Cash Management

Subject:

Requested By: Phillip J. Kirk, Jr. Secretary Department of Human Resources

Questions: (1)

Are the following funds required to be expended and reported in accordance with the Executive Budget Act, G.S. 143-1 et seq.:

(a)

Personal funds of patients of institutions operated by the Division of Mental Health, Mental Retardation and Substance Abuse Services [Division of Mental Health] deposited in trust by or for the patient with the institution?

(b)

"Enterprise accounts" which are maintained by the Division of Vocational Rehabilitation Services [DVR] and comprised of proceeds from contracts for the provision of services by clients of State-owned and operated sheltered workshops?

(c)

"Student activity fees" assessed from students of Schools for the Deaf which are devoted exclusively to extracurricular activities for students and staff of the respective schools?

(d)

Private donations to institutions and programs owned and operated by Department of Human Resouces [DHR]?

(2)

Are the following funds required to be deposited with the State Treasurer pursuant to Chapter 147 of the North Carolina General Statutes, Article 6A, "Cash Management":

(a)

Patient funds?

(b)

Enterprise funds maintained by DVR?

(c)

Student activity fees assessed by Schools for the Deaf?

(d)

Private donations to institutions and programs operated by DHR?

(3)

May individual patient funds held in trust by a State institution be invested with the State Treasurer or placed in an interest-bearing savings account without the consent of the patient or legally responsible person, or donor of the trust?

(4)

Who is entitled to the income or interest accruing from the deposit of individual patient funds held in trust by a State custodian?

(5)

If patient funds are deposited in a common interest-bearing savings account, may the trustee/institution charge a fee for administration costs of computing interest earned by individual moneys?

Conclusions: (1a) No. (1b) Yes. (1c) Yes. (1d) This depends upon the purpose of the gift and the conditions imposed by the donor of the gift. (2a) No. (2b) Yes. (2c) Yes. (2d) Yes, unless the gift or trust evidences a contrary disposition or handling.

(3)

Funds may not be invested with the State Treasurer without consent.

(4)

The patient who is the beneficial owner.

(5)

No.

(1)

The Executive Budget Act, Article 1 of Chapter 143 of the General Statutes provides for fiscal control of entities which receive for use or expend funds of the State of North Carolina, including funds appropriated by the General Assembly and funds arising from the collection of fees, taxes, donations appropriative, or otherwise. See G.S. 143-2. All State and federal funds must be accounted for and spent in accordance with the Act and rules promulgated thereunder. G.S. 14316 and 143-16.1. Therefore, the threshold inquiry is whether the fund involved is comprised of federal funds or state funds. "State funds" is defined by the Executive Budget Act, which provides in pertinent part as follows:

"State funds" are hereby defined to mean any and all moneys appropriated by the General Assembly of North Carolina, or moneys collected by or for the State, or any agency thereof, pursuant to the authority granted in any of its laws.

G.S. 143-1.

The test as to whether an institution, department, agency, board, commission, or corporation or person is included within the purpose and powers and duties of the Director of the Budget shall be whether such agency or person receives for use, or expends, any of the funds of the State of North Carolina, including funds appropriated by the General Assembly and funds arising from the collection of fees, taxes, donations appropriative, or otherwise. (Emphasis added).

G.S. 143-2.

Federal funds are funds belonging to the federal government even though they may be collected by the State.

Clearly patient funds held by institutions operated by the Division of Mental Health, either in its capacity as representative payee of the patient’s Social Security income or as trustee of other personal funds received voluntarily from the patient or on his behalf, are not funds belonging to the State. These funds are not collected by or for the State pursuant to its laws and therefore are not subject to the Act or fiscal policies adopted pursuant to the Act.

To the contrary, "enterprise funds," referred to in Question 1(b), established for the enhancement of vocational rehabilitation services for clients of State-operated sheltered workshops are subject to the fiscal control of the Act. The funds are "State funds" (as defined in G.S. 143-1, supra) because they are collected by the State under contractual agreements with private entities who are recipients of services provided by the workshops. Expenditure of these funds is governed by the Executive Budget Act, and rules pursuant thereto when these provisions are not inconsistent with federally-imposed conditions. Federal regulations which prescribe the manner in which "grantrelated" or "program income" may be spent and also the specific terms of the grant itself would preempt any contrary State provision. See, 34 CFR 361.24 and 34 CFR 74.40 through 74.42. Furthermore, where the use of the income from a grant is federally controlled, although the income is technically State money, it is arguable that the fund should be classified as a federal fund for the purpose of this analysis. In that case, G.S. 143-16.1 provides that all federal funds shall be expended and reported in accordance with the Act, "except as otherwise provided by law. . .", and the Director of the Budget may adopt rules "establishing uniform planning, budgeting and fiscal procedures, not inconsistent with federal law, that insure that all federal funds shall be expended in a standardized manner." (Emphasis added). In either event, these funds are subject to the operation of the Act when not in conflict with federal law or the terms of the grant.

