Knowledgebase-Questions on Capital Outlay Notes


Information Product

Title:Questions on Capital Outlay Notes
Summary:MTAS was asked two questions on capital outlay notes.
Original Author:Hemsley, Sid
Co-Author:
Product Create Date:04/15/94
Last Reviewed on::10/30/2009
Subject:Finance--Notes--Capital outlay; Purchasing--Bids proposals and specifications; Purchasing--Laws and regulations; Purchasing--Policies and procedures
Type:Legal Opinion
Legal Opinion:

Reference Documents:

Text of Document: April 15, 1994

You have two questions:

1. If the city issues a capital outlay note by resolution for $50,000 for the rebuilding of the swimming pool, will its issuance satisfy the City Charter requirement [Section 6] that all contracts costing over $5,000 be supported by an ordinance?

2. Can the city purchase police cars costing over $5,000 under a state contract, without bid, without an ordinance supporting the bid, and would the answer depend upon whether the city purchased the police cars with a capital outlay note?

The answer to both questions is no, and the answer to question 2 does not depend upon whether the city made the purchase of the police cars by capital outlay notes.

Question 1

The state can regulate municipalities by general law. Such general laws supersede the charter when that is the intention of the legislature. Municipal authority to issue capital outlay notes is found in the Local Government Public Obligations Act of 1986, codified in Tennessee Code Annotated, title 9, chapter 21. The following provisions are contained in that Act:

- Tennessee Code Annotated, section 9-21-102 provides that:

It is the intent and purpose of this chapter to provide a uniform and comprehensive statutory framework authorizing any local government to issue...capital outlay notes...

- Tennessee Code Annotated, section 9-21-105(17) defines "municipality" for the purposes of the Local Government Public Obligations Act of 1986 as "any incorporated city or any incorporated town of this state."

- Tennessee Code Annotated, section 9-21-107 declares that "All local governments have the power ... to [here follows a long list of things local governments are authorized to do under the Local Government Public Obligations Act of 1986, including to borrow money and to issue the various kinds of instruments provided for under the act, including capital outlay notes].

- Tennessee Code Annotated, section 9-21-108 expressly permits municipalities to do anything authorized under the Local Government Public Obligations Act of 1986 "by resolution."

It is very clear that the Local Government Public Obligations Act of 1986 supersedes any inconsistent provision of a municipal private act governing public obligations and expenditures where any of the instruments covered by that act are used, including capital outlay notes. However, comparing the city's charter provision requiring all municipal contracts costing over $5,000 to be supported by an ordinance and the Local Government Public Obligations Act's provision permitting capital outlay notes to be issued by resolution is comparing apples and oranges. Capital outlay notes represent municipal borrowing by the sale of interest-bearing notes to