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 The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.

BONDS AND NOTES -- Debt Limit (amount chargeable for zero coupon bonds); (amount chargeable for bonds sold at discount) -- Discount Bonds (amount chargeable to debt limit); (need to establish sinking fund) -- Zero Coupon Bonds (amount chargeable to debt limit); (need to establish sinking fund)

CONSTITUTIONAL LAW -- Debt Limit (amount chargeable for zero coupon bonds); (amount chargeable for bonds sold at discount) -- Discount Bonds (amount chargeable to debt limit); (need to establish sinking fund)

STATE CONSTITUTION, ARTICLE VIII, §2; LOCAL FINANCE LAW, §§21.00(d), 57.00(e), 104.00: There is no requirement for the establishment of a sinking fund with respect to "zero coupon bonds" issued between July 19, 1991 and December 31, 1993 as part of an issuance having an overall discount of twenty-five percent or less. The face amount at maturity of "zero coupon bonds" issued between July 19, 1991 and December 31, 1993 is chargeable against the local government's debt limit.

You ask whether the face amount of "zero coupon bonds" (i.e. deep discount bonds on which no periodic interest is payable) issued in 1993 is chargeable to a county's debt limit or whether only the difference between the face amount and the discount is chargeable. You also ask whether there is a requirement for annual contributions to an "escrow account" to accumulate an amount equal to the difference between the face amount and the amount received upon issuance of such bonds.

Article VIII, §2 of the State Constitution, which sets forth requirements for the issuance of indebtedness by municipalities, was amended, effective January 1, 1994, in several respects. The amended article VIII, §2 authorizes municipalities to repay debt with substantially level or declining debt service payments as an alternative to repayment pursuant to the "50% rule", and provides for an alternative method of determining the maximum maturity of municipal bonds by using the weighted average period of probable usefulness for all objects or purposes for which indebtedness is to be contracted. Further, the amendment provides that all interest on an issue of indebtedness need not be paid annually so long as either: (a) substantially level or declining debt service payments, including all payments of interest, are made over the life of the issue of indebtedness; or (b) there is annually contributed to a sinking fund the amount necessary to bring the balance of the fund, including interest earned on contributions, to the accreted value of the obligations to be paid therefrom on the date the contribution is made, less the sum of all required future payments of principal. Finally, the amendment provides that when a municipality sells obligations at a discount, the debt incurred for the purposes of constitutional debt limitations is deemed to include only the amount actually received, irrespective of the face amount of the obligations.

The provisions of this constitutional amendment were implemented by chapter 201 of the Laws of 1994, which also is effective January 1, 1994. Among other changes, chapter 201 amended Local Finance Law, §57.00(e) with respect to the sale of bonds at a discount to provide that: 

... no issue of bonds shall be sold at a price such that the difference between the sale price of such bonds, not including accrued interest, and the face value of such bonds at maturity, shall exceed five percent of the face value of such issue of bonds at maturity unless the municipality, school district or district corporation issuing such bonds has determined to issue them pursuant to a substantially level or declining annual debt service schedule or unless interest is contributed at least annually to a sinking fund in accordance with section two of article VIII of the constitution and the procedures of section 22.10 of this article . . . (emphasis added; see also Local Finance Law, §21.00[d], as amended by chapter 201, with respect to bonds on which interest is compounded and payable at maturity or prior to redemption).

Chapter 201 also amended Local Finance Law, §104.00 to provide that, for purposes of debt limitations, only the amount of money actually received by municipalities, school districts and fire districts for obligations sold at a discount constitutes chargeable indebtedness, irrespective of the face amount of the obligations at maturity. Section 135.00, relative to information provided in debt statements, similarly was amended to provide that, in listing the amount of outstanding obligations, " only the original amount of money actually received ... irrespective of the face amount of the obligations at maturity" be included (emphasis added).

Based on the foregoing, it is clear that, for obligations issued on or after January 1, 1994, only the difference between the face amount of zero coupon bonds and the discount, that is, the amount actually received, is chargeable against constitutional and statutory debt limits. Further, contributions are required to be made to a sinking fund with respect to zero coupon bonds issued on or after January 1, 1994 only if zero coupon bonds are not part of an issue of indebtedness issued pursuant to a substantially level or declining debt service payment schedule.

The bonds in question, however, were issued in 1993. From July 19, 1991 until December 31, 1993, municipalities were authorized to issue "zero coupon bonds" as part of an issuance having an overall discount of twenty-five percent or less (Local Finance Law, §57.00[e], as amended by L 1991, ch 413). There was, however, no requirement for the establishment of a sinking fund with respect to such bonds issued during that period. Further, there is nothing in the language or the history of the constitutional amendment or chapter 201 to suggest that the new sinking fund requirement is to apply to zero coupon bonds issued prior to January 1, 1994.

As to the amount to be charged against debt limits with respect to zero coupon bonds issued prior to January 1, 1994, it is clear that the constitutional amendment anticipates prospective application to bonds issued on or after January 1, 1994. The provision states that when obligations "are sold at a discount", only the amount received "shall be deemed" to be debt for debt limit purposes. The quoted language clearly speaks to future sales of obligations, not to obligations which had already been sold prior to the effective date of the amendment. Thus, the face amount at maturity of zero coupon bonds issued prior to January 1, 1994 is chargeable against the debt limit.

We note that this reading of the amendment is consistent with the purpose of the constitutional amendment when read as a whole. The change in the amount chargeable to the debt limit with respect to discount bonds was added, in part, in recognition of the new additional restrictions on indebtedness issued on or after January 1, 1994 on which interest is not paid annually. The restrictions, as noted, require payments into a sinking fund unless debt service is paid on a substantially level or declining basis. Since a municipality is required under the amendment to effectively treat the amount of the discount on obligations issued on or after January 1, 1994 as interest (see also Local Finance Law, §2.00[26], [27]), it is consistent to charge only the amount received against its debt limit. In view of the inter-related purposes of these two parts of the constitutional amendment, it is evident that they were intended to take effect at the same time and apply only to issuances on or after January 1, 1994.

November 18, 1994
Patricia Lamb McCarthy
Deputy State Comptroller