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 The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.
MUNICIPAL COOPERATION -- Municipal Funds (cooperative investments)
MUNICIPAL FUNDS -- Deposits and Investments (as cooperative activity)
EDUCATION LAW, §§1604-a, 1723-a; GENERAL MUNICIPAL LAW, §§11, 119-o: Pursuant to a cooperative investment agreement, school districts and municipalities may, on a cooperative basis, temporarily invest unneeded funds in instruments and obligations in which all the participants are authorized to invest. The fiscal officer of a participating school district or municipality may be given custody of the funds and the authority to invest those funds. Authority over the investment of funds may not be delegated to an advisory board. Prior opinions relative to cooperative investment agreements superseded to the extent inconsistent.
You state that a number of municipalities and school districts are interested in cooperatively investing their moneys pursuant to a municipal cooperation agreement. In your letter, you have described the substance of the proposed agreement and ask our opinion as to whether such an agreement would be proper. While it is not a function of this Office to review the propriety of specific agreements negotiated among school districts and municipalities, we will, in general terms, discuss some of the issues raised by your inquiry.
The agreement contemplated by your inquiry would be entered into by participating school districts and municipalities pursuant to the provisions of Article 5-G of the General Municipal Law. Under the proposed agreement, one of the participating school districts or municipalities, through its fiscal officer, would take responsibility for the custody of the funds to be invested, provide for the administration of the funds, and make necessary decisions relating to those funds. The school district or municipality designated under the agreement to invest moneys for the participants (the "lead municipality") would be authorized to contract with an investment consultant to advise its fiscal officer, a custodial bank to hold funds and collateral, and an administrator to assist the fiscal officer with ministerial acts. All fees payable under these contracts would be paid out of the funds to be invested by the fiscal officer upon audit of the appropriate officer or body of the lead municipality.
It is proposed that, once the fiscal officer of the lead municipality has established an account with the custodial bank, the participating school districts and municipalities will deposit funds to be invested in that account. The fiscal officer, with the advice of the investment consultant, would then determine how the funds of the participating municipalities and school districts are to be invested and will instruct the investment consultant to execute the necessary transactions. The fiscal officer of the lead municipality need not consult with the fiscal officer of any other participating school district or municipality before making any investment permitted under the agreement. The custodial bank is to receive securities and collateral and hold them in an account in the name of the lead municipality.
All income, losses, and expenses relating to the investment of funds are to be allocated to the participating school districts and municipalities in proportion to their contributions to the total amount to be invested under the agreement. Each participating school district or municipality will have, initially, a zero balance under the agreement and the balances will be increased or decreased as the school districts and municipalities deposit and withdraw funds. Balances under the agreement will be adjusted to reflect the allocation of income, losses, and expenses to each participating school district and municipality.
The agreement also provides for the establishment of a body of advisors that would consist of fiscal officers of some of the participating school districts and municipalities. This body would have the authority to:
- Determine the value of any property, other than cash, contributed by a participating school district or municipality;
- Direct that all or a part of a balance be repaid to the participating school district or municipality;
- Adopt restrictive resolutions governing the investment practices of the fiscal officer of the designated school district or municipality;
- Adopt resolutions directing that any or all of the participating school districts or municipalities be indemnified or reimbursed, in appropriate circumstances, from the funds to be invested under the agreement; and
- Temporarily delay withdrawals under certain circumstances specified in the agreement.
Your inquiry details neither the number of members nor the manner of election of the proposed board of advisors.
While the inquiry does not specify how the agreement is to be amended, it does indicate that any participating school district or municipality which fails to approve an amendment to the agreement will cease to be a participant under the agreement. Finally, the inquiry indicates that the agreement is to terminate if the value of the contributions made by the participating school districts and municipalities falls below a level established under the agreement. At the time of the termination, each school district or municipality will receive its balance under the agreement.
Article 5-G of the General Municipal Law (§§119-m-119-oo) authorizes municipal corporations to enter into agreements for the performance among themselves or one for the other of their respective functions, powers or duties on a cooperative or contract basis or for the provision of a joint service (General Municipal Law, §119-o). As defined under Article 5-G, the term "municipal corporation" includes counties, cities, towns, villages, school districts and boards of cooperative educational services, but includes fire districts only for the purpose of agreements among one or more fire districts (General Municipal Law, §119-n[a]). General Municipal Law, §119-n(c) defines "joint service" to include "the joint performance or exercise of any function or power which each of the municipal corporations or districts has the power by any other general or special law to provide, perform or exercise, separately...."
