a loan pursuant to what is now section 1011.14(1). As
provided by what is now section 1011.71(2)(f), the loan to purchase that "equipment" could then be repaid from capital outlay millage proceeds.
A number of school districts have pointed to the Department's 2000 legal opinion issued to St. John's to show the Department's appropriately broad prior interpretation of "equipment." One such example in evidence is from Lee County school district, for the 2007-08 audit findings for which it ultimately obtained a "good-faith" penalty waiver.
In a candid admission by the Auditor General's witness, this whole murky area of computer-related purchases under the "equipment" category in section 1011.71(2)(d) "started to be clarified" by the Legislature in 2009. Following the adoption of the "enterprise resource software" addition to the equipment category in the 2009 special session, two things occurred that should have happened a long time ago.
The first thing that should have happened a long time ago, perhaps in a different form such as an amendment to the Red Book, was that the Department communicated to the school districts how the Department interpreted the newly amended "equipment" category in section 1011.71(2)(d), Florida Statutes (2009). In August 2009, the Department issued a memorandum to all school district financial officers regarding the new enterprise resource software addition to the "equipment"
category. The Department offered the school districts a definition that it had "developed" for what was included in, and what was excluded from, the new statutory term:
The following definition of "enterprise resource software" has been developed to assist school districts in complying with the amended statute:
Qualified software consists of programs and applications used district-wide for administration of the school district or used to comply with state-mandated reporting requirements. Such software includes software used district-wide to account and coordinate for resources and information related to items such as financial data, human resource information, student and asset records, but does not include instructional software. Qualified software must be classified as a capital asset in accordance with Governmental Accounting Standards Board (GASB) Statement No. 5, and have a useful life of at least 5 years determined in accord with Florida Department of Education GASB 34 Guide. (Emphasis added.)
As a follow-up to the August 2009 memorandum, the second noteworthy event, long overdue, was a discussion held in September 2009 between an accountant in the Auditor General's Office and a Department representative, in which the Department representative cataloged which computer-related purchases the Department believed were included in, and which were excluded from, the newly amended "equipment" category. This discussion was memorialized in a September 28, 2009, memorandum, in which the accountant with the Auditor General's Office summarized his
"productive conversation" with a Department representative regarding computer-related purchases from capital outlay millage funds. The memorandum was directed to Mr. Centers, the audit manager over school boards, who then forwarded the memorandum to many others in the Auditor General's Office. The summary of the September 2009 "productive conversation" was as follows:
FDOE defines allowable [enterprise resource software] as a system that fulfills state-mandated reporting requirements (AFR, FTE surveys, etc.) comprised of Financial, HR, and student records (see attached) [copy of August 2009 Department memo to districts].
Instructional s/ware is not allowable (ex. Math and Reading s/ware); Only software installed on computer to make operating system run (ex. Windows, DOS) are [sic] allowable. Microsoft Office, Photoshop, etc. are not allowable. Putting these types of programs on a server as opposed to individual computers does not make the maintenance allowable.
Software to operate routers and maintain the network as a whole, including anti-virus and firewall software, is allowable.
However, as indicated above, maintaining non-[enterprise resource] application software installed on the network is not allowable.
Some computer maintenance is allowable:
Centralized computer repair shop, in which computers are hooked up and repaired (ex. Replace hard drive, install more memory) is allowable.
Maintenance of [enterprise resource software] is allowable.
Installation or maintenance of non- [enterprise resource] software is not allowable (ex. Install MS Office).
Data base maintenance or other data management is unallowable.
Technical assistance and/or trouble- shooting for end users involving network connectivity, e-mail, or other software issues is unallowable.
The interpretations set forth in the Department's August 9, 2009, definition that it "developed" and communicated by memorandum to the school districts, plus the Department's clarification to the Auditor General's Office detailing which computer-related purchases were authorized capital outlay millage expenditures and which were not authorized expenditures, did not appear in statute or rule until the 2010 legislative amendment to section 1011.71(2)(d).
Interest Earnings
By pre-hearing stipulation, the parties agreed that during the fiscal year ending June 30, 2009, the District earned sufficient interest in its Local Capital Improvement Fund to pay for the disputed software purchases and that the District used the interest earnings from its Local Capital Improvement Fund to pay for the disputed software purchases.
The Red Book provides as follows with respect to interest earnings:
Interest or profit should be recorded in the fund that produced the earnings unless specified otherwise by bond resolution or legal documents.
This Red Book rule is consistent with the statutory requirement in section 1011.09(1), which states that "[a] district school board shall credit interest or profits on investments in the specific budgeted fund, as defined by the accounting system required by s. 1010.01, that produced the earnings unless otherwise authorized by law or rules of the State Board of Education."
The District did not identify any law or rule that "otherwise authorizes" interest earned on capital outlay millage proceeds to be credited anywhere other than in the fund that produced the earnings, i.e., in fund 370.
The District's position is that this general requirement that interest be "recorded in" and "credited to" the fund that produced the earnings is satisfied by the accounting function of recording interest in the fund whose revenues produced the interest. The District asserts that this requirement does not mean that the use of interest, recorded in the proper fund, is actually restricted in the same manner that the fund is restricted.
