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 The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.

CITIES -- Powers and Duties (deposit of State aid for education in mandatory reserve fund)

MUNICIPAL FUNDS -- Mandatory Reserve Funds (criteria for establishing)

SCHOOL DISTRICTS -- Powers and Duties (use of State aid); Reserve Fund (deposit of State aid in mandatory reserve fund)

EDUCATION LAW, §§3601-a, 3602, 3604, 3609, 3609-a; GENERAL MUNICIPAL LAW,§6-l: A city with 125,000 or more inhabitants which receives State aid on behalf of the city school district on account of a school building project for which indebtedness was contracted and remains outstanding must deposit the aid in a mandatory reserve fund for the payment of debt service to the extent that the aid is not applied directly to pay for the project or to retire obligations issued in anticipation of the aid. State aid paid in relation to a school building project financed from a source other than the proceeds of obligations which remain outstanding may be expended for any school purpose as provided in Education Law, §§3604(4), 3609(3) and 3609-a(3), and is not restricted to use for funding capital projects.

This is in response to your inquiry concerning restrictions applicable to state aid for school building purposes paid to a city with 125,000 or more inhabitants on behalf of the city school district. You ask whether this aid may be used to pay operating expenses of the school district or is required to be used to fund capital projects of the school district.

Article 73 of the Education Law provides for the apportionment of public moneys to school districts. Sections 3601-a (for school years 1962-1963 through 1992-1993) and 3602 (for school years commencing on or after July 1, 1993) of the Education Law set forth the manner in which the amount of school aid is to be calculated for each school district. Subdivision 6 of each of these sections establishes a similar formula for the payment of state aid for school building purposes. The amount of state aid payable to a school district for school building purposes is based upon the school district's approved expenditures for capital outlays for school building purposes from its general fund, capital fund or from a reserve fund during the preceding school year and the school district's approved expenditures for payments of debt service for school building purposes in the current school year (Education Law, §3601-a[6]; §3602[6]). The term "approved expenditures" is defined to include "only . . . new construction, reconstruction, purchase of existing structures, for site purchase and improvement, for new garages, for original equipment, furnishings, machinery, or apparatus, and for professional fees and other costs incidental to such construction or reconstruction, or purchase of existing structures" (Education Law, §3601-a[6]; §3602[6]).

In relation to the use of the moneys apportioned pursuant to section 3602, section 3604(4) of the Education Law states that those moneys:

are for the purpose of aiding school districts in paying the salaries of teachers and the cost of school maintenance, and the sums so apportioned to such school districts shall be applied for such purposes and such sums shall not in any case be placed in the city treasury of any city to the credit of the general fund of such city for the reduction of taxation therein, notwithstanding any provision to the contrary contained in the charter of such city or in any act relating to such city or in any general, special or local law.

In addition, the moneys apportioned to the school districts are subject to sections 3609 (moneys payable prior to June 30, 1993) and 3609-a (moneys payable after July 1, 1993) of the Education Law. Subdivision three of each of these sections provides, in pertinent part, that: "[a]ny payments to a school district pursuant to this section shall be general receipts of the district and may be used for any lawful purpose of the district. . . ." In light of these statutory provisions, it is our opinion that the Education Law, in providing aid to reimburse school districts for capital outlays and debt service for school building purposes, does not restrict the use of that aid to the funding of capital projects (cf. Education Law §§3609[3] and 3609-a[3] pertaining to the use of state aid payments for debt service for school building purposes on debt excluded from a school district's debt limit).

We also note, however, that, to the extent the city contracted indebtedness for schoolbuilding purposes and any of that indebtedness remains outstanding, the state aid received for those purposes will be subject to the provisions of section 6-l of the General Municipal Law. In general, section 6-l of the General Municipal Law requires the establishment of a mandatory reserve fund in two situations: first, upon the cash sale of a capital improvement where there are outstanding obligations issued to finance the cost of the improvement; and second, where federal or state aid is received on account of a capital improvement where there are outstanding obligations issued to finance the cost of the improvement (30 Opns St Comp, 1974, p 138; 1972 Opns St Comp No. 72-751, unreported).

More specifically, section 6-l(2) provides that:

[w]hen a municipal corporation, fire district or school district has outstanding indebtedness incurred to finance the cost of such a capital improvement, federal and state aid received on account of such improvement, to the extent that it is not applied directly to the payment of a part of the cost of such improvement or to retire indebtedness issued in anticipation of such aid, shall likewise be deposited in a reserve fund for the purpose of retiring such obligations. . . . [S]uch state or federal aid . . . shall be deposited to the credit of such fund, provided however, that if the aggregate amount thereof shall exceed the principal of such indebtedness due or to become due, or if, when all such outstanding obligations have been retired, any moneys remain unexpended in the reserve fund, such excess moneys may be used for any lawful municipal or district purpose, as the case may be.

Thus, state aid received on account of a capital improvement financed with the proceeds of outstanding obligations, which is not applied directly to payment of the cost of the project or to retire indebtedness issued in anticipation of the aid, must be placed in mandatory reserve fund. With certain exceptions, appropriations from the reserve fund may be made only for the payment of all or part of the outstanding indebtedness (General Municipal Law, §6-l[3]). Balances in excess of the sum of all the installments of principal due or to become due on the outstanding obligations or the balance remaining in the reserve fund after all the outstanding obligations have been retired may be expended for any lawful municipal or district purpose, as the case may be (General Municipal Law, §6-l[2], [3]).

Here, it appears that the apportionments for school building purposes are paid "on account of" the school district's approved expenditures for capital improvements. Consequently, it is our opinion that if the city contracted indebtedness for school building purposes, and state aid is received in relation to a building project for which indebtedness was contracted and remains outstanding, that aid must be placed in a mandatory reserve fund pursuant to section 6-l of the General Municipal Law to the extent that it is not applied directly to pay for the project or to retire obligations issued in anticipation of the aid. If the school district financed a school building project from a source other than the proceeds of obligations which remain outstanding, the school district may expend the state aid received in connection with that project for any school district purpose as provided in Education Law, §§3604(4), 3609(3) and 3609-a(3), and is not restricted to using the aid for the funding of capital projects.

August 21, 1995
Patricia L. McCarthy
Deputy Comptroller