Sinking Fund Expenditures 101

As school officials plan for facility updates or major purchases, a common question often arises: can sinking fund revenue be used for this expense?

Sinking fund revenue, distinct from general fund money or bond proceeds, comes with its own set of statutory and voter-approved spending restrictions. Understanding these restrictions is crucial for complying with permissible uses and avoiding costly consequences.

Permissible Uses

A sinking fund tax, once authorized by voters, may only be used for purposes permitted under Revised School Code Section (RSC) 1212 and the approved ballot language. These revenues must be spent on eligible capital-type expenditures, not day-to-day operations.

RSC Section 1212 identifies the permissible uses of sinking fund dollars. Because the statute has been amended multiple times over the past decade, allowable uses depend on both the ballot language approved by voters, which often reflects the version of RSC Section 1212 in effect at the time of voter approval. Schools may only use sinking fund revenue for purposes that were approved by voters and consistent with RSC Section 1212.

For a sinking fund tax approved in 2026, permissible expenditures may include:

• purchasing real estate for school buildings;
• constructing or repairing school buildings;
• school security improvements (e.g., metal detectors, cameras, and entryway enhance-ments);
• instructional technology;
• student transportation vehicles (including buses);
• parts, supplies, and equipment used to maintain student transportation vehicles;
• trucks and vans (registered under the Michigan Vehicle Code) used to carry parts, equipment, and personnel for building maintenance; and
• parts, supplies, and equipment used to maintain those trucks and vans.

Sinking fund revenues generally may be used for repairs, but not maintenance. Maintenance is preventative and keeps assets in good working condition, while repairs are corrective and restore assets that are no longer in good condition. In addition, qualifying repairs typically must be completed by contracted service providers rather than school staff.

Treasury Guidance

The broad nature of RSC Section 1212 frequently generates questions as to permissible expenditures. In the early 2000s, the Michigan Department of Treasury issued guidance letters in response to specific inquiries about permissible expenditures. In some cases, Treasury guidance has resulted in decisions that may seem inconsistent with the general rule above.

These letters provide helpful insight into the nuances of sinking fund expenditures, which can be more complex than they initially appear. One notable example involves air conditioning. An air conditioning unit integrated into a school building (e.g., part of centralized controls) is generally a permissible expenditure, while a room or window air conditioner unit is considered “equipment” and therefore, is not permissible. Another example involves landscaping. Non-recurring landscaping may be permissible, while recurring landscaping, such as planting flowers or replacing wood chips, is not. Although this guidance is not binding and has not been updated to reflect recent statutory amendments, it can still offer useful direction for determining the eligibility of an expenditure.

Thrun Law Firm, in coordination with MSBO, has digitized and organized these letters, available on the MSBO website.

Beware of Penalties!

RSC Section 1212 requires sinking funds to be audited annually, and the audit report must be submitted to the Department of Treasury. If Treasury determines that the school has misused sinking funds, the school will be required to repay the amounts from general operating funds and may be prohibited from continuing to levy the sinking fund tax for its duration, potentially losing hundreds of thousands of dollars.

Remember that permissible uses of sinking fund revenues are limited, and schools cannot borrow from sinking fund revenues to pay operating purposes, such as covering payroll.

Given the severity of potential penalties, schools are strongly encouraged to consult with a Thrun finance attorney to address questions arise regarding permissible sinking fund expenditures.