Questions of Interest - Highlights from the Loan Program Listserv Discussions


From Rob Groenendaal, March 29, 2007

Question: Many states have laws on the books that require public entities (CBO’s are not public entities but state agencies getting grants are) to invest funds in accordance with state laws governing such matters. For example, in many states, municipalities are required to collateralize certificates of deposits in excess of $100,000 at a single bank. Once the Dept of Education grants AFP funds to a state, do the funds become “state” funds or do they remain federal funds?

Answer: AFP funds do not become “state” funds; they remain federal funds. The Department of Education has a federal responsibility for AFP funds and an interest in ensuring these funds are spent in accordance with all federal requirements.

Question: If they become state funds, are they subject to state laws governing the investment of public funds (until contracted to a CBO)?

Answer: N/A.

Question: When a state in turn, contracts with a community-based organization, the AT Act says funds become the property of the CBO (Section 303(b)(6)).

Answer: According to section 303(b)(6)(B), “any interest or investment income that accrues on or derives from such funds after such funds have been placed under the control of the organization administering the alternative financing program, but before such funds are distributed for purposes of supporting the program, will be the property of the organization administering the program.” RSA interprets this provision to mean interest or investment income must become part of the rest of the permanent separate account along with the principal and be used in accordance with the AT Act.

Question: However, the state may terminate a CBO and take back funds, which, in turn, must be remitted to the Dept of Education.

Answer: If a state terminates its AFP, then the state must return the entire federal share of funds remaining in the permanent separate account, which includes any interest remitted to it on outstanding loans and investment income. Federal Register 70 (30 June 2005): 37794.

Question: If AFP funds are considered “state” funds until they are contracted to a CBO, are they still considered state funds once they are contracted to the CBO?

Answer: AFP funds are not considered “state” funds by the Department of Education.

Question: During the time period AFP funds are held by the non-profit CBO, are they subject to state public investment laws/requirements?

Answer: According to section 303(b)(5)(B), states must provide an assurance that: “if the organization administering the program invests funds within the account, the organization will invest funds in low-risk securities in which a regulated insurance company may invest under the law of the State;”

Question: If a state terminates a CBO, do remaining AFP funds again become “state” funds until they may be remitted back to the Dept of Ed (it is assumed a state may contract with another CBO rather than remit funds back to the Dept of Ed)?

Answer: As far as the Department of Education is concerned, AFP funds are federal funds. However, in a situation when a state terminates a CBO, a state may contract with another CBO rather than remit funds back to the Department of Education.