The District's petition asserted that there was a dispute regarding the Department's practice in permitting
unrestricted use of interest proceeds by other school districts. However, the District presented no evidence that the Department has permitted any other school district to use interest earned on capital outlay millage proceeds in a manner that was inconsistent with the expenditure restrictions for the capital outlay millage proceeds themselves.
The District did present evidence that the Department allowed unrestricted use of interest earned on certain categories of revenue in school districts' general funds, despite restrictions in the districts' usage of the those categories of revenue. The difference, though, is that this practice is limited to categories of revenue that are permitted to be pooled and accounted for, in accordance with the Red Book, in the residual "general fund." The District has not shown that the Department's practice in this regard is applicable to the circumstances here, such that it would constitute precedent that would apply to the District's case.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties and the subject matter of this proceeding. §§ 120.569 and 120.57(1), Fla. Stat. (2010).
The initial action taken by the Department that gave rise to this proceeding was the Department's determinations, pursuant to section 1011.71(5), that the District violated the
expenditure provisions of section 1011.71(2) by making unauthorized computer software purchases and that the District was required to take corrective action to avoid a penalty. The Department is asserting the affirmative of the issue and, thus, bears the burden of proving that the District's computer software purchases were unauthorized so as to justify the corrective action that the Department took. See, e.g., Southpointe Pharmacy v. Dep't of HRS, 596 So. 2d 106 (Fla. 1st DCA 1992) (Department had the burden of proving allegation of Medicaid overpayments to pharmacy as identified in audit findings); Charlotte Cnty. Sch. Bd. v. Dep't of Educ.,
Case No. 98-3218 (Fla. DOAH April 13, 1999), RO ¶ 47 ("Absent the Audit Report and the action taken by Respondent . . ., Petitioner would have retained the funds in dispute over the classification[.] Respondent has the affirmative of the issue to show that Petitioner is entitled to zero funding[.]").7/ See
generally Fla. Dep't of Transp. v. J.W.C. Co., Inc., 396 So. 2d 778 (Fla. 1st DCA 1981) (burden of proof is generally on the party asserting the affirmative of the issue).8/
This proceeding is an enforcement proceeding in the sense that the Department is exercising authority to enforce the expenditure restrictions in section 1011.71(2), which the Department is contending that the District violated. However, the Department is not seeking to invoke the penalty provision of
section 1011.71(5), because the Department already imposed the corrective action it requires for a violation, subject to being reversed if a final order ultimately determines that no violation occurred. Thus, the standard of proof is by a preponderance of the evidence. § 120.57(1)(j), Fla. Stat. (2010). Accord Colonial Cut-Rate Drugs, Inc. v. Agency for
Health Care Admin., Case No. 03-1547MPI (Fla. DOAH March 14, 2005; Fla. AHCA May 10, 2005), Rec. Order at pgs. 65-71,
74 (Medicaid overpayment case, distinguishing between agency's burden to prove by a preponderance of the evidence the overpayment for which recoupment is sought and the agency's higher burden of proof, by clear and convincing evidence, as to the sanction sought to be imposed).
The District has standing, as the party specifically named in the Department's initial determination, whose substantial interests are being determined in this proceeding.
§ 120.52(13)(a). The Department's initial determination was that the District had violated the expenditure restrictions in section 1011.71(2), and the Department required the District to take corrective action to avoid a Department-imposed penalty of reduced FEFP funding. That plainly is a determination of the District's substantial interests, and the District is entitled to an administrative hearing. The Department does not dispute
the District's standing, and when prompted, notified the District of its right to an administrative hearing.
As a general proposition, deference should be paid to an administrative agency's construction of its rules and of the statutes administered by the agency, unless the agency has clearly drawn an erroneous impression or the construction is unauthorized. P.W. Ventures, Inc. v. Nichols, 533 So. 2d 281,
283 (Fla. 1988). However, the general rule of deference gives way when the following rule of interpretation applies: "When a statute imposes a penalty, any doubt as to its meaning must be resolved in favor of strict construction so that those covered by the statute have clear notice of what conduct the statute proscribes." City of Miami Beach v. Galbut, 626 So. 2d 192, 194 (Fla. 1993).
As characterized by the Department itself in its April 23, 2011, letter notifying the District of its initial agency action, section 1011.71(5) provides for imposition of "a penalty" in the form of reduced state FEFP funding against a violating district. That the Department gave the District the option to avoid the penalty by taking immediate corrective action does not change the nature of the statute as one that imposes a penalty for statutory violations. School districts should not be made to guess at unclear expenditure restrictions to which they must conform their conduct and be subjected to or
threatened by penalties if their guess is later proven to be wrong.
Computer Software as "Equipment"
Prior to the 2009 special legislative session, section 1011.71(2)(d) authorized school districts to spend capital outlay millage funds for school purposes to purchase new and replacement equipment. No statutory definition was provided for the term "equipment." Moreover, the Department was not given express rulemaking authority to interpret the terms used in section 1011.71, and the Department did not adopt rules specifically interpreting the statutory terms as used in section 1011.71(2).