Likewise student activity fees, referred to in 1(c), which are assessed from students of the Schools for the Deaf pursuant to G.S. 115C-126.1, unequivocally fall within the purview of "State funds". Moneys which are "collected by or for the State pursuant to authority granted in any of its laws" are State funds. G.S. 143-1. Additionally, G.S. 143-2 specifically designates fees collected by a State agency as funds belonging to the State of North Carolina.

As to Question 1(d), which addresses private donations to the State or its agencies, it cannot be categorically stated that all such donations either are or are not subject to the Executive Budget Act. The determination turns upon the nature of the gift and the particular terms and directions of the donor. For example, G.S. 122C-185(a) states that all moneys and proceeds of property donated to a State facility operated by the Division of Mental Health shall be deposited in the State Treasury and accounted for in the appropriate fund as determined by the Secretary and approved by the Office of State Budget and Management. If, however, the donor has left special directions for application of the principal and interest earned on these funds, the funds shall not be subject to the provisions of the Executive Budget Act unless they are to be used for capital improvement projects. Although this statutory provision deals exclusively with donations to agencies and institutions operated by the Division of Mental Health, by analogy it would appear that all donations to State agencies or programs would be treated similarly unless otherwise proscribed by law. Further indicia that private donations or gifts should be handled in accordance with restrictions imposed by the donor are G.S. 147-83 (exempting these gifts from depositing, accounting, and reporting requirements of Chapter 147 when a contrary disposition or handling is required by the gift), and general principles of property law which allow a gift to be made contingent upon restrictions which are not illegal or contrary to public policy. Campbell v. Jordan, 274 N.C. 233, 243, 162 S.E. 2d 545 (1968). For example, a gift in trust to a State institution or agency for the benefit of particular beneficiaries must be used in accordance with the terms of the trust. Thus, when the terms of the gift indicate intentions of the donor for handling and disposition of the gift contrary to the provisions of the Executive Budget Act and rules promulgated thereunder, the terms of the gift control unless contrary to law or public policy.

Additionally, G.S. 143-18.1(c) provides for disposition and handling of grants and gifts for construction or capital improvement projects not provided for or authorized by the General Assembly. That provision mandates investment in a special reserve account to be held by the State Treasurer either until the end of the biennium in which the account was established or until the project is authorized by the Director of the Budget (Governor), whichever occurs first. Should the project not be approved by the end of that biennium, the funds accumulated (including interest or investment income) revert to the donor/grantor.

(2)

Article 6A of Chapter 147 of the North Carolina General Statutes was established for the purpose of creating a general state-wide cash management policy. It provides, in pertinent part, as follows:

(e)

The receipt section of the uniform statewide plan promulgated by the Director of the Budget shall provide at a minimum that:

Except as otherwise provided by law, moneys received by employees of State agencies in the normal course of their employment shall be deposited as follows:

a.

Moneys received in trust for specific beneficiaries for which the employee-custodian has a duty to invest shall be deposited with the State Treasurer under the provisions of G.S. 147-69.3.

b.

All other moneys received shall be deposited with the State Treasurer pursuant to G.S. 147-77 and G.S. 147-69.1.

(Emphasis added). G.S. 147-86.11(e).

Individual patient funds which are held in trust by a State institution operated under the Division of Mental Health are not required to be deposited with the State Treasurer. North Carolina General Statute 147-86.11(e)(a) requires trust funds for specific beneficiaries to be deposited with the State Treasurer only if the employee-custodian "has a duty to invest". Any duty to invest or make trust property productive must be found either expressly or impliedly from the trust agreement. Bogert, Trusts and Trustees, § 611 at p. 3 (2d Rev. Ed. 1978). Ordinarily, a duty to invest trust funds is implied when the terms of the trust require income to be paid to the beneficiary. Id. at n. 2. Since there is no express agreement involved in creating this trust relationship, any duty to make trust property (money) productive must be implied from the nature and object of the trust. It is therefore important to examine the particular purpose and nature of the trust relationship.

