Opinion 91-55


This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.


BONDS AND NOTES -- Debt Limits (exclusion from - calculation of net revenues for exclusion for self-liquidating indebtedness)
WORDS AND PHRASES -- "Cost of Operation, Maintenance and Repairs" (depreciation not included as) -- "Net Revenues" (depreciation not deducted from gross revenues to calculate)

GENERAL MUNICIPAL LAW, §6-k; LOCAL FINANCE LAW, §123.00; STATE CONSTITUTION, ART VIII, 5(C): Depreciation is not a "cost of operation, maintenance and repairs" to be deducted from "gross revenues" to calculate "net revenues" for purposes of the exclusion from debt limitation for self-liquidating indebtedness pursuant to Local Finance Law, §123.00.

You ask whether depreciation is included within the phrase "costs of operation, maintenance and repairs" for the purpose of calculating the exclusion from debt limitation pursuant to Local Finance Law, §123.00. Apparently, municipalities which account for revenues on a cash basis have not been including depreciation as a cost of operation. In contrast, those municipalities which account on an accrual basis have been including depreciation as a cost of operation.

Article VIII, §4 of the State Constitution limits the amount of indebtedness which may be incurred by counties, cities, towns, villages and certain school districts to specified percentages of the average full valuation of taxable real estate therein. The purpose of constitutional debt limits is to prevent the imposition of heavy tax burdens on future generations (Report by the New York State Constitutional Convention Committee 1938, Vol. X, "Problems Relating to Taxation and Finance", p 381; Bank for Savings v Mayor, 102 NY 313, 318).

Article VIII, §5(C) of the Constitution authorizes an annual exclusion from the debt limitation of a county, city, town or village for indebtedness contracted by the county, city, town or village for a public improvement or service owned or rendered by the municipality. The amount of this exclusion is proportionate to the extent that the improvement or service yields "net revenue" in a sum equal to 25% or more of the amount required for debt service on the indebtedness. Section 5(C) also requires that "net revenue" must generally be determined "by deducting from gross revenues of the preceding year all costs of operation, maintenance and repairs for such year ..." The exclusion may be granted only if the revenues are applied to and actually used for payment of all costs of operation, maintenance and repairs, and payment of the amount required for annual debt service. The rationale for this exclusion, as explained in the Report of the Constitutional Convention Committee of 1938, is that the "debt ... incurred by a municipality for a revenue-producing improvement, to the extent that such debt is self-liquidating, ... neither adds to the burden on the taxpayer nor impairs the municipality's credit" (Report, op cit, pp 384-385).

In accordance with article VIII, §5(C), the State Legislature, in Local Finance Law, §123.00, has prescribed the method by which and the terms and conditions under which the proportionate amount of any indebtedness to be excluded shall be determined. Under section 123.00, an application may be filed with the State Comptroller for the purpose of obtaining an exclusion of the indebtedness (Local Finance Law, §123.00[g]). The Comptroller is then required to make a determination as to the extent to which any such indebtedness may be excluded (Local Finance Law, §123.00[j]).

Determinations of whether, and the extent to which, indebtedness for a revenue-producing improvement is excludable from the municipality's debt limitation require a determination of the amount of revenues available for the payment of debt service on the indebtedness (Local Finance Law, §123.00[e]). Local Finance Law, §123.00(e) provides that the maximum amount of the indebtedness that may be excluded:

shall be in the same proportion to the total amount of any such indebtedness as the amount of any such net revenue shall bear to the amount required in any such year for the payment of interest on and amortization of, or payment of, any such indebtedness (emphasis added).

"Net revenue" is determined for this purpose by deducting from gross revenues of a year all "costs of operation, maintenance and repair for such year" (Local Finance Law, §123.00[d]; emphasis added). Taxes, assessments and subsidies by the municipality are expressly excluded from the computation of gross revenues (id.).