Absent statutory or rule definitions, the word "equipment" in section 1011.71(2)(d) should be accorded its plain and ordinary meaning. See, e.g., Humana, Inc. v. Dep't of Banking & Fin., 603 So. 2d 672, 673 (Fla. 1st DCA 1992). As commonly defined in dictionaries, the word "equipment" has a broad meaning. This point was made to the Department by Miami- Dade in arguing that its purchase of computer software costing over one million dollars was an allowable expenditure of capital outlay millage proceeds for "equipment," given the common broad meaning of that term:
Equipment is defined in Black's Law Dictionary as "the articles or implements used for a specific purpose or activity."
Definitions of equipment by other sources are equally broad. In the current education environment, a functioning, secure computer is a tool or equipment that is vital to the delivery of student instruction.
The common definition of equipment from a variety of sources is broad, similar to the Black's Law Dictionary definition. For example, the Merriam-Webster online dictionary definition of "equipment" includes "the set of articles or physical resources serving to equip a person or thing; the implements used in an operation or activity." See www.meriam-webster.com/dictionary/
equipment. Dictionary.com provides this similar definition: "Anything kept, furnished, or provided for a specific purpose." Dictionary.reference.com/browse/equipment. The online Oxford Dictionaries give the following definitions: "The necessary items for a particular purpose; the process of supplying someone or something with the items necessary for a particular purpose." Oxforddictionaries.com/definition/equipment?region=us.
Looking only at section 1011.71(2)(d), in the form existing when the District made most of the disputed software purchases, the undefined term "equipment," construed according to its broad common meaning, would support inclusion of application software as a necessary item to allow a computer to be used for particular purposes. For example, Microsoft Office application software, when used for instructional purposes, enables the use of the computer for the purpose of teaching
students Excel spreadsheet usage. That same software, when used to support state-mandated reporting, enables the use of the computer for the purpose of completing the Department's forms to report summary budgets and financial results, which are required to be completed electronically on Excel spreadsheets and transmitted electronically to the Department. Software applications enable a computer to be used for district-wide administrative purposes, such as human resources activities, payroll, and accounting (as recognized in the 2000 Department legal opinion issued to St. John's).
The Department contends that the Red Book distinction between systems software and application software in expenditure account code 690 made clear to the school districts that in 2008, the Department considered certain operating software to be "equipment" for purposes of section 1011.71(2)(d), but that application software was something else. Yet when the District noted that object code 690 falls under the umbrella of the 600 series of object codes for "capital outlays" and described as expenditures for land, construction of buildings, renovation, and equipment--a description strikingly similar to the core provisions of section 1011.71(2)--the Department reversed course to say that the so-called "capital outlay" object code accounts do not purport to define authorized expenditures of capital
outlay millage funds, because these codes apply to all types of revenue sources.
The Department itself chose to link the Red Book expenditure codes in the 600 series to the question of which expenditures are authorized under the "equipment" category in the capital outlay millage statute. There was no other written guidance to the school districts before 2009. As found above, the Red Book expenditure code descriptions in the 600 series would reasonably lead a school district to believe that purchases of computer software, whether systems software or application software and whether for administration or for instruction, were permissible expenditures of capital outlay millage proceeds under the "equipment" category.
As also set forth in the Findings of Fact above, the Department had no answer to the additional point that its own forms, promulgated as rules, specifically allowed a school district to budget for expenditures of capital outlay millage proceeds collected pursuant to section 1011.71(2)(d) for purchases of "computer software" designated by expenditure
code 690. Expenditure code 690 expressly includes application software; indeed, according to the Department's witness, application software is essentially all that expenditure code 690 is used for.
The Department's interpretation of the pre-2009 "equipment" category, distinguishing between permissible and impermissible computer software depending on such nuances as timing of purchase, functionality, and usage was not supported in statutory language or in the Department's rules/manuals/forms in existence in 2008. Before the 2009 legislation expressly added one kind of computer software applications to the "equipment" category, there was no other guidance available to school districts. The Red Book account descriptions and the Department's forms for submitting budgets and financial reports provided the only departmental guidance as to when computer software purchases were permissible expenditures falling generally within the broad "equipment" capital outlay category.
The 2009 special legislative session provided the first written expression that purchases of computer software not meeting the new description of enterprise resource software applications were arguably excluded by implication.
The 2009 amendment to section 1011.71(2)(d), expressly adding enterprise resource software applications to the "equipment" category was also expressly made retroactive to July 1, 2008. Thus, without a doubt, the 2009 law's authorization of enterprise resource software applications applies retroactively to authorize such purchases made between July 2008 and February 2009, when the 2009 law took effect.
The statutory grace periods codified in the 2009 special session law and subsequent general session law demonstrate a legislative recognition that the capital outlay millage law was less than clear with respect to allowability of computer software. As such, a school district could have, in "good faith," been under the impression that computer software purchases of all kinds were permissible under the "equipment" category before it was amended.