A trust of patient funds is created when the patient or someone on his behalf deposits funds with a custodian-employee of the institution to be held either for safekeeping or for objectives similar to those in a spendthrift trust. In any event, the primary objective of the trust is to have cash readily available to meet the patient’s personal needs which are not supplied by the institution. The trust relationship ends when the patient is discharged from the hospital or institution. Thus, it is apparent from the nature of the trust and the attendant circumstances of the trust relationship that it is not necessary for the trustee or employee-custodian to invest the corpus or principal of the trust in order to effectuate its terms and carry out its purpose. Additionally, the usual small dollar amounts of funds deposited with the trustee militate against a finding that there is a duty to invest and produce income. See, In re Whitney’s Estate, 248 P. 754 (1926). Obviously, the purpose of a trust may be such as to require the trustee to obtain no income from the trust property, as where the trustee is merely a custodian-trustee with a duty to safeguard the res or where as here the beneficiary/patient is to be allowed to possess and enjoy the res directly. Consequently, a State custodian-trustee owes the beneficiary no duty to make the trust property productive. Bogert, Trusts and Trustees, § 661 at pp. 6-7. It is also clear that if there is no implied duty to invest where an unequivocal trust relationship exists, a fortiori, there is no duty to invest when the sole purpose of the relationship is for safekeeping of the patient’s money as in a bailment.

A trust relationship is also created when the State institution is made representative-payee of the patient’s Social Security benefits. Federal guidelines govern disposition and handling of these funds entrusted to the institution. Under applicable federal regulations, there is no requirement or duty to invest these funds. The Code of Federal Regulations requires that payments not needed for the beneficiary’s current maintenance or reasonably foreseeable needs shall be "conserved or invested" on behalf of the beneficiary. (Emphasis added). 20 CFR 404.2045 (1986). To conserve means "to save from loss" and does not imply a duty to invest to generate income. Black’s Law Dictionary, p. 378 (Rev. 4th Ed. 1968). Because there is no duty to invest funds held in trust either under State or federal law, these moneys are not required to be deposited with the State Treasurer.

Conversely, "enterprise funds" maintained by the Division of Vocational Rehabilitation Services and "student activity funds" maintained by the Schools for the Deaf are required to be deposited pursuant to G.S. 147-77. It requires that "all funds belonging to the State of North Carolina" be deposited daily in a bank or trust company selected or designated by the State Treasurer and in the name of the State Treasurer. G.S. 147-86.11(e)(1) and (b).

As to private gifts or donations, in Question 2(d), G.S. 147-83 exempts such gifts from the operation of G.S. 147-77 when "a contrary disposition or handling is prescribed or required. . . ." Therefore, any gift in trust where the terms contraindicate investment or deposit with the State Treasurer (for example where the terms of the gift provide for a private trustee) would be exempt from the operation of the cash management policy. See, Lichtenfels v. North Carolina National Bank, 268 N.C. 467, 477, 151 S.E. 2d 78 (1966).

(3) Funds which are held by a State institution in trust for patients receiving care, maintenance, or treatment at that institution may be invested if they are being held by the institution as representative-payee of Social Security benefits. The relevant federal regulation, 20 CFR § 404.2045, allows the trustee to either conserve or invest payments which are not needed for the beneficiary’s current maintenance or reasonably foreseeable needs or the support of legal dependants. The power to invest these funds is discretionary under the regulation, and the standard governing investments is that generally applied in trust relationships. By example, however, the regulation recommends that for beneficiaries whose benefits have accumulated to $150.00, the funds should be deposited in an interest-bearing account or invested relatively free of risks on behalf of the beneficiaries. Preferred investments include U.S. Savings Bonds and deposits in an interest or dividend-paying account in a bank, trust company, credit union, or savings and loan association which is insured under either federal or state law. All interest which accrues from investments is the property of the patient/beneficiary. While the advice contained in this regulation as to investments is not mandatory, compliance with the regulation is prima facie evidence that the investment is a prudent one. In any event, a trustee is held liable only for losses resulting from his failure to act in good faith or his failure to use ordinary care and reasonable diligence in the management of the funds. Lichtenfels v. North Carolina National Bank, supra, 268 N.C. at 476.

In contrast, other funds held on behalf of the patient in the nature of a trust may not be invested with the State Treasurer in accordance with provisions of G.S. 147-69.2 and 147-69.3. Although

G.S. 147-69.3 permits deposit with and investment by the State Treasurer when the State agency has custody of funds not required by law to be so deposited and invested, this is only permissible when there is no contrary provision in the law. It is a generally accepted principle of the law of trusts that powers of the trustee are created by the particular trust agreement. Since there is no written agreement establishing the terms and parameters of the trust relationship, the powers and duties of the trustee must be interpreted from the circumstances of the relationship — i.e., the nature of the trust, the purpose and object for which the trust was created, and the nature and condition of the trust property existing when the trust was created. 90 CJS § 246 at p. 219 (1955). Before a trustee can exercise rights, he must be able to point to an express or implied authority to do so. In Re Evangelical Church of Lansferd, Pa., 24 A 2d 42, 45 (1942). As previously discussed, because the particular object to be accomplished by the creation of the trust is to make cash readily available to the beneficiary, and because the trust relationship is in most instances of a short duration, there is no implication that the trustee has either a duty to invest or a concomitant power to do so. Therefore, there is no power to invest funds with the State Treasurer or otherwise.

