Opinion 95 - 28
MUNICIPAL FUNDS -- Deposits and Investments (in obligation issued by a financial institution and secured by a letter of credit issued by a Federal Home Loan Bank)
LOCAL LAWS -- Municipal Funds (authorizing investment in vehicle not listed in General Municipal Law, §11) -- Pre-emption (investments)
GENERAL MUNICIPAL LAW, §11; MUNICIPAL HOME RULE LAW, §10(1): A local government may not, pursuant to General Municipal Law, §11, invest a portion of its funds in an obligation issued by a financial institution and secured by an irrevocable letter of credit issued by a Federal Home Loan Bank. A local government may not authorize such an investment by local law.
You ask whether a town may, under the provisions of section 11 of the General Municipal Law, invest a portion of its funds in an obligation issued by a financial institution and secured by an irrevocable letter of credit issued by a Federal Home Loan Bank (hereinafter "FHLB").
General Municipal Law, §11 contains provisions of law governing the investment of moneys by local governments, including towns. Insofar as is relevant here, section 11 authorizes local governments to invest moneys held in the custody of the chief fiscal officer or other officer of the local government, and not required for immediate expenditure, in obligations of the United States of America and obligations guaranteed by agencies of the United States of America where principal and interest are guaranteed by the United States of America.
Each of the regional FHLBs is a separate corporation, owned by those savings and loan associations, cooperative banks, homestead associations, insurance companies, and other insured depository institutions within the region that are eligible and have become members of the FHLB (12 USC §§1424, 1426, 1432). The FHLBs, which are supervised by the Federal Housing Finance Board (see 12 USC §1422a), provide loans, in the form of advances, to member institutions, and other services, including accepting deposits, and collecting and settling checks, drafts, and other negotiable instruments (12 USC §§ 1430, 1431). Although the FHLBs are authorized to issue obligations to raise funds, those obligations are not deemed to be obligations of the United States of America, nor are they guaranteed by the United States of America (12 USC §§ 1431, 1435).
Even if the direct obligations of a FHLB were guaranteed by the United States of America, an irrevocable letter of credit issued by a FHLB, offered as security for a financial institution's promise to pay the town under the terms of an obligation issued by the financial institution, would not, in our opinion, constitute a guarantee, by the United States of America, of the payment of principal and interest due under the terms of the obligation issued by the financial institution. Under a letter of credit, the issuing bank must honor a draft or demand for payment that complies with the conditions specified in the letter of credit (see Uniform Commercial Code §§5-103[a]; 5-114). The issuing bank's obligation under the letter of credit is, however, independent of any underlying contractual agreement between its customer and the beneficiary of the letter of credit (see Uniform Commercial Code §§5-109[a], 5-114; Gillman v Chase Manhattan Bank, N.A., 73 NY2d 1, 537 NYS2d 787). Based on the foregoing, we find no authority under section 11 for the town to invest funds in an obligation issued by a financial institution and secured by an irrevocable letter of credit issued by a FHLB (cf. General Municipal Law, §10[b], which authorizes local governments to accept certain letters of credit as collateral for the deposit of public money).
This Office is also of the opinion that a town may not, pursuant to its home rule power, authorize this type of investment. Municipal Home Rule Law, §10(1) authorizes local governments to adopt local laws, not inconsistent with any general law or the Constitution, relating to their property, affairs or government. In addition, except to the extent restricted by the State Legislature, local governments may adopt local laws, not inconsistent with general laws and the Constitution, relating to certain enumerated subjects, whether or not they relate to property, affairs or government. One such enumerated subject is the transaction of its business (Municipal Home Rule Law, §10[ii][a]).
The doctrine of pre-emption, however, represents a fundamental limitation on home rule powers (Albany Area Builders v Town of Guilderland, 74 NY2d 372, 547 NYS2d 627). Where the State Legislature has clearly evinced a desire to pre-empt an entire field and preclude any further regulation, a local law regulating the same subject matter is considered inconsistent and will not be given effect (Incorporated Village of Nyack v Daytop Village, Inc., 78 NY2d 500, 577 NYS2d 215; see also Albany Area Builders, supra). The intent to pre-empt may be express (see Jancyn Manufacturing Corp. v County of Suffolk, 71 NY2d 91, 524 NYS2d 8) or may be inferred from a comprehensive, detailed statutory scheme (see Daytop Village, supra; Albany Area Builders, supra).
Section 11 of the General Municipal Law was originally enacted, at the request of this Office, by chapter 464 of the Laws of 1954, as a "uniform provision" authorizing temporary investments of municipal moneys (Memorandum of the State Department of Audit and Control, McKinney's Session Laws, 1954, p 1493). Section 11 was substantially amended by chapter 708 of the Laws of 1992. The bill enacted as chapter 708 was also introduced at the request of the State Comptroller. In our memorandum to the Governor on the 1992 bill, we stated that the primary purpose of the bill was to "consolidate the various statutory provisions pertaining to the... investment of monies of local governments [and to] establish uniform strengthened procedures to secure ... investments ..." (Memorandum of State Comptroller to Governor for L 1992, ch 708, July 30, 1992). We further stated as follows:
Thus, in our opinion, the legislative history of section 11, as amended, clearly indicates that it is intended to provide a comprehensive, uniform investment statute for local governments and, therefore, evidences an intent to preclude the adoption of local laws in this area (see also 1981 Opns St Comp No. 81-191, p 202).
November 7, 1995