While the 2009 amendment to section 1011.71(2)(d) may exclude, by implication, non-enterprise resource software applications, the express retroactivity of that amendment's authorization for one kind of expenditure cannot give rise to implied retroactivity of the new exclusion arguably created by implication. It was not until the 2009 amendment became law and the words of the amended section 1011.71(2)(d) were known that it became arguably clear that there was an exclusion by implication of the new language. This conclusion is simply an application of the general proposition that substantive changes in the law are presumed to operate prospectively only, absent clear legislative expression that a change in law is intended to operate retroactively. See, e.g., Memorial Hospital-West Volusia, Inc. v. News-Journal Corp., 784 So. 2d 438, 440 (Fla. 2001). This avoids the potential implication of constitutional
rights that would override an indiscriminate interpretation of a new law as retroactive. Id.
The Department argues that the 2009 amendment to section 1011.71(2)(d) shows that computer software (of any kind, presumably) was never included within the meaning of the term "equipment," because the new express authorization for enterprise resource software applications was added to the "equipment" category, following the words "equipment,
and . . .," instead of "equipment, including . . .". According to the Department, if the word "equipment" always included software, then the phrase "enterprise resource software applications" would have been preceded by the word "including."
However, the Department admittedly did not interpret the pre-2009 law that way. According to the Department, its Red Book rule allowed certain kinds of computer software, depending on timing of purchase, cost-allocation treatment, and functionality distinctions to be considered "equipment." And the Department's 2000 legal opinion approved the purchase of enterprise resource software applications and software licenses as part of an overall purchase of a computer system and components that the Department concluded "constitutes equipment for educational purposes." In this proceeding, it is impossible to arrive at an appropriate interpretation of section
1011.71(2)(d) before the 2009 amendment without considering the Department's rules, interpretations, and private practice.
The Department's argument, based on the phrasing of the 2009 amendment, is also refuted by the 2010 amendment to section 1011.71(2)(d). In 2010, when the Legislature chose to more specifically delineate which computer-related purchases were allowable uses of the two-mill levy and which were not, the Legislature made the "equipment" category even longer, adding computer hardware and the systems software that the Department said it has also always considered "equipment." Although these additions to the "equipment" category were placed after the word "equipment," they were not linked by the word "including" (e.g., "equipment, including computer hardware and systems software"). While such a linkage would have certainly made it very clear that computer hardware and systems software were considered "equipment," the fact remains that the Legislature placed these additional items in the "equipment" category, just as it did the previous year for enterprise resource software applications. Though not the neatest phrasing, the amended and expanded "equipment" category suggests that the Legislature was attempting to delineate which computer-related purchases could be considered "equipment" and which should not be considered "equipment."
The 2010 amendment also emphatically refutes the argument that section 1011.71(2) requires precise, all- inclusive, express listing of each item for which expenditures of capital outlay millage funds are authorized. As noted, the 2010 law, for the first time, expressly added computer hardware as separate from "equipment," but in the same category (section 1011.71(2)(d)), even though computer hardware has always been assumed by all concerned to be included within "equipment." And the 2010 law, for the first time, expressly added a separate reference in section 1011.71(2)(d) to systems software, even though the Department believed that systems software was also always included within "equipment." The 2010 law, also for the first time, expressly added an exclusion for all other kinds of software besides the expressly authorized systems software and enterprise resource software applications.
The "equipment" category was decidedly unclear prior to 2009 when, in the words of the Auditor General's audit manager over school boards, the Legislature started to clarify the law. The 2010 amendment suggests that the focused amendment in 2009 designed to secure Miami-Dade's dismissal of a lawsuit against the Department was insufficient to clear up the ambiguities.
Before the 2009 amendment to section 1011.71(2)(d), the Department's rules, including the Red Book and the financial
reporting forms, categorized computer software expenditures as capital outlays and allowed for such expenditures to be reported from the capital outlay millage fund (fund number 370). An agency such as the Department is bound by its rules unless and until they are amended, or in this case, arguably altered by subsequent legislation in 2009. See, e.g., Boca Raton
Artificial Kidney Ctr., Inc. v. Dep't of HRS, 493 So. 2d 1055 (Fla. 1st DCA 1986) (reversing agency action that was inconsistent with the plain language of the agency's rule, rejecting agency's interpretation of the rule to comport with the agency's practice; "If, as HRS contends, the rule as it reads has proven impractical in operation, it can be amended pursuant to established rulemaking procedures. Absent such amendment, expedience cannot be permitted to dictate its terms." Id. at 1057).
As of 2008, apparently the only published agency determination that had a bearing on the issue of the proper interpretation of the "equipment" category was the 2000 Department legal opinion no. 00-07, published online at http://www.fldoe.org/ogc/opinions/2000/00-07.asp. This opinion, addressing a related statute that used the same term "equipment," supports a broad interpretation of the word "equipment" in the pre-2009 capital outlay millage statute to include the disputed software purchases. While the Department
argues that this legal opinion did not address the same statute at issue here, the Department acknowledged the express linkage of the two statutes. As such, it is appropriate to consider the interpretation of what is now section 1011.14(1) in determining the proper meaning of the pre-2009 version of section 1011.71(2)(d). See, e.g., Fla. Dep't of State v. Martin, 916 So. 2d 763, 768 (Fla. 2005) ("The doctrine of in pari materia is a principle of statutory construction that requires that statutes relating to the same subject or object be construed together to harmonize the statutes and to give effect to the Legislature's intent.").