It has been the opinion of this Office that Article 5-G grants municipal corporations broad authority to engage in cooperative ventures and that the investment of municipal moneys is one of the activities which municipalities may cooperatively pursue under that Article (1985 Opns St Comp No. 85-47, p 63; 1983 Opns St Comp No. 83-80, p 95; 1982 Opns St Comp No. 82-337, p 427; 1980 Opns St Comp No. 80-202, p 52; see also Office of the State Comptroller, Financial Management Guide, Cash Management and Investment Policies and Procedures, subsection 2.0060). Therefore, since you state that the purpose of the proposed municipal cooperation agreement is to enable school districts and municipalities to cooperatively undertake the investment of moneys, it is our opinion that the agreement referred to in your inquiry is of a type permitted by Article 5-G of the General Municipal Law.
According to your letter, the allocation of all income, losses, and expenses relating to the cooperative investment of funds among the participants is to be made on a pro rata basis under the proposed agreement. The agreement indicates that the balance of each participant will be adjusted to reflect this allocation at certain intervals not specified in your inquiry. Under section 119-o(2) of the General Municipal Law, a municipal cooperation agreement may set forth:
"a. A method or formula for equitably providing for and allocating revenues and for equitably allocating and financing the capital and operating costs, including payments to reserve funds authorized by law and payments of principal and interest on obligations. Such method or formula shall be established by the participating corporations or districts on a ratio of full valuations of real property, or on the basis of the amount of services rendered or to be rendered, or benefits received or conferred or to be received or conferred, or on any other equitable basis, including the levying of taxes or assessments to pay such costs on the entire area of the corporation or district, or on a part thereof, which is benefited or which receives the service."
The authority to allocate revenues and costs on any equitable basis found in the foregoing provision is, on our opinion, broad enough to encompass an allocation arrangement such as that outlined in the proposed agreement. In this regard, we note that the agreement appears to provide only for the pooling of funds for investments and not the issuance of any shares or securities to the participating school districts and municipalities (cf. 1987 Opns St Comp No. 87-14, p 25 which concludes that the purchase of shares evidencing ownership of in a registered investment company is not a permitted investment).
Under the proposed agreement, one participating school district or municipality, through its fiscal officer, is to take custody of the funds to be invested and is to be responsible for the payment of all expenses arising from the investment of those funds. Section 11 of the General Municipal Law provides that the governing board of a municipal corporation may authorize the "chief fiscal officer or officer having custody of moneys of such municipal corporation" to make its deposits and investments. Similarly, the sections of the Education Law governing investments provide that a school board may authorize the "district treasurer or other officer having custody of district moneys" to make its deposits and investments (see Education Law, §§1604-a, 1723-a). In addition, section 119-o(2)(h) of the General Municipal Law provides that a municipal cooperation agreement authorizing the provision of a joint service may contain provisions relating to:
" h. Custody by the fiscal officer of one participant of any or all moneys made available for expenditure for the joint service ...and authorization to such fiscal officer to make payments on audit of the auditing official or body of the participating corporation or district of which he is the fiscal officer."
Therefore, since Article 5-G permits one municipal corporation to undertake authorized activities on a joint or "one for the other" basis, we believe that the fiscal officer of one of participant may be given custody of the funds for the purpose of having that officer invest them on behalf of the others (Opn No. 85-47, supra; 1982 Opns St Comp No. 82-197, p 250; 1982 Opns St Comp No. 82-109, p 137; 1981 Opns St Comp No. 81-302 p 328; 1980 Opns St Comp No. 80-629, unreported).
