Opinion 96 - 4


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 The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.

LOCAL LAWS -- Municipal Funds (disposition of proceeds of sale of property); (establishment of general reserve fund); (authority to supersede village budget procedures) -- Real Property (payment of proceeds of sale of village property to third party for benefit of village)

MUNICIPAL FUNDS -- Budget Procedures (authority to supersede in village); (disposition of proceeds of sale of property)

PUBLIC CONTRACTS -- Terms and Conditions (payment of proceeds of sale of village property to third party for benefit of village)

REAL PROPERTY -- Sale (payment of proceeds of sale of village property to third party for benefit of village)

VILLAGES -- Powers and Duties (payment of proceeds of sale of village property to third party for benefit of village)

MUNICIPAL HOME RULE LAW, §10; VILLAGE LAW, §§1-102, 5-508, 5-520, 5-532: A contract for the sale of village real property may not authorize payment of an amount equal to the purchase price to a third party for subsequent distribution to the village annually over a thirty year period for general village purposes.

This is in reply to your request for our opinion concerning the disposition of the proceeds of the sale of certain village owned real property.

You state that the village acquired the property in question with the proceeds of bonds which have since been retired. The village anticipates that the proceeds from the sale of the property will equal approximately twice the village's current annual budget. The village does not wish to deposit the proceeds of the sale into one or more reserve funds currently authorized by State statute because the village believes the amount would exceed the village's anticipated needs for the purposes for which such reserve funds may be established.

Under these circumstances, you ask whether the village, for the sole purpose of ensuring that it does not receive immediately the entire proceeds of the sale, may authorize the establishment of a trust account at a financial institution authorized to serve as a depository of village funds and have the purchaser deposit the proceeds of the sale into the trust account. Alternatively, you ask whether the village may agree to have the proceeds of the sale deposited into an escrow fund held by an attorney designated by the village. As another alternative, you ask whether the village may take back a purchase-money note secured by both a first mortgage on the property and a fund created by the buyer and held by a financial organization approved by the village in the amount of the purchase price less the amount due on closing. Under each of these alternatives, the moneys held by the third party would be invested in the types of investments authorized by law for the investment of municipal funds. The moneys held by the third party would be distributed to the village annually over a thirty year period. We assume that the amounts distributed to the village would be available for general village purposes.

In lieu of establishing a fund or account held by a third party, you also ask whether the village may agree to accept a promissory note providing for payment of the purchase price over thirty years secured by an annuity contract acquired by the buyer for the benefit of the village with a lump sum payment equal to the amount of the purchase price less the amount due on closing. The annuity payments to the village would be in the same amount as the payments from the account or fund discussed above.

Initially, we note that it is well established that "[t]he power of villages to contract is defined and limited by the Constitution and statutes" (Marine Midland Trust Company v Village of Waverly, 42 Misc 2d 704, 248 NYS2d 729, affd 21 AD2d 753, 251 NYS2d 939; see also Wells v Town of Salina, 119 NY 280). Village Law, §1-102(1) authorizes a village to sell real property no longer needed for village purposes (see, e.g., 1988 Opns St Comp Nos. 88-1, p 1 and 88-11, p 17)(1). Neither section 1-102, nor any other State statute of which we are aware authorizes a village to defer immediate receipt of the proceeds from the sale of village real property by contracting to have the buyer pay an amount equal to the purchase price to a third party for investment and subsequent payment to the village (cf. 1987 Opns St Comp No. 87-51, p 78, concluding that section 1-102 does not authorize a village to take back a purchase-money mortgage). Therefore, whether the village may enter into a contract providing for one or more of the alternative forms of the transaction at issue depends on whether the village may adopt a local law authorizing this type of transaction.

Municipal Home Rule Law, §10 authorizes a "local government", including a village (see Municipal Home Rule Law, §2[8]), to adopt and amend local laws, not inconsistent with the Constitution or any general law, relating to its "property, affairs or government" (Municipal Home Rule Law, §10[1][I]) and, except to the extent restricted by the Legislature, in relation to a number of enumerated subjects whether or not they relate to the "property, affairs or government" of the local government (Municipal Home Rule Law, §10[1][ii]). A village, however, may not adopt local laws "changing, amending or superseding" the statutory village budget process (see Municipal Home Rule Law, §10[1][ii][e][3]; Village Law, §5-532; see also Village Law, §§5-500 through 5-508, 5-520, 5-522), or authorizing the establishment of reserve funds not authorized by State statute (see 1980 Opns St Comp No. 80-710, p 195; see also 1980 Opns St Comp No. 80-302, p 89), including a reserve fund for general village purposes (see General Municipal Law, §6-c through 6-o; cf. Town Law, §55).

Assuming arguendo that each of the alternative forms of the transaction involve matters relating to the village's "property, affairs or government" or one of the other subjects enumerated in Municipal Home Rule Law, §10, we note that, ordinarily, the proceeds from the sale of village property are village moneys (see NY Const. Art VIII, §1; Grand Realty Company v City of White Plains, 125 AD2d 639, 510 NYS2d 172), which must be held in the custody of the village treasurer (Village Law, §4-408[1]) and may be invested only by the board of trustees or, if the board so delegates, by the village treasurer (General Municipal Law, §11[2]). Further, the village budget process generally requires that, upon receipt, all revenues generated by a village function, including proceeds from the sale of village property, must be credited to the appropriate village budgetary fund, usually the village's general fund (see Village Law, §5-506[1][b]; 9 Opns St Comp, 1953, p 374; 5 Op St Comp, 1949, p 500; see also 1982 Opns St Comp No. 82-238, p 299; 1980 Opns St Comp No. 80-784, p 214; 18 Opns St Comp, 1962, p 362; cf. General Municipal Law, §6-l, relative to depositing the proceeds of a cash sale into a mandatory reserve fund). The village budget process also requires moneys in the general fund to be used to finance appropriations in the current fiscal year (Village Law, §§5-508[4], 5-520[1]-[4]), including an appropriation to a duly authorized reserve fund (see General Municipal Law, §§6-c through 6-o), or included in the estimated year-end "surplus" in the general fund and used to reduce taxes in the following fiscal year (see Village Law, §5-506[1][c], [e]; see also Korn v Gulotta, 72 NY2d 375, 534 NYS2d 108; 1980 Opns St Comp No. 80-280, p 79; 1970 Opns St Comp No. 70-393, unreported).