Upon consideration of the law, rules, relevant precedent, and agency prior practice as of 2008, the Department has not met its burden of proving a violation of the expenditure restrictions in section 1011.71(2). In particular, as of 2008, the District reasonably considered the disputed software purchases to be authorized expenditures under the "equipment" category in section 1011.71(2)(d). Therefore, the required corrective action should be reversed as to the $105,815 spent by the District for disputed software purchases in 2008.
The same cannot be concluded as to the District's purchase of disputed software on March 31, 2009. The 2009 amendment to the "equipment" category to add express authorization for one type of software applications--enterprise
resource software applications--changed the meaning of section 1011.71(2)(d).9/ The express mention of one type of software applications gave rise to an implied exclusion for other types of software applications, through application of the principle of statutory interpretation that the express mention of one thing in a statute implies exclusion of the other. See P.W.
Ventures, 533 So. 2d at 283.
Based on the new implied exclusion of non-enterprise resource software applications that first appeared in statute in February 2009, the Department met its burden of proving that the District violated the capital outlay millage expenditure restrictions as to the $31,500 spent on disputed software purchases on March 31, 2009. Therefore, the required corrective action was justified with respect to that final purchase amount. Interest Earned on Capital Outlay Millage Proceeds
The District argues that all of its disputed software purchases were allowable, because they were made from interest earned on capital outlay millage proceeds. The District's legal argument is not persuasive.
Section 1011.09(1) provides:
A district school board shall credit interest or profit on investments to the specific budgeted fund, as defined by the accounting system required by s. 1010.01, that produced the earnings unless otherwise authorized by law or rules of the State Board of Education.
No law or rule was shown to "otherwise" authorize any different treatment of interest earned on investments of capital outlay millage proceeds in "specific budgeted fund" 370. Instead, the Red Book, incorporated by reference in rule 6A-1.001, is similar to the statute by providing that "[i]nterest or profit should be recorded in the fund that produced the earnings unless specified otherwise by bond resolution or legal documents."
The District argues that the statutory requirement to "credit" interest to the specific fund that produced the earnings, as well as the Red Book requirement that interest "be recorded in the fund that produced the earnings," are accounting requirements only, met by the act of recording and in no way limit the usage of the interest revenue that is recorded in a specific fund. As to usage restrictions, such as the expenditure restrictions imposed on capital outlay millage proceeds, the District argues that those statutory restrictions apply to only the millage proceeds themselves and do not extend to the interest earned on those proceeds.
The District is correct only insofar as it is technically and literally true that the words "credited" and "recorded" are different words from the word "used." No doubt, the statute and Red Book rule could have closed the small gap left open by the word choice by specifying that usage restrictions applicable to the fund also apply to the interest
credited to and recorded in that fund. However, considered in context, it must be concluded that the District's argument is an overly technical, literalistic interpretation of the words "credited" and "recorded" as being satisfied by the mere paper or electronic act of recordation.
There is no binding case law or Department precedent interpreting the statute or Red Book rule requirement for interest. The Department offers a 1988 Attorney General opinion, AGO 88-1 (Jan. 7, 1988), in which the Attorney General opined to the then-Auditor General that a district school board is not authorized to use interest earned on capital outlay millage proceeds for purposes other than the authorized purposes in the statute (at that time, section 236.25(2), Florida Statutes (1987)). The Attorney General relied on the general principle stated in the 1954 edition of C.J.S. on Taxation and in other Attorney General opinions "that interest accumulating on taxes deposited in a bank prior to distribution follows the taxes." This articulation implicitly equates "follows" with "is subject to the same usage restrictions as," without really explaining why.
Attorney General opinions are not binding authority, although they may be considered, if persuasive. Edney v. State, 3 So. 3d 1281, 1294 (Fla. 1st DCA 2009). The 1988 Attorney General opinion is not particularly persuasive.
However, the District failed to provide any authority to support any different interpretation of the statute and Red Book. While the Attorney General's opinion does not add anything to the analysis, the bottom line is that the Department reasonably interprets the statute and its Red Book rule regarding interest proceeds by providing substance and not merely form to the requirement that interest be "credited to" and "recorded in" the specific fund to which the earnings are attributed.
Where, as here, the Department has seen fit to require school districts to establish a specific fund for the ad valorem tax proceeds collected pursuant to the authority of section 1011.71(2), then the rule definition of "fund" in the Red Book comes into play in answering how the interest statute applies to the facts of this case. The capital outlay millage proceeds, together with the interest earned on those proceeds, must be credited to fund 370; the revenues in that single purpose fund are "segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations."