Before any school district or municipality can agree to act cooperatively under Article 5-G, it must be determined that each municipality or school district entering into the agreement has the authority to perform the function or service on its own (see 24 Opns St Comp, 1968, p 873; 19 Opns St Comp, 1963, p 172). For example, section 11 of the General Municipal Law authorizes counties, towns, cities, and villages to invest in special time deposit accounts in or certificates of deposit issued by a bank or trust company located and authorized to do business in this State, obligations of the United States and the State of New York, and obligations fully guaranteed by the United States acting through an agency, subdivision, department or division thereof. While the provisions of the Education Law governing investment of school district funds authorize the investment of those funds in special time deposit accounts, certificates of deposit, and obligations of the United States and the State of New York, they do not authorize investments in obligations guaranteed by federal agencies (see Education Law, §§1604-a, 1723-a, 1804, 2503, 2554). Similarly, while General Municipal Law, §6-f permits municipalities to invest in their own obligations, other investment statutes, such as General Municipal Law, §11, do not. Consequently, any agreement entered into pursuant to Article 5-G for the joint investment of funds must restrict investments to those instruments or obligations in which all the participants are permitted to invest (1981 Opns St Comp No. 81-418, p 467).
We also be note that certain types of funds may be subject to limitations or conditions that must be considered before making investments under a joint investment agreement (see, e.g., Local Finance Law, §§22.10, 165.00). Each of the school districts and municipalities should be aware of the restrictions on the investment of particular funds and the impact of those restrictions on their participation under the joint investment agreement (see also Education Law, §3652; General Municipal Law, §6-f).
Another aspect of the proposed agreement which we believe requires some discussion relates to the use of an investment advisor and an administrator. Your description of the proposed agreement indicates that the fiscal officer, rather than the investment advisor, will be responsible for all investment decisions. You further state that the administrator will assist the fiscal officer "with ministerial functions." Presumably, these functions will relate to keeping records pertaining to the participants' accounts and providing participants with statements of their accounts.
It is a well-settled principle of municipal law that the statutory duties and responsibilities of public officers which involve the exercise of judgment or discretion cannot be delegated to others, unless authorized by the State Legislature (2 McQuillin, Mun Corp, 3rd Ed, §10.40; Hartford v Town of North Hempstead, 118 AD2d 542, 499 NYS2d 161; Foxluger v Gossin, 65 AD2d 51, 411 NYS2d 51; Syrtel Building, Inc. v City of Syracuse, 78 Misc 2d 780, 358 NYS2d 627). Thus, where the law imposes a duty which is not purely ministerial in nature on a public officer or board, that duty may not be discharged by contracting with private entities (see 2 McQuillin, Mun Corp, 3rd Ed, §10.41). Accordingly, since decisions concerning the types of investments to be made with municipal funds require the exercise of discretion and cannot be characterized as ministerial, it is apparent that these decisions must be made by the body or officer charged by law with that responsibility (1987 Opns St Comp No. 87-14, p 25).
While investment decisions must be made by the fiscal officer, a school district or municipality is not precluded from contracting for the services of experts to assist the fiscal officer in making investment decisions so long as the fiscal officer retains ultimate control over those decisions (Opn No. 87-14, supra; 1985 Opns St Comp No. 85-38, p 52). Further, it is well settled that a municipality or school district may contract with private parties for the performance of those functions of an officer which are purely ministerial in nature (Finch v City of New York, 205 NYS2d 308; 1986 Opns St Comp No. 86-75, p 119; 1980 Opns St Comp No. 80-540, p 154). Therefore, so long as the contracts authorized under the agreement do not entail the delegation of any statutory duties or responsibilities to the investment advisor or the administrator, they would be permissible. It must be remembered, however, that the fiscal officer is responsible for all investment decisions he or she makes and, therefore, must carefully review the recommendations made by the investment advisor to determine their legality and their compliance with the investment policies and procedures governing the joint investments.
The proposed agreement also provides for the creation of a board of "advisors" to which certain powers relating to the investment of funds would be delegated. In this regard, we note that General Municipal Law, §119-o(2)(h) permits custody of funds to be given to a single fiscal officer under those circumstances when the individual participants will not retain custody of their own funds. Further, General Municipal Law, §11 and the related investment statutes only permit governing boards to delegate the investment function to officers having custody of the moneys. Reading these provisions together, we conclude that a municipal cooperation agreement may not delegate part of the investment function to a fiscal officer other than the officer having custody of the money. Accordingly, it is our opinion that the proposed board of advisors may not be assigned those investment functions which, pursuant to General Municipal Law, §11 and the related investment statutes, may be delegated only to the officer having custody of moneys.
