Cost-Saving Ideas: Capital and Repair Reserve Funds for Water and Sewer Districts
The brochure will assist your governing board in planning for major, nonrecurring or unforeseen capital expenditures.
Municipal and district governing boards prepare budgets every year that estimate, to the best of their ability, the revenues and expenditures they expect for the coming year. In addition to budgeting for such expenditures as salaries, benefits, utilities and other typical annual costs, prudent management also means planning ahead and saving for capital projects and infrastructure maintenance. Planning today and saving incrementally for future needs using a reserve fund can help reduce the financial impact of major, nonrecurring or unforeseen expenditures on your
annual operating budget.
Establishing and funding allowable reserve funds for a clear purpose can help smooth out spikes not only in the annual budget, but in the real property tax levy as well. In addition, saving for future capital needs can reduce or eliminate interest and other costs associated with debt issuances.
Governing boards should develop a written policy that communicates to taxpayers why money is being set aside, the reserve’s financial objectives, estimated funding levels, and the conditions under which funds will be utilized. A reserve fund should be established with a clear intent or plan regarding its future purpose, and not be merely a “parking lot” for excess fund balance.
Capital Reserve Fund
A capital reserve fund, authorized by General Municipal Law Section 6-c, is used to finance all or part of the cost of construction, reconstruction, or acquisition of capital improvements, or to finance the acquisition of equipment. Capital improvements include any physical improvement or betterment and related preliminary studies and surveys; land or rights in land; and any furnishings or equipment for the improvement or betterment acquired at the time. Equipment, including vehicles, machinery, and apparatus, must have a period of probable usefulness as defined in Local Finance Law Section 11.00.
Capital reserve funds take one of two forms:
- Capital reserve funds may be for “specific” capital improvements, such as a sewage disposal plant, or for a specific item or items of equipment, such as a sewer system pump. For these reserve funds, the estimated maximum cost of the specific item(s) must be stated in the authorization.
- Capital reserves also may be established for a “type” of improvement, such as land or buildings, or a type of equipment, such as sewer or water system maintenance equipment or machinery. This type of capital reserve does not require an estimated maximum cost.
A capital reserve fund is created by resolution of the district’s governing board, and is subject to permissive public referendum requirements in certain cases. It may be funded by district budgetary appropriations, transfers from unexpended district balances, or surplus district moneys. Expenditures from a capital reserve fund also are subject to permissive referendum requirements in some cases.
Repair Reserve Fund
A repair reserve fund, authorized by General Municipal Law Section 6-d, is used to pay for certain nonrecurring repairs to capital improvements or equipment. The type of repairs must be those that do not recur annually or at shorter intervals. This fund may not be used to pay for the operation and maintenance of a water or sewer system.
A repair reserve fund is created by resolution of the district’s governing board. It may be funded by district budgetary appropriations, transfers from unexpended district balances, or surplus district moneys.
Reserve Fund for Improvement Districts in Suburban Towns
A reserve fund for an improvement district, authorized by Town Law Section 55-a, is used to finance all or part of the cost of “objects or purposes” that may be constructed, reconstructed, acquired, or provided by (or on behalf of) an improvement district located wholly within a town governed by the Suburban Town Law (see Town Law Article 3-a). The fund may be used for a “specific” object or purpose, or a “class” of objects or purposes, as defined in Local Finance Law Section 2.00. For water and sewer districts, objects and purposes include such things as buildings, furnishings, equipment, machinery, etc., as defined in Local Finance Law Section 11.00, and which have periods of probable usefulness defined in the same section.
The fund is created by resolution of the town board and is subject to a permissive public referendum in the affected district. The authorization must set forth the maximum cost of the specific object or purpose, or class of objects or purposes. The fund may be funded by budgetary appropriations or district revenues not required by law to be paid into any other fund or account.
In general, reserve funds have specific intended purposes and requirements. Each statute that authorizes a reserve fund sets forth a particular underlying purpose for the fund. Because of the complexity of some of the legal requirements relating to the establishment, funding, use, and dissolution of reserve funds, we encourage local officials to consult with their legal counsel before establishing a particular reserve fund.
To further aid your understanding of reserve funds, the Office of the State Comptroller offers a publication entitled Local Government Management Guide: Reserve Funds. The guide provides information on general provisions for each type of reserve fund, purposes for which each reserve fund may be used, and special provisions, if applicable, that pertain to certain reserve funds. The guide, and other publications that provide information of interest relating to this topic, can be found on the Office of the State Comptroller’s website as noted in the Additional Resources panel of the brochure.
Our website also includes online tutorials relating to capital planning and budgeting, as well as multiyear financial planning.