The District makes the argument that the tax proceeds themselves are the only funds expressly restricted by section 1011.71(2), so even though interest proceeds have to be recorded
in fund 370, that does not mean they have to be used the same way as the tax proceeds. That argument ignores the Red Book definition of fund, as applied to this particular single-purpose fund. The Red Book rule dictates that the tax proceeds, plus the interest earnings, are segregated for the purpose of carrying on specific activities or attaining certain objectives. Of necessity, those specific activities and objectives must be the expenditure restrictions in section 1011.71(2). The District's argument would only have some of the revenues segregated in the fund directed to those specific activities and objectives, while other revenues segregated in the same fund would not be used for the same purpose. That would be contrary to the definition of "fund."
The District would focus only on the last part of the "fund" definition--"in accordance with special regulations, limitations, or restrictions"--to circle back to the section 1011.71(2), which does not expressly extend the expenditure restrictions to interest earned on invested tax proceeds. But this argument is answered by the interest statute itself, section 1011.09(1). According to the interest statute, the question should not be whether section 1011.71(2) expressly extends the tax proceeds expenditure restrictions to interest earned on those tax proceeds; the question should be whether section 1011.71(2) provides an exception to the general rule by
stating that interest is not subject to the same restrictions as the tax proceeds.
The District points to the fact that there are other revenue sources which are restricted by statute in how the revenues are used and which are permitted by the Red Book rules to be recorded in a school district's general fund. When interest is earned on restricted revenue sources that are recorded in the general fund, the interest is also recorded in the general fund, but is not subject to the same usage restrictions as the revenue sources generating the interest, absent a specific statutory restriction on the use of such interest.
The Department acknowledges, but distinguishes, its practice in this regard. There are many revenue sources recorded in the residual "general fund," some restricted and some not. By definition, the general fund is the "fund used to account for all financial resources except those required to be accounted for in another fund." Thus, interest earned on the financial resources in the general fund is recorded in the general fund, which has no overall "purpose of carrying on specific activities or attaining certain objectives" other than the overall general objective of serving "educational purposes."
The difference for fund 370 is the nature of the fund itself as a single-purpose fund, unique in that it is defined by
reference to the capital outlay millage statute itself. The revenues required to be credited to fund 370 are the tax proceeds and interest earnings on those proceeds. By operation of the definition of "fund," the reason these tax and interest revenues are segregated in fund 370 is for the purpose of carrying on specific activities and achieving certain objectives in accordance with section 1011.71(2).
The District also makes the legal argument that section 1011.71(5) only authorizes the Department to penalize a district by an equal dollar reduction in FEFP funding when the district violates the expenditure provisions set forth in subsection (2). According to the District, this means that the Department may not penalize a district for a violation using the interest earned on capital outlay millage proceeds. This argument misses the point that by virtue of section 1011.09(1) and the Red Book, interest earned on capital outlay millage funds is subject to the expenditure provisions set forth in section 1011.71(2). This argument is really just a different way of arguing that interest earnings should not be subject to the same usage restrictions as the tax proceeds themselves. Unadopted Rule
By its Amended Petition, the District asserted that the Department's position in this proceeding is impermissibly
based on an unadopted rule. In this regard, section 120.57(1)(e)1., Florida Statutes (2010), provides:
An agency or an administrative law judge may not base agency action that determines the substantial interests of a party on an unadopted rule. The administrative law judge shall determine whether an agency statement constitutes an unadopted rule.
This subparagraph does not preclude application of adopted rules and applicable provisions of law to the facts. (Emphasis added.)
The inquiry under this statute is whether an agency statement meets the definition of a "rule," but has not been promulgated as such pursuant to section 120.54. Section 120.52(16) sets forth the following definition of a "rule":
“Rule” means each agency statement of general applicability that implements, interprets, or prescribes law or policy or describes the procedure or practice requirements of an agency and includes any form which imposes any requirement or solicits any information not specifically required by statute or by an existing rule.
The agency statement identified by the District as an "unadopted rule" is the Department's interpretation of the "equipment" category before section 1011.71(2)(d) was amended in 2009 and 2010. As explained above, the Department's position articulated in this case is that before the 2009 and 2010 amendments, the "equipment" category should be interpreted for computer software items in a complicated, nuanced fashion that
would differentiate between systems software and application software based on a debatable functionality test.
The Department does not contend that its position is not generally applicable; the Department would apply its nuanced interpretation to conclude that any school district purchasing software applications before the 2009 and 2010 statutory amendments would have violated the expenditure restrictions in section 1011.71(2), if capital outlay millage proceeds were used.
The Department failed to establish that its interpretation of the pre-2009 "equipment category" results from a straightforward application of the Red Book, an existing rule. Instead, the Department's position was shown to be inconsistent with the Red Book's capital outlay expenditure code 690 that includes both kinds of software. That inconsistency is heightened by the Department-created forms for budgeting and financial reporting that invite school districts to report computer software expenditures (code 690) to be budgeted from, and made from, the capital outlay millage fund 370.
