Opinion 92-1

PUBLIC CONTRACTS -- Retained Percentages (collection of interest on securities deposited in lieu of); (mandatory nature of withdrawal provisions); (procedure for withdrawal upon deposit of appropriate securities); (submission of securities in excess of amount to be withdrawn); (substitution of certificates of participation for); (types of securities which may be substituted for)

GENERAL MUNICIPAL LAW, §§106, 109-b: (1) A municipality does not have discretion to refuse to permit the withdrawal of retained percentages when proper securities of sufficient market value are submitted. (2) In addition to the securities enumerated in General Municipal Law, §106, the securities of certain public benefit corporations also may be deposited for the withdrawal of retained percentages. (3) Certificates of participation ("COPs") in connection with installment purchase contracts entered into by political subdivisions are securities which may be deposited for the withdrawal of retained percentages. (4) The fiscal officer of the municipality, or a designated bank or trust company, is required to collect all interest on the securities deposited and pay it to the contractor. A reasonable fee may be imposed on the contractor for receiving, handling and disbursing the obligations, funds and coupons. (5) Municipal officials should periodically monitor the market value of the deposited securities to make sure that the market value at all times is substantially equal to the amount of retainage withdrawn. (6) Before registered obligations are accepted in substitution for retained percentages, ownership of the obligations should be transferred to the municipality, or the obligations, together with an assignment in blank, should be delivered to the municipality or its custodial bank.

You ask the following questions concerning the responsibility of municipal officials in connection with withdrawal of amounts retained from payments to contractors:

(a) does a municipality have the option to refuse to permit the withdrawal of retained percentages when proper securities of sufficient value are submitted?;

(b) what securities may be deposited?;

(c) is a municipality required to collect interest on the deposited securities, and if so, can the municipality charge the contractor a service fee?;

(d) what happens if the market value of the securities increases or decreases after withdrawal of the retainage?; and

(e) what steps should be taken to ensure that the securities pledged can be readily converted into cash?

Section 106 of the General Municipal Law provides that contractors, from time to time, may withdraw, at their option, the whole or any portion of the amount retained from payments to the contractor pursuant to the terms of the contract, upon depositing with the fiscal officer of the municipality certain enumerated securities having a market value equal to the amount so withdrawn. The statute also provides that the fiscal officer may require the contractor to deposit the securities with a designated bank or trust company having an agreement with the fiscal officer.

A municipality does not have discretion to refuse to permit the withdrawal of retained percentages when proper securities of sufficient market value are submitted (1985 Opns St Comp No. 85-64, p 93; 19 Opns St Comp, 1963, p 354). Therefore, since many of the eligible securities are issued as book entry only securities, it will probably be necessary for the fiscal officer to designate a bank or trust company to accept certain securities deposited by contractors in lieu of retainage. As is explained below, the municipality is permitted to charge the contractor for the cost of receiving, handling and disbursing obligations so deposited.

The enumerated securities which may be deposited are:

(1) bonds or notes of the United States, or obligations, the payment of which is guaranteed by the United States,

(2) bonds or notes of the State of New York, or

(3) bonds of any political subdivision in the State of New York.

In addition, the statutes applicable to certain public benefit corporations, such as industrial development agencies, urban renewal agencies, public housing authorities and many public authorities, provide that bonds and notes of these public entities may be deposited with and received by municipal officials "for any purpose" for which the deposit of obligations of the State is authorized (see, e.g., General Municipal Law, §872, re: industrial development agencies; General Municipal Law, §559[4], re: urban renewal agencies; Public Housing Law, §49, re: public housing authorities; Public Authorities Law, §370, re: New York State Thruway Authority; Public Authorities Law, §1808, re: Job Development Authority; see also 1991 Opns St Comp No. 91-50, p 138; 1986 Opns St Comp No. 86-81, p 128). Therefore, when obligations of a public benefit corporation are tendered for deposit, it is incumbent on the chief fiscal officer to review the provisions of law governing the entity to determine whether he or she may accept them in lieu of retainage.