A local law authorizing payment of an amount equal to the purchase price of village real property to a third party for subsequent distribution to the village annually over a thirty year period for general village purposes would, in our view, supersede the statutory village budget process because it would eliminate the requirement that the proceeds from the sale of the property be used either to fund appropriations in the current fiscal year or to reduce taxes in the succeeding fiscal year. Similarly, we believe that such a local law would result in the establishment of the functional equivalent of a reserve fund for general village purposes because the moneys would be carried over outside the general fund and made available for general village purposes. Accordingly, since a village may not adopt a local law which supersedes the village budget process or establishes a reserve fund for general village purposes, it is our opinion that a village lacks authority to adopt a local law which authorizes itself to agree to any of the alternative forms of the transaction(2).

In support of this conclusion, we note that in Korn v Gulotta, supra, the Court of Appeals invalidated a county budget because the estimated year-end cash balance in the county's general fund as set forth in the budget did not include moneys which county officials desired to set aside for a three-year tax stabilization program. In invalidating the budget the Court reasoned that:

The provisions [of law governing the preparation of the budget] are mandatory. They direct that the proposed budget 'shall' contain a statement of the estimated cash balance. The requirement is in accord with the strong policy of the law to require a full accounting of all public funds and to prevent municipal governments from acquiring tax proceeds faster than they are needed. A corollary of this generally recognized principle is that funds may not be accumulated for the remote future or for contingencies which may never occur. The accumulation is unjust because it deprives the people of the use of money taken from them by taxes for a considerable period and it is impolitic because it may tempt public officials having custody of the funds [citation omitted]. The rule is intended to protect taxpayers from the misuse of surplus funds 'to hide deficit spending or to reap political profit' [citation omitted]. (72 NY2d 363, 373, 534 NYS2d 108,113).

Thus, Korn makes clear that municipal budget processes are based on "strong" public policies which require, inter alia, a full accounting for all public funds and look with disfavor on unauthorized accumulations of moneys for the remote future or for contingencies which may never occur. We believe that these policies are equally applicable in this instance. We also believe that these policies would be undermined were a municipality authorized to adopt a local law with the effect of removing the proceeds from the sale of municipal property from the municipal budget process and State reserve fund requirements.

We are also mindful that it can be argued that under each of the alternative forms of the transaction the proceeds of the sale would not become village moneys subject to the village budget process and State reserve fund requirements until actually received by the village. It is well established, however, that a municipality may not do indirectly what it cannot do directly (see, e.g., Commco v Amelkin, 62 NY2d 260, 476 NYS2d 775; Signacon Controls Inc v Mulroy, 32 NY2d 410, 345 NYS2d 527). Since it appears that the buyer has sufficient resources to pay the purchase price to the village at the closing and no legitimate interest in the disposition of the proceeds following the closing, we believe that the only purpose for paying an amount equal to the purchase price to a third party is to enable the village to avoid the village budget process and State reserve fund requirements.

Finally, we believe that the village should reexamine the current State statutes which authorize the establishment of reserve funds. In this regard, we note that General Municipal Law, §6-e authorizes the establishment of a contingency and tax stabilization reserve fund equal to no more than ten percent of the village's current budget for the purpose of financing "unanticipated expenditures" and "unanticipated revenue losses", and to mitigate tax increases in excess of five percent. In addition, General Municipal Law, §6-c authorizes the creation of one or more capital reserve funds to finance the construction, reconstruction or acquisition of capital improvements and equipment, as well as the transfer of moneys between capital reserve funds. Other sections of law authorize the establishment of additional types of reserve funds, including reserve funds to finance repairs of capital improvements or equipment of a type not recurring annually or at shorter intervals (General Municipal Law, §6-d), to pay debt service on bonds having a maximum maturity five years or more (General Municipal Law, §6-h), and to finance certain types of judgments, compromised or settled claims, and uninsured property losses (General Municipal Law, §6-n). This statutory scheme provides a number of options with respect to the purposes for which a municipality may accumulate moneys for future use.

March 7, 1996
Jay L. Zeiger, Esq., Village Attorney
Village of Ellenville

1. For purposes of this opinion, we assume that the property in question is no longer needed for village purposes. We also note that village park lands are impressed with a public trust and may not be alienated without specific State legislative authority (see, e.g. 1988 Opns St Comp No. 88-1, supra). Therefore, we also assume that the property in question is not park land impressed with a public trust or that the village has or will secure a special act of the State Legislature authorizing the sale of the property.

2. In Opn No. 87-51, supra, we concluded that a village may adopt a local law authorizing itself to take back a purchase money mortgage in connection with the sale of village real property. The type of transaction discussed in that opinion is distinguishable from the transactions at issue in this instance because a purchase-money mortgage evidences a security interest in real property which does not involve the payment of cash by the buyer to a third party for the benefit of the village and thereby implicate the village budget process and State reserve fund requirements.