The Department also argues that its interpretation, sought to be applied here to non-enterprise resource software applications, is supported by the 2009 amendment to section 1011.71(2). The Department's position is accepted in this regard, as previously determined, but only as applied to
determine the permissibility of expenditures in 2009. To the extent the Department's position is the basis for concluding that the District's 2009 disputed software purchases violated the expenditure restrictions in section 1011.71(2), then that position is not based on an unadopted rule. Instead, the Department's position as to the District's 2009 software purchase is based on application of the existing law to the facts, as allowed by section 120.57(1)(e).
However, the Department's position cannot be used as the basis for agency action with respect to the District's 2008 disputed software purchases, because such agency action would be based on an unadopted rule, not an application of the 2008 law or rules to the facts.
The Department's position, not promulgated as a rule and inconsistent with existing rules, would prescribe law or policy, if applied, to prohibit application software expenditures made in 2008, as if the 2009 statutory amendment had actually occurred in 2008 and was on the books. As previously determined, the implied exclusion borne of the 2009 law's express authorization for one type of software applications cannot be applied retroactively. To repeat: "When a statute imposes a penalty, any doubt as to its meaning must be resolved in favor of strict construction so that those covered by the statute have clear notice of what conduct the statute
proscribes." City of Miami Beach v. Galbut, 626 So. 2d 192, 194 (Fla. 1993). The District was entitled to clear notice of what expenditures were unauthorized under section 1011.71(2) at the time of the disputed purchases, so that the District had a chance to conform its conduct to what the law proscribed.
Therefore, a determination that the District's 2008 software purchases violated the expenditure restrictions of section 1011.71(2), would be impermissibly based on an unadopted rule.
Based upon the foregoing Findings of Fact and Conclusions of Law, it is
RECOMMENDED that a final order be entered by Respondent, Department of Education, determining as follows:
That Petitioner, Charlotte County School District, violated the expenditure restrictions in section 1011.71(2), Florida Statutes (2009), by spending $31,500 in 2009 for computer software and that the corrective action previously required by Respondent, and previously accomplished by Petitioner, was correct with respect to this $31,500 expenditure;
That Petitioner did not violate the expenditure restrictions in section 1011.71(2), Florida Statutes (2008), by spending $105,815 in 2008 for computer software;
That Petitioner is authorized to re-transfer $105,815 from its Local Capital Improvement Fund to its general operating account to reverse the corrective action previously required by Respondent, and previously accomplished by Petitioner, with respect to this $105,815 expenditure; and
That provided the recommendations in (2) and (3) above are adopted, Respondent's agency action is not based on an unadopted rule.
Jurisdiction is reserved for the purpose of ruling on Respondent's motion for attorney's fees.
DONE AND ENTERED this 16th day of June, 2011, in Tallahassee, Leon County, Florida.
S
ELIZABETH W. MCARTHUR
Administrative Law Judge
Division of Administrative Hearings The DeSoto Building
1230 Apalachee Parkway
Tallahassee, Florida 32399-3060
(850) 488-9675
Fax Filing (850) 921-6847 www.doah.state.fl.us
Filed with the Clerk of the Division of Administrative Hearings this 16th day of June, 2011.
ENDNOTES
1/ Unless otherwise indicated, all references to the Florida Statutes herein will be to the 2008 version, because that was the law on the books when most of the disputed software
purchases were made. Of the $137,315 spent for disputed software purchases, $105,815 was for purchases made in
August 2008. However, one purchase of disputed software in the amount of $31,500 was not made until March 31, 2009, after section 1011.71(2) was amended in an early 2009 special session. See §§ 12, 13, Ch. 2009-3, Laws of Fla. (2009).
2/ Respondent's Motion for Attorney's Fees will be resolved by separate order.
3/ The Auditor General Report referred to and applied section 1011.71(2) as amended in 2009, without noting that most of the questioned software purchases occurred in 2008 before the statute was amended.
4/ The Department's responsibility in this regard is not entirely clear from the statute, which provides in pertinent part (in language that has remained unchanged at all times relevant to this case): "Violations of the expenditure provisions in subsection (2) . . . shall result in an equal dollar reduction in the Florida Education Finance Program (FEFP) funds for the violating district in the fiscal year following the audit citation." § 1011.71(5). As noted, the Auditor General Report did not contain a "citation" or determination of a violation, but rather, simply questioned costs. Mr. Centers, the audit manager over school boards with the Auditor General's Office, was adamant that the Auditor General does not make violation determinations, but simply raises questions about items for the Department's consideration. The Department's representative testified just as clearly that the Department interprets the above-quoted statutory language to require that the Auditor General's audit report must first question expenditures under section 1011.71(2) before the Department has authority to find that a school district has violated section 1011.71(2) and to require that the violating district take corrective action to avoid the penalty of a reduced allocation of FEFP funds.
