GENERAL MUNICIPAL LAW, §§6-c, 6-d, 119, 119-a, 119-o; VILLAGE
LAW, §14-1404: Moneys in a repair reserve fund may be
appropriated to a duly authorized capital reserve fund. Moneys
in a capital reserve fund may be expended to pay debt service
on obligations only as authorized by General Municipal Law, §6-c(9-a). A village may not contract with a town sewer district
for the conveyance, treatment, and disposal of sewage at the
village treatment plant, if the use by the district will,
during the life of the contract, render the plant inadequate
for the needs of the village or its inhabitants.
This is in reference to your inquiry concerning the expansion of a sewage treatment plant currently owned and operated by the village to serve the needs of the surrounding town and the use of moneys held in reserve funds established by the village to finance such an expansion.
You indicate that the sewage treatment plant serves the village and, pursuant to a contract, two sewer districts in the town. The village and town are examining the possibility of expanding the capacity of the plant to permit additional development in the town. You state that it has been proposed that the town and village enter into an agreement under which the town will receive an ownership interest in the plant and will issue obligations to finance the cost of the expansion. You also indicate that the village has established a repair reserve fund, into which tie-in fees paid by village residents and tie-in fees paid by town residents before 1985 have been deposited, and a "sewer expansion fund", into which tie-in fees paid by town residents since 1985 have been deposited. Finally, you state that, as a part of the planned expansion of the sewage treatment plant, it has been proposed that the repair reserve fund and "sewer expansion fund" be combined. A portion of the moneys in the combined reserve fund would be transferred to a new repair reserve fund established by the village for the sewage collector system within the village, while the remaining moneys would be used to pay the debt service on the obligations issued by the town to finance the cost of the expansion of the sewage treatment plant.
You pose several questions relating to the planned expansion of the plant and the manner in which it is to be financed. First, you ask what procedural requirements apply to the transfer of moneys from the repair reserve fund to the "sewer expansion fund". You also ask whether it is proper to use the moneys in the combined reserve fund established by the village to pay debt service on obligations issued by the town. You note that, if the moneys in the combined reserve fund are used to pay the town's debt service, the fund will be depleted rapidly and this depletion will necessitate that any subsequent repairs to the plant be financed in another manner. You, therefore, also question whether it is proper for the village to raise moneys to be expended for repairs on the expanded plant when the expanded capacity is of benefit only to the residents of the town sewer districts. Finally, you ask whether there is any restriction on the village's authority to allocate the excess capacity of the existing plant to the use of the town sewer districts.
Initially, we note that municipalities are authorized to contract joint and several indebtedness in connection with a jointly-owned sewage facility (NY Const, art VIII, §§1, 2-a; Local Finance Law, §15.00; see 1988 Opns St Comp No. 88-26, p 47; 1985 Opns St Comp No. 85-23, p 31). Inasmuch as it appears that only the full faith and credit of the town would be pledged for the obligations issued to finance the expansion, it appears that your question contemplates the issuance of "several" indebtedness of the town (Local Finance Law, §15.00[b]; Opn No. 85-23, supra).
In this regard, we note that article VIII, §1 of the State Constitution prohibits counties, cities, towns, villages and school districts from giving or loaning their credit to or in aid of any individual or public or private corporation or association (see also Local Finance Law, §101.00[a]). Under the proposal, the village would be paying moneys received initially from town and village residents as tie-in fees to the town for town debt service. Clearly, all these fees became village moneys once paid to the village, including that portion paid to the village by town residents. Therefore, if, under the terms of the agreement between the village and town, the village is indebted or obligated to make the debt service payment on the town debt, or if the town's debt is, in some manner, issued on behalf of the village, a loan of credit question would arise and should be considered (cf. Comereski v City of Elmira, 308 NY 249; Wein v City of New York, 36 NY2d 610, 370 NYS2d 550). Since we understand, however, that the agreement is not yet finalized and all terms are not known, we do not have sufficient facts to determine at this time whether the payment of village money for town debt service would constitute a violation of the constitutional loan of credit prohibition.
Assuming, however, that the agreement would be fashioned in a manner so that there would be no constitutional violation, we believe, as discussed below, that village reserve fund moneys may not be used to make the proposed payments. Article 2 of the General Municipal Law contains the provisions of law governing the establishment of reserve funds and the use of the moneys therein. General Municipal Law (GML), §6-c authorizes village boards of trustees to establish capital reserve funds for the purpose of financing all or part of the cost of the "construction, reconstruction or acquisition" of a specific or type of "capital improvement" (GML, §6-c). The term "capital improvement" is defined to include "any physical public betterment or improvement or any preliminary studies and surveys relative thereto," as well as the contemporaneous acquisition of related "furnishings, equipment, machinery or apparatus" (GML, §6-c[b], ).
The procedures for establishing and expending moneys from a capital reserve fund vary depending on whether the fund is established to finance the cost of a specific or type of capital improvement (GML, §6-c,,). Where a village establishes a capital reserve fund to finance a specific capital improvement, the creation of the fund may be subject to permissive referendum requirements, but expenditures from the fund are not subject to referendum. However, where a village establishes a capital reserve fund to finance a type of capital improvement, the creation of the fund is not subject to a referendum, but expenditures from the fund may be subject to permissive referendum requirements (see GML, §6-c,; Local Finance Law, §§11.00, 35.00; see also 1988 Opns St Comp No. 88-62, p 123; 1988 Opns St Comp No. 88-58, p 117; 1979 Opns St Comp No. 79-42, p 7).