Furthermore, under G.S. 122C-58, which provides that all clients of institutions operated by the Division of Mental Health retain their civil rights to dispose of property, the beneficiary retains his rights to have the trust res administered in accordance with the terms of the trust which grants no authority or power to invest.

Notwithstanding the above, individual patient funds may be placed in an insured interest-bearing savings account without the consent of the patient, grantor of the trust, or legally responsible person. Deposit in an insured interest-bearing savings account is not an investment in the true sense and would not defeat the purpose of the trust. Funds would be readily available if needed for the patient’s particular needs. Also it is implied from the nature of the trust that the trustee should carefully preserve the corpus or principal of the trust, and this purpose can be effectuated by depositing funds in an interest-bearing account which is insured. This is obviously preferable to maintaining funds at the institution itself – in addition to providing a more secure way of maintaining the funds, this alternative would further benefit the beneficiary with interest earned on his money.

(4) The patient who is the beneficial owner of the funds is entitled to any interest or income generated by deposit in an interest-bearing savings account. See, McMillan v. Robeson Co., 262

N.C. 413, 417, 137 S.E. 2d 104 (1964). The rule espoused in McMillan is that "interest must follow the principal". Although McMillan dealt with liability of clerks of superior court for interest upon moneys held by them, the principle is applicable to the situation where patient funds are being held in the nature of a trust. Thompson v. Knapp, 111 N.E. 792, 792 (1916). See also, Bogert, Trusts and Trustees § 661 at 6, n. 5. Thus, any interest earned by deposit in an insured commercial institution would belong to the individual beneficiary and use of that interest for the benefit of the general patient population without the consent of the patient, his general guardian or guardian of the estate would be prohibited. (Compare, G.S. 147-86.11(d) which provides that net earnings on funds invested with the State Treasurer whose beneficial owner is not the State shall be paid to the beneficial owner.)

(5) In some of the State institutions, funds of patients who have $25.00 in excess of the amount necessary to cover immediate or foreseeable needs are deposited in a common interest-bearing savings account. This necessitates computing interest which has accrued on individual funds deposited in the common account. Thus, the issue arises as to whether the State may charge an administrative handling fee to cover the costs of such complex computation. There is no basis or legal authority for the extraction of such a fee without the consent of the patient or grantor who has entrusted funds to the facility for the patient’s use. In fact, the Human Rights for Clients of State-Owned and Operated Facilities, 10 NCAC 14G, 14H, 14I, and 14J, which addresses the subject of a client’s personal funds, states that "[t]he facility may not deduct from a personal fund account any amount owed or alleged to be owed to the facility for treatment or habilitation services unless the legally responsible person authorizes the deduction." 10 NCAC 14I § .0310(f). Although the rule does not address a deduction to cover the administrative costs in question, it is apparent that such policy would not be permitted absent authorization by the client, the legally responsible person or the donor/grantor of the funds. If deductions for costs of treatment are not allowed absent this authorization for costs of treatment, a fortiori, they would not be allowed for costs of computing interest on personal funds when the reasonableness of commingling such funds is questionable. There is no apparent reason for depositing funds in one savings account when interest on individual accounts would be computed by the depository institution. Of course, some financial institutions may require a minimum initial deposit greater than twenty-five dollars ($25.00) to establish an interest-bearing savings account. In that case, the custodian of the patient’s funds may wait until the excess funds accumulate to this minimum amount. Otherwise, the State institution would be responsible for computing interest earned on individual funds commingled in a common account. Therefore, even if it were permissible to charge such a fee absent a contractual agreement, there appears to be no reasonable basis for its extraction when a viable alternative exists which would result in no fee being assessed to the patient.

Additionally, G.S. 122C-51, Declaration of Policy on Clients’ Rights, states the following:

It is the policy of the State to assure basic human rights to each client of the facility. These rights include the right to dignity, privacy, humane care and freedom from mental and physical abuse, neglect, and exploitation. Each facility shall assure to each client the right to live as normally as possible while receiving care and treatment.

The North Carolina Administrative Code states in pertinent part as follows:

Where the client, due to his/her physical or mental condition, is unable to manage his/her funds, the legally responsible person may request that the facility director provide for the handling of a portion of funds in the personal account for a personal needs allowance of the client. . . .

10 NCAC 14I § .0320(d)

Taken together, these provisions strongly imply that by virtue of its custodian responsibilities to a client, an institution must provide a service for safekeeping and management of a client’s personal funds. Responsibility is not contingent upon payment of a fee for the service. Consequently, because there is no authority for charging such a fee and because such a practice would impugn the policy of this State to make life as normal as possible for clients within State institutions, such a fee may not be charged without consent.

Lacy H. Thornburg Attorney General

Doris J. Holton Assistant Attorney General