Subdivision 10 of the General Municipal Law, §109-b, enacted by chapter 413 of the Laws of 1991, provides that certificates of participation ("COPs") in connection with installment purchase contracts entered into by political subdivisions pursuant to section 109-b are securities which may be deposited with and received by public officers of the state and all municipalities and other public corporations for any purpose for which the deposit of bonds or other obligations of the State is authorized. These certificates, therefore, may also be deposited for the withdrawal of retained percentages (see also Public Authorities Law, §2445, as amended by L 1991, ch 413, in connection with COPs executed and delivered by the New York State Municipal Bond Bank Agency on behalf of a political subdivision).

The fiscal officer of the municipality (or the designated bank or trust company) is required by section 106 to collect all interest on the securities deposited and pay it to the contractor. The contractor, however, is not entitled to interest on obligations which have been used or applied by the municipality pursuant to the terms of the contract. A fee may be imposed on the contractor as a service charge for receiving, handling and disbursing the obligations, funds and coupons. The service charge may not exceed a reasonable amount which is generally consistent with charges by a bank or trust company for such services (General Municipal Law, §§106, 106-a).

The statute contemplates that, at all times, the market value of the securities on deposit will be substantially equal to the amount of retainage withdrawn (Opn No. 85-64, supra). We believe, therefore, that municipal officials should periodically monitor the market value of the submitted securities. The municipality may not, at the time of the withdrawal of retainage, require the submission of securities having a market value in excess of the amount to be withdrawn (id.). Whenever market value has decreased substantially, however, it is our opinion that the contractor, upon demand, would be obligated to submit additional securities. Similarly, whenever market value has increased substantially, the municipality would be obligated to release to the contractor securities having a market value equal to the amount of the increase (id.). We recommend that the contract itself set forth the responsibilities of the contractor and the municipality with regard to the deposit and release of securities under General Municipal Law, §106. In order to avoid the necessity of submitting additional securities in the event of a decrease in market value, the contractor, at the time of the initial withdrawal, may, in his discretion, offer securities of a market value in excess of the amount withdrawn.

Since securities substituted pursuant to section 106 are intended to take the place of cash retained, it is our opinion that these securities must be readily convertible into cash by the municipality. Bearer obligations satisfy this requirement since they may be readily liquidated by the municipality in the event of a default. Registered obligations, however, are not as readily convertible into cash. Therefore, it is our opinion that, before registered obligations are accepted in substitution for retained percentages, certain steps should be taken (see 1986 Opns St Comp No. 86-74, p 117).

Clearly, a municipality may accept deposit of registered obligations in lieu of retained percentage where the obligations are reissued to the municipality or new obligations are issued. It also may accept a deposit by having the appropriate entries made to effect a transfer of ownership through a book entry system. With respect to a proposed substitution of book-entry obligations for retained percentages, in the case of U.S. government obligations, the obligations must be credited to a custodial bank's federal reserve system account or to a member bank with which the custodial bank maintains an account. In the case of the other eligible obligations, an automated clearing house must make appropriate entries on its records, or a participant in the clearing house with which the custodial bank maintains an account must make such entries on its books, in order that the municipality's interest in the obligations are reflected on the records of its custodial bank.

The actual transfer of registered obligations as a condition to the release of retained percentages may be impractical in the case of certificated securities. In those cases, it is our opinion that delivery of the obligations should be accompanied by an assignment sufficient to enable the municipality to transfer the obligations in the event of a default (18 Opns St Comp, p 425). For example, the municipality could require an assignment in blank of the obligations being substituted. Alternatively, the obligations and the assignment could be deposited with a custodial bank with which the municipality and the contractor have entered into a custodial agreement for such purpose. The assignment should provide clearly that, in the event that the contractor defaults under the terms and conditions of the public works contract, ownership of the obligations being held in custody will be transferred to the municipality.

Appropriate provision should be made for payment by the municipality to the contractor of any interest received while the obligations are registered in the name of the municipality. Upon termination of the retainage requirement, the obligations should be re-registered in the name of the contractor, or if they were never registered in the name of the municipality, returned to the contractor with his or her assignment.

February 12, 1992
Cornelius F. Healy
Deputy State Comptroller