Knowledgebase-City Gas Department Wishes to Loan the General Revenue Fund an Amount Necessary to Construct a Municipal Garage


Information Product

Title:City Gas Department Wishes to Loan the General Revenue Fund an Amount Necessary to Construct a Municipal Garage
Summary:MTAS was asked whether the city gas department could loan the general revenue fund an amount necessary to construct a municipal garage.
Original Author:Shechter, Leslie
Co-Author:
Product Create Date:10/04/93
Last Reviewed on::12/05/2016
Subject:Utilities--Finance; Public works--Construction; Public works--Finance
Type:Legal Opinion
Legal Opinion:

Reference Documents:

Text of Document: October 4, 1993

This is a follow-up to my letter dated September 28th in which I answered whether the city gas department could loan the general revenue fund an amount necessary to construct a municipal garage in the negative. I must revise my earlier opinion.

While I see no distinction in the utility law between loans and outright transfers Mr. Leuty explained that loans are not considered "revenues" within the meaning of the statute, and thus, a municipally owned utility would not be prohibited from loaning money to construct this facility.

If the city wishes to borrow from the gas fund for this purpose and repay with utility funds as well as general revenue, the gas fund should loan some amount directly to the general fund and some amount directly to the other utilities. Each of the borrowing entities would help pay for the garage based on historical and projected usage. This way, you can use utility funds to repay the loan and still be certain of being in compliance with the utility law. Otherwise:
- you might have to negotiate how much will be due from each utility each year;
- it brings into question the indirect cost payments from utility funds; and
- weakens the arms-length nature of the arrangement.

Whether you make the loan to the general fund and repay exclusively with general revenues or make the loan partially to the general fund and partially to the utilities and repay from all borrowing funds the following conditions must be met:
1. the note should be issued under the three-year capital outlay note law;
2. the transaction must be arms-length, meaning that the municipality would negotiate three-year notes not more than two times and repay the loan over no more than a nine-year period, paying at least one-ninth each year;
3. the loan must also be made at the current rate of interest payable if the city were to finance this facility with a bank (this is true for the first three years and any renewal of the notes);
4. under no circumstances could the utility "forgive these loans";
5. the city would have to repay the loans from revenues of the funds to which the loan were made; and
6. finally, there must be a resolution to issue the notes, which resolution must be approved by the Comptroller's office.

If all these conditions are met, the gas department would be able to loan the $100,000 to construct the garage as long as the loans are repaid as if borrowed from a financial institution, a transaction that we would recommend instead.

Sorry for confusing the issue. Thanks for asking MTAS to help. If we can help further please call.
Sincerely,

Leslie Shechter
Legal Consultant

Please remember that these legal opinions were written based on the facts of a given city at a certain time. The laws referenced in any opinion may have changed or may not be applicable to your city or circumstances.

Always consult with your city attorney or an MTAS consultant before taking any action based on information contained in this database.