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 The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.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 FUNDS -- Repair Reserve Fund (procedure for abolition of); (use of moneys for dredging lake)

GENERAL MUNICIPAL LAW, §§6-c(1)(b), 6-d: Moneys in a repair reserve fund may be expended for the dredging of a lake if the work is intended to restore the lake to its original condition and need not be undertaken annually or at shorter intervals. Where all moneys in a repair reserve fund have been expended and the town board has determined that there is no longer a need for such fund, the fund may be abolished by board resolution.

This is in reply to your letter concerning the expenditure of moneys held in a repair reserve fund. You state that a man-made lake is owned by a park district. In 1983, the town board included an item designated "Reserve for Draining the Lake" in its 1984 budget. The funds appropriated for this item have been held in a bank account entitled "Reserve Fund". The town board wishes to use the funds and accumulated interest to pay for the dredging of the lake. You ask whether the use of the funds for this purpose is permissible. If the funds may not be used to dredge the lake, you ask whether the reserve fund may be abolished.

We note, initially, that the fund in question was not clearly designated as a repair reserve fund under section 6-d of the General Municipal Law. Whether the town board, by including the "Reserve for Draining the Lake" in the 1984 budget, intended to establish a repair reserve fund for the park district is a question of fact that must be resolved by the town. We will, for purposes of this inquiry, assume that the town board properly established a repair reserve fund for the park district.

Section 6-d of the General Municipal Law authorizes the governing board of any town improvement district to establish a repair reserve fund. Subdivision (3) of section 6-d states that moneys in a repair reserve fund may be appropriated for repairs of capital improvements or equipment, which repairs are of a type not recurring annually or at shorter intervals. The term "capital improvement" is defined in section 6-c(1)(b) of the General Municipal Law, as follows:

"(1) Any physical public betterment or improvement or any preliminary studies and surveys relative thereto.

(2) Land or rights in land.

(3) Any furnishings, equipment, machinery or apparatus for any physical public betterment or improvement acquired at the time when such betterment or improvement is constructed, reconstructed or acquired."

It is our opinion that a man-made lake constructed or acquired by a park district constitutes a physical betterment and, therefore, a capital improvement for the purposes of section 6-d.

Having found that the lake is a capital improvement, it remains to be determined whether the dredging work constitutes a repair for which moneys from the repair reserve may be expended. As noted above, section 6-d provides that moneys may be expended from a reserve fund for repairs of capital improvements if the repairs are of a type that do not recur annually or at shorter intervals. Expenditures for the acquisition, construction and reconstruction of a capital improvement, however, may not be made from a repair reserve fund. Further, while moneys in a repair reserve fund generally may be transferred to a capital reserve fund (General Municipal Law, §6-d[3]), towns are not authorized to establish capital reserve funds on behalf of improvement districts (General Municipal Law, §6-c[3]). Therefore, if the work constitutes an improvement rather than a repair, there would be no statutory procedure available to utilize the repair reserve fund moneys for the work.

To determine whether a particular expenditure is a repair or a capital improvement, the underlying purpose of the expenditure must be examined. In 1984 Opns St Comp No. 84-8, p 10, we noted that, for purposes of the Internal Revenue Code, the distinction between a capital expense and a repair expense has been described as follows:

"'To repair is to restore to a sound state or to mend, while a replacement connotes a substitution. A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it appreciably prolong its life. It merely keeps the property in an operating condition over the probable useful life for the uses for which it was acquired. Expenditures for that purpose are distinguishable from those for replacements, alterations, improvement or additions which prolong the life of the property, increase its value, or make it adaptable to a different use.' (Illinois Merchants Trust Co., ex., 4 BTA 103)"

In addition, we have noted that a capital improvement generally involves a more complete rebuilding, remodeling or major overhaul and often the replacement of old, worn materials with new material (1988 Opns St Comp No. 88-50, p ; 1982 Opns St Comp No. 82-65, p 80).

Your inquiry does not detail the nature of the dredging work to be done. However, if the dredging is intended to restore the lake to a sound condition rather than to rebuild, improve or add value to the lake, and the work need not be undertaken annually or at shorter intervals, then the proposed work would constitute a repair which may be financed from the repair reserve fund.

In relation to the abolition of the repair reserve fund, we note that section 6-d is silent with regard to abolishing such a fund. It has been our opinion, however, that when there are no moneys remaining in a repair reserve fund and the town board has determined that there is no longer a need for such a fund, the town board may adopt a resolution abolishing the fund (1981 Opns St Comp No. 81-232, p 250). However, where moneys remain in the fund, those moneys must be appropriated pursuant to subdivision (3) of section 6-d before the fund may be abolished. Under subdivision (3), the moneys in a repair reserve fund established for a town improvement district may be appropriated only for repairs as discussed above.

November 1, 1988
Lewis B. Stadler, Esq., Town Attorney
Town of Kent