5/ The District put in evidence the Auditor General's annual audit reports for the District for the fiscal years 2002-03, 2003-04, 2004-05, 2005-06, 2006-07, and 2007-08. In each one of
these years, the District made substantial purchases of computer software using capital outlay millage funds according to the District's CFO and according to the District's ESE 348 reports to the Department. Yet the Auditor General never once questioned these costs. It was not until the Auditor General had the benefit of three new sources of information, which the
District did not have when it made disputed computer software purchases in 2008, to question the District's computer software purchases for the first time in the March 2010 Audit Report for the fiscal year ended June 30, 2009. These three new sources of information were: the 2009 statutory amendment; an August 2009 memorandum from the Department providing a newly developed definition of permissible and excluded expenditures; and a September 2009 memorandum from a CPA in the Auditor General's Office summarizing his "productive conversation" with a Department representative, yielding a detailed enumeration of permissible and excluded computer-related expenditures of capital outlay millage proceeds. See Findings of Fact ¶¶ 85-87.
6/ The Department's witness acknowledged that the 2000 legal opinion approved the purchase by St. John's of a computer system with components for use district-wide to support the school district's business, financial, payroll, personnel, and accounting matters, as well as handling student assessment and achievement information. As conceded by the Department in its Proposed Recommended Order, the computer "software purchased in that opinion was more like enterprise resource software[.]" However, the Department argued that the 2000 legal opinion only approved the purchase of operating software and did not also approve the purchase of the enterprise resource software. That distinction nowhere appears in the opinion, and the Department presented no evidence to support its argument that its 2000 legal opinion did not approve the entire contemplated computer system purchase, including the enterprise resource software.
Instead, the opinion sweepingly approved the entire proposed purchase, including the enterprise resource software, software licenses, and other ancillary items and services needed to make the described system work for the intended purposes, i.e., for human resources, payroll, accounting, and student assessment and achievement information management. As the opinion states, these ancillary items are necessary to make the computer system "fully functional."
7/ The Department's Final Order in Case No. 98-3218, adopted Recommended Order, paragraph 47, regarding the burden of proof. Case No. 98-3218, Final Order at 3 (Fla. Dep't of Ed., July 8, 1999).
8/ The Department asserted in its Proposed Recommended Order that the burden of proof should be on the District, because the District challenged the Department's initial action and, therefore, is the party asserting error. Of course, by the very nature of administrative proceedings under the Administrative
Procedure Act, the agency proposes to take action and offers an administrative hearing to contest the proposed action, while the non-agency party seeking to contest the proposed action requests an administrative hearing. Thus, the fact that the District challenged the Department's initial action does not answer the burden of proof question. For example, the Board of Medicine might propose to revoke a doctor's license and the doctor might assert error in the Board's allegations, but the Board plainly would have the burden of proof. Or, as in the Southpointe Pharmacy case, the agency charged with ensuring compliance with Medicaid regulations might assert that an audit showed that a pharmacy made unauthorized charges to the Medicaid program and had to pay back the overpayments. The agency had the burden of proof in that case, even though it was the pharmacy asserting error in the agency's audit and proposed action. So too here, the Department is acting in an enforcement role with respect to the expenditure restrictions in section 1011.71(2), by acting on audit findings to determine whether there is a violation, and, if so, to require corrective action or impose a penalty.
9/ The District notes that the 2009 amendment to the capital outlay millage statute, which expressly authorized expenditures for enterprise resource software applications, "did not . . . specify any other type of computer software that a school district was prohibited from purchasing with its two-mill levy." However, the District did not address whether the 2009 law gave rise to a new exclusion by implication as of when that amendment became law. Instead, the District's Proposed Recommended Order asserted that it made all of the disputed software purchases before the law was amended in 2009. That assertion is not correct. The 2009 amendment to the equipment category became law in February 2009, the month before the District made its final purchase of disputed software. Ch. 2009-3, Laws of Fla.
COPIES FURNISHED:
Dr. Eric J. Smith Commissioner of Education
Florida Department of Education Turlington Building, Suite 1514
325 West Gaines Street Tallahassee, Florida 32399-0400
Lois Tepper, Acting General Counsel Florida Department of Education Turlington Building, Suite 1244
325 West Gaines Street Tallahassee, Florida 32399-0400
Lynn Abbott, Agency Clerk Florida Department of Education Turlington Building, Suite 1514
325 West Gaines Street Tallahassee, Florida 32399-0400
Steven S. Ferst, Esquire Jason M. Hand, Esquire
Florida Department of Education
325 West Gaines Street, Suite 1244 Tallahassee, Florida 32399-0400
R. David Jackson, Esquire Kevin S. Hennessy, Esquire Lewis, Longman & Walker, P.A.
1001 Third Avenue, West, Suite 670
Bradenton, Florida 34205-7848
Edwin A. Steinmeyer, Esquire Lewis, Longman & Walker, P.A. 2600 Centennial Place, Suite 100
Tallahassee, Florida 32308-0572
NOTICE OF RIGHT TO SUBMIT EXCEPTIONS
All parties have the right to submit written exceptions within
15 days from the date of this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the Final Order in this case.
| Issue Date | Document | Summary |
|---|---|---|
| Sep. 09, 2011 | Agency Final Order | |
| Jun. 16, 2011 | Recommended Order | Respondent did not meet its burden of proving Petitioner's 2008 computer software purchases violated expenditure restrictions in section 1011.71(2), but did prove such a violation as to a 2009 purchase made after the law changed. |