As to the other responsibilities which are proposed to be assigned to the advisors and which relate to the operation and administration of the cooperative activity, we also believe that these functions may not be properly exercised by the advisors except possibly under the limited circumstances described below. As was explained above, a municipality may only delegate non-ministerial functions in the manner provided by law. In our view, the types of decisions to be made by the advisory board, such as whether to suspend withdrawals or determining the value of assets to be contributed to the fund by participants, are not ministerial in nature.
Section 119-o(2) of the General Municipal Law provides that an agreement may contain provisions relating to the "officers responsible for the immediate supervision and control" of a joint service. In our opinion, however, this provision does not permit the governing board of a municipality to delegate its discretionary functions to a board comprised of officers or employees of the participating municipalities (see 1988 Opns St Comp No. 88-40, p 79). Therefore, we believe that such decisions must be made by the governing boards of the participants in the manner prescribed by the municipal cooperation agreement unless the agreement sets forth criteria and procedures governing these decisions in sufficient detail to enable them to be properly characterized as administrative in nature. With such criteria and procedures, the agreement, pursuant to General Municipal Law, §109-o(2), could delegate some of the responsibilities of the proposed advisory board to one or more officers or employees of the participants. Of course, for the reasons set forth above, decisions relating to the investment of moneys must be made by the officer having custody of them.
With respect to the amendment of the cooperative investment agreement, we note that your inquiry does not outline any procedure by which amendments are to be proposed or adopted. Rather, the only reference to the amendment of the agreement indicates that if the governing board of a participating school district or municipality fails to approve an amendment to the agreement, the participation of that district or municipality will automatically cease upon the effectiveness of the amendment.
In our opinion, any amendment to the agreement must be adopted in accordance with the same procedures as required for entering into the original agreement; that is, amendments must be approved by each participating school district or municipality by a majority vote of the voting strength of its governing body (General Municipal Law, §119-o; see Opn No. 81-302, supra). If the agreement were to allow for amendment by assent of less than all the participating governing boards, it would, in our view, constitute as improper surrender of legislative power (see, gen., 2 McQuillin, Mun. Corps., §10.38; 1A Antieau, Mun. Corp. Law, §§10.20, 10.21). However, we note that some practical difficulties may arise under an agreement which automatically terminates the participation of districts and municipalities that do not adopt proposed amendments to the agreement. Since a school district or municipality cannot continue to participate unless its governing board approves the amended agreement, it would appear that a school district or municipality that did not approve an amendment would have to be given a reasonable opportunity to withdraw its funds before the amendment becomes effective.
A municipality or school district, in addition to reviewing an agreement which provides for the cooperative investment of municipal moneys for compliance with applicable law, should also review the agreement to determine that it incorporates those investment policies and procedures which are essential to any sound investment program. In the Financial Management Guide for Local Governments published by this Office, we state that management policies, operating procedures and audit procedures are essential to a sound investment program and set forth in detail what those policies and procedures should contain. For example, our management guide recommends that there be a written investment policy which, among other things, sets forth the types of permissible investments, the procedures to be adhered to for each type of investment, an approved list of trading partners with investment limits and a requirement that all investments be made in accordance with applicable statutory provisions and policy directives of the board. We also recommend that all bank deposits should be secured by a pledge of collateral and that the collateral be held by a third-party bank pursuant to a written custodial agreement. In our opinion, any municipal cooperation agreement which authorizes the cooperative investment of municipal moneys should include the types of policies and procedures referred to in our Financial Management Guide. It is only through such incorporation that the participants can be certain that the responsibilities of the lead municipality and its fiscal officer are clearly defined and that investments are made in a manner which complies with applicable law and sound investment procedures.
Finally, it is necessary to emphasize that the existence of the joint agreement does not relieve participating school districts and municipalities of their responsibility to evaluate their individual investment needs or to ensure that cooperative investments made under the agreement are consistent with sound investment policies and procedures. In addition, we note that this opinion only addresses the general authority of municipalities and school districts to cooperatively invest under Article 5-G of the General Municipal Law and the various municipal investment statutes of New York State. It is not intended as a comment on the desirability or propriety of cooperative investment agreements nor on the applicability of other laws to such agreements. Therefore, it is incumbent on each municipality and school district which contemplates entering into a cooperative investment agreement to carefully review the agreement prior to participating.
October 24, 1988
Mr. Richard Freyman, Assistant Superintendent for Business Services
Ossining Public Schools