When preparing your annual operating budget for a water or sewer district, consider setting aside money in a capital or repair reserve fund to be used for future capital projects or certain repair costs. Planning today and saving incrementally can help reduce the financial impact of such expenses on your annual budget.
Establishing and funding allowable reserve funds for a specific intended purpose can smooth out spikes in both expenditures and revenues. Saving for future capital needs can also reduce or eliminate interest and debt issuance costs.
Develop a Written Policy
Governing boards should develop a written policy that explains why money is being set aside in a reserve. It should also document the reserve’s financial objectives, estimated funding levels and the conditions under which funds will be used. Reserves should be established with a clear intent or plan about its future purpose and not merely a "parking lot" for excess fund balance.
Establish a Capital Reserve Funds
A capital reserve fund finances construction, reconstruction or acquisitions of capital improvements or equipment acquisitions. There are two forms of capital reserve funds:
- Specific capital improvement, such as a sewage disposal plant, or a specific item of equipment, such as a sewer system pump. For this type of fund, the authorization must state the estimated maximum cost of the specific item.
- Type of improvement, such as land or buildings, or type of equipment, such as sewer or water system maintenance equipment or machinery. Equipment, including vehicles, machinery, and apparatus, must have a defined "period of probable usefulness" (see New York State Local Finance Law Section 11.00). This type of capital reserve does not require a stated estimated maximum cost.
A governing board resolution is required to establish a capital reserve fund. Funding sources for the reserve may include district budgetary appropriations, transfers from unexpended district balances or surplus district moneys. Expenditures from "type" capital reserve funds are generally subject to permissive referendum requirements, as is the creation of a "specific" capital reserve fund.
Establish a Repair Reserve Fund
A repair reserve fund may be used for certain nonrecurring repairs to capital improvements or equipment. These are repairs that don’t recur annually or at shorter intervals. This fund may not be used to pay district operation and maintenance costs.
A governing board resolution is required to establish a repair reserve fund. Funding sources for the reserve may include district budgetary appropriations, transfers from unexpended district balances or surplus district money. Expenditures are subject to notice and a public hearing (except in an emergency, when other requirements apply).
Establish a Reserve Fund for Improvement Districts in Suburban Towns
A reserve fund for an improvement district may be used to finance 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 New York State Town Law Article 3-a).
The fund may be used for a specific object or purpose or a class of objects or purposes (see Local Finance Law Section 2.00). For water and sewer districts, objects and purposes include buildings, additions to a water supply system, reconstruction of a sewer system and certain other items (see Local Finance Law Section 11.00).
A town board resolution is required to create the reserve fund. The resolution is subject to a permissive referendum in the affected district and must set forth the maximum cost of the specific object or purpose or class of objects or purposes. Funding sources, including budgetary appropriations and district revenues, are not required by law to be paid into any other fund or account.
Review Legal Requirements
Reserve fund statutes generally provide for specific intended purposes and requirements. Each statute that authorizes a reserve fund sets forth a particular underlying purpose for the fund.
We encourage you to consult with legal counsel because of the legal requirements related to the establishment, funding, use and dissolution of reserve funds to ensure you are complying with all provisions of the pertinent statute.
Statutory authority for reserve funds:
- Establish a Capital Reserve Fund (New York State General Municipal Law Section 6-c)
- Establish a Repair Reserve Fund (New York State General Municipal Law Section 6-d)
- Establish a Reserve Fund for Improvement Districts in Suburban Towns (Town Law Section 55-a)
Our office has created Local Government Management Guide entitled Reserve Funds that provides more information on this topic.