Although the phrase "costs of operation, maintenance and repairs" is not defined, it is a general rule that "[t]he primary consideration ... in the construction of statutes is to ascertain and give effect to the intention of the Legislature" (McKinney's Statutes, §92[a], p 176). The first source of that intention is found in a literal reading of the entire statute itself (id., §92[b], p 182). In this regard, we note that the language of Local Finance Law, §123.00(f), describing the disposition of revenues after an exclusion has been granted, suggests that the "costs" referred to in section 123.00(d) include only items involving actual expenditures:

Where an exclusion has been granted pursuant to this section, the revenues of such public improvement ... for the period for which the exclusion is granted, shall be applied to and actually used for payment of all costs of operation, maintenance and repairs for such period, and payment of the amounts required in such period for interest on and amortization of or redemption of the indebtedness excluded, or such revenues shall be deposited in a special fund to be used solely for such payments. (emphasis added; see also NY Const, art VIII, §5[C]).

Moreover, such a construction of section 123.00(d) is consistent with the rationale for the exclusion because only costs involving actual expenditures affect a municipality's ability to pay debt service from the revenues of the improvement.

It has been held that "[d]epreciation expense does not represent an actual expenditure of money ... but is a deduction against income to allow for the exhaustion and wear and tear of certain assets" (Kroger Co. v Dep't of Revenue, 614 SW 2d 705, 709). Similarly, it has been held that "[d]epreciation is a mere book figure which does not either reduce the actual dollar income ... or involve an actual cash expenditure when taken" (Stoner v Stoner, 307 A 2d 146, 152). Therefore, since section 123.00 anticipates that only costs involving actual expenditures be deducted from gross revenues, and since depreciation does not involve an actual expenditure, we conclude that the phrase "costs of operation, maintenance and repairs" in article VIII, §5(C) and Local Finance Law, §123.00(d) does not encompass an allocation for depreciation.

We find further support for our conclusion in the legislative history of a companion statutory provision, General Municipal Law, §6-k. Section 6-k provides that:

The governing board of any municipal corporation operating an electric public utility service shall establish solely by appropriations from the revenues of such service, a depreciation reserve fund, the assets of which shall be used solely for, and for no other purpose than, the improvement, extension, or replacement of such service, or the payment of indebtedness incurred in relation to the construction, improvement, extension or replacement of such service, except as otherwise provided in section 123.00 of the Local Finance Law ... (emphasis added)

Under section 6-k, the municipal governing board must require that, out of the revenues of the service, there is deposited periodically in the reserve fund the amounts entered in the depreciation reserve account of the electric utility service as the depreciation accruals for that period. A depreciation reserve account is described in section 6-k as an account in which the original cost of the service is being distributed to expenses in substantially equal annual, quarterly or monthly amounts during the expected service life of the component parts of the service, by direction of the public service commission (see 16 NYCRR 197, Balance Sheet Account No. 261).

Section 6-k was added by chapter 457 of the Laws of 1952. In this Office's memorandum to the Governor concerning the bill which became chapter 457, we noted that the "except" clause resolved a conflict between section 6-k, and Local Finance Law, §123.00 and article VIII, §5(C) of the Constitution:

The conflict occurs because the words "costs of operation, maintenance and repairs", as used in such statutory and constitutional provisions, do not require contributions to depreciation reserve accounts. It follows that the revenues of a municipal electric utility to which such provisions are applicable must be used for operation, maintenance and repairs, and debt service, before the revenues may be used for contributions to a depreciation reserve fund ... (emphasis added).

The clear implication of the foregoing is that the term "operation, maintenance and repairs" as used in Local Finance Law, §123.00 and article VIII, §5(C) does not include depreciation. Therefore, contributions may not be made to a reserve fund established pursuant to General Municipal Law, §6-k until after the revenues have been applied for the purposes prescribed by these constitutional and statutory provisions.

Accordingly, it is our opinion that the phrase "costs of operation, maintenance and repairs" as used in Local Finance Law, §123.00 for purposes of calculating the exclusion from debt limitations for self-liquidating indebtedness does not include depreciation as a "cost" to be deducted from "gross revenues" to calculate "net revenues".

December 23, 1991
Cornelius F. Healy
Deputy State Comptroller