Cash-strapped school districts are laced into an accounting straight jacket that is preventing them from using $1 billion in marooned cash, B.C.'s auditor general has found.

John Doyle's report, released Wednesday, looked into how school districts and colleges manage working capital and he found that most of them are holding more cash and short-term investments than they need.

Much of that unused cash is being held in low-interest bank accounts, rather than being invested. It is broken up among the province's school districts, with each district managing its own money.

Instead of earning money by pooling the funds together and investing them, the money sits in mostly low-return bank accounts and because the province is in a budget deficit, the $1 billion racks up interest charges.

"Basically, that money is costing the province," Doyle said, estimating the cost to be up to $40 million.

But Doyle said the situation isn't entirely the school districts' fault and fixing the problem could mean a departure from balanced-budget requirements.

Because of legislation requiring school districts to balance their budgets, districts can't access the excess capital because it would be logged on their books as an expenditure without the revenue to off-set it.

"The fact that they've got cash in the bank account is not income," Doyle said in an interview.

"The fact that they want to spend money is expenditure. So for them to draw down on the cash that they've got in the bank account, they have to increase expenditures on their operating statement and that puts them into deficit."

Doyle added: "It's money that's trapped in the system."

Doyle said the trapped money has been building for years. Four years ago, the pool was about $600 million.

That's happened because school districts don't pay cash to cover all their expenditures. For example, costs associated with pensions, leaves of absences and depreciation of assets are considered expenditures.

School districts receive money to cover those, but the costs associated with them aren't paid until later, sometimes years later.

Efficient use of working capital would have the school districts compensated for their costs when they actually occur, Doyle said.

Education Minister Margaret MacDiarmid said the province has already started to change how it flows capital to school districts with a view to handing out money on a "just-in-time" basis.

"We knew that there was cash that was not needed at this time and that we were actually sending money to districts farther ahead of when we actually needed to," MacDiarmid said in an interview.

She said the biggest expense for school boards is salaries and those are very predictable.

School districts across the province, most notably the Vancouver School Board, have complained their money from government has not kept up with their expenses.

The Vancouver board has been in a public stand-off with the province and tabled a balanced budget in June that included $16.3 million in cuts, including chopping 137 jobs and closing 11 schools.

The province called on its comptroller general to look into the board's finances and Cheryl Wenezenki-Yolland concluded the board mismanaged its finances, made bad decisions and had not been upfront about its fiscal situation.

But her report did not look at how the province funds education, which the board maintains is the root of the problem.

Doyle steered clear of the debate with the Vancouver School Board and his report deals with school districts as a group rather than as individuals.

But he said Wednesday it will be very difficult to allow school boards to get their hands on some of that $1 billion without changing the balanced budget requirement, even if it's one-time only.

"Something has got to shift or change otherwise, this billion dollars is going to be locked into the system and they can't spend it. Which doesn't make sense."

MacDiarmid said the changes the government has made will mean the money won't accumulate in the same way as it has in the past, and the $1 billion pool Doyle refers to will dwindle over time.

"What you'll see in the future is there won't be that much money. It's money they eventually do need to pay salaries, but they don't need it lying around in a bank account."

She rejected the notion of allowing school districts to run a deficit.

"If school districts run a deficit, that adds to government deficit."

Doyle recommended government give school districts and colleges clear direction on investing. He said they appear to be more worried about making a bad investment than worrying about the investment chances they might have by seeking out solid ones.

Government should be handing out districts and colleges funds based on their need, rather than on equal bi-monthly payments, Doyle said.

And the government should put limits on the amount of cash allowed to sit in districts' bank accounts and should consider flowing excess cash through the central treasury where it can be used properly.

Though Doyle refused to comment on the difficult relationship between some school boards and the government, he said it makes no sense to let the current situation continue.

"I read the newspapers...and I hear a cacophony of complaints that there aren't sufficient funds, schools will have to be closed...and I'm looking at a summary set of financial statements which say there's a billion dollars there.

"What's going to happen with that billion? Someone has got to work their way through that."