Moneys in a capital reserve fund established for a specific capital improvement may be expended only for that specific purpose, transferred to another capital reserve fund pursuant to General Municipal Law, §6-c(9) or appropriated for a purpose specified in section 6-c(9-a) (1986 Opns St Comp No. 86-28, p 47; 1986 Opns St Comp No. 86-21, p 36; 1981 Opns St Comp No. 81-128, p 129). Moneys in a capital reserve fund established for a type of improvement may be expended pursuant to the provisions of section 6-c(8). Any unexpended balances remaining in a reserve fund established for a type of improvement equipment may be transferred to another capital reserve fund (GML, §6-c[b]).
Section 6-d of the General Municipal Law authorizes a village board of trustees to establish a repair reserve fund. Section 6-d(3)(a) provides that moneys in a repair reserve fund may be appropriated for repairs of capital improvements or equipment, which repairs are of a type not recurring annually or at shorter intervals. Moneys in a repair reserve fund established by a village may also be appropriated to a duly established capital reserve fund or tax stabilization reserve fund (GML, §6-d[b]). Appropriations from a repair reserve fund are subject to notice and hearing requirements, except, under certain circumstances, in emergencies (GML, §6-d).
Before examining the application of the provisions discussed above to your inquiry, we note that it is not entirely clear whether the "sewer expansion fund" is properly considered a capital reserve fund established for a specific improvement or a type of improvement. Further, we are not informed with respect to the procedures followed by the village in establishing the fund. Although the foregoing presents questions of fact which must be resolved by the village, we will, for purposes of this inquiry, assume that the village board properly established a capital reserve fund and we will discuss the differing results if the fund is found to have been established for a specific capital improvement or for a type of capital improvement.
In relation to your first two questions, it is clear that the village board may, following a public hearing, adopt a resolution transferring moneys from the repair reserve fund to the "sewer expansion fund" (GML, §6-d,[b]). Once the moneys so appropriated have been paid into the capital reserve fund, however, they are subject to the restrictions provided in section 6-c, and nothing in that section would authorize the use of moneys in a capital reserve fund to pay the debt service on obligations issued by another municipality (see Opn No. 86-28, supra, concluding that a municipality may not use capital reserve fund moneys to pay debt service on its own obligations except as provided in section 6-c[9-a]).
In reference to your question on the means of financing repairs to the expanded plant, we note, initially, that there is no statutory procedure to utilize moneys in a capital reserve fund to pay for the cost of work which constitutes the repair of a capital improvement (1988 Opns St Comp No. 88-50, p 101; 1988 Opns St Comp No. 88-51, p 103). If the village and the town operate the plant jointly pursuant to an Article 5-G agreement, such an agreement may provide, in addition to other items, for the allocation and financing of the operating costs of the plant and for payments into any duly authorized reserve fund (GML, §119-o; see also 1988 Opns St Comp No. 88-46, p 89). Therefore, any such agreement should be drafted to assure that the village would not have to pay any more than its equitable share of the cost of repairs to the plant.
If, in the alternative, the village and the town do not operate the plant jointly under a cooperation agreement, the village may make provision for the cost of necessary repairs to the expanded plant in negotiating the contract for conveying, treating, and disposing of sewage from the town sewer districts (see Village Law, §14-1404; GML, §§119, 119-a). The estimated cost of repairs could be reflected in the consideration stated in the contract and the portion of the consideration attributable to the cost of repairs could be paid into the existing repair reserve fund or, if the existing fund has been abolished, a newly established repair reserve fund.
The restriction, if any, on the village's authority to allocate the excess capacity of the sewage treatment plant to serve the needs of the town sewer districts will depend, to a great extent, on how and whether the proposed expansion of the plant goes forward. Under Article 5-D of the General Municipal Law, a village which has sewage treatment capacity in excess of its own needs is authorized to contract to convey, treat, and dispose of the sewage of another public corporation or improvement district (GML, §§119, 119-a). Article 5-D does not, however, define "capacity in excess of its own needs." Under section 14-1404 of the Village Law, a village is similarly authorized to sell excess capacity to individuals and corporations outside its corporate limits. Section 14-1404 provides that "[t]he board [of sewer commissioners] shall not sell nor permit the use of its sewerage system under this section if thereby such system will be rendered inadequate for the village or its inhabitants." In interpreting section 260-b of the former Village Law, which included a similar limitation on the board's authority, this Office concluded that a village could contract to serve the needs of an outside user only if the use by the outside user did not, or would not during the life of the contract, thereby render the sewer system inadequate for the needs of the village or its inhabitants (27 Opns St Comp, 1971, p 157; see also 1982 Opns St Comp No. 82-217, p 275; Kennilworth v City of Ithaca, 63 Misc 2d 617, 313 NYS2d 35). It is our opinion that this same analysis should be applied in determining the existence of "excess capacity" for purposes of Article 5-D.
Therefore, if the village determines to contract with the town, on behalf of the sewer districts, for the conveyance, treatment, and disposal of additional sewage at the existing plant, it will be necessary for the village to take into account the needs of the village during the term of the proposed contract and restrict the capacity to be contracted to the sewer districts accordingly. Where, however, the capacity of the plant is to be expanded, the village may provide for capacity adequate to meet its needs by other means. If the village enters into an Article 5-G agreement with the town under which the plant is to be expanded, such an agreement could provide that capacity in the expanded plant, sufficient to meet the present and future needs of the village, be reserved for use by the village. If the expansion of the plant is accomplished under the provisions of Article 5-D of the General Municipal Law, the village may reserve to itself whatever portion of the excess capacity developed it deems necessary.
July 6, 1989