Submission Date:
Question:
Is it legal for a library board to approve expenditures (without a referendum) for a capital project from its operating funds (or operating fund balance) to bridge a shortfall in bond monies earmarked for the construction of a new building?
Answer:
Before I address this question, let's parse the meaning of "legal."
There's "legal" as in: Is this specifically against the law?
There's "legal" as in: Is this not only not specifically against the law, but generally allowed?
And there's "legal" as in: Is this a cool thing to do?
What the member is proposing in their question is taking previously allocated dollars designated for the operating budget--the budget used to pay routine salaries, utilities, and other planned-for expenses--and applying it to other expenses (in this case, construction).
Is that specifically illegal? No.[1] While voters approve budget amounts, how the precise dollars are allocated for otherwise allowable expenses is within a library board's authority.[2]
Is that generally allowed? Yes. Boards of public libraries have the authority to set fiscal policies governing accounts, and it could be within the bounds of both bylaws and policy to responsibly re-allocate use of funds.
Is it a cool thing to do? Hard to say[3], but using allocated operational money as a bridge loan, unless there is a solid plan to replenish it, may not be optimal for a fiduciary. Meaning: unless there is a clear, actionable plan to ensure there are funds on hand for the operating line before there is a risk of an operating shortfall, it is not a cool thing to do.
This is where "how" something is done is just as important as "what." Some libraries have very conservative fiscal policies that would never allow such a transfer, even with a solid plan for timely replenishment (for instance, if a distribution was due from an endowment). Some libraries have more liberal policies, but also have trustees who would take a very dim view of such internal "borrowing." And some have policies and a practice of retaining reserve fund balances that could certainly allow for it.
To document that a board has properly considered and documented the "how," a board would need to show that at all times, their actions were 1) allowed under the bylaws; 2) per duly approved fiscal policy; 3) in the best interests of the library; and 4) that the plan of replenishment was rock-solid, not based on luck or untested hopes of fundraising.
Which brings us back to the first question: is it illegal?
If a governing board makes a financial decision to re-allocate use of certain funds that can't show the above four things[4], it risks recklessly incurring debt and liability, which may be a violation of the fiduciary duties of the trustees...meaning YES, it would be illegal.[5] To discern that, however, careful analysis of many factors would need to be made.
Fortunately, most governing boards do not engage in financial brinksmanship requiring that level of analysis.
Thank you for a thoughtful question.
[1] But...
[2] Obviously, if the money were "allocated" to buying the board a vacation beach house, or "allocated" to feed a gambling addiction, or "allocated" to supporting a political candidate, such an act would be illegal!
[3] Unless you have full access to the financial records and meeting minutes. With those, after many hours of analysis, it would be easier to say.
[4] Is it allowed under the bylaws, allowed by policy, best interests of the library, solid plan for fiscal stability.
[5] Not "go to jail"-type illegal, but "be removed as trustee and possibly face civil liability for certain types of debt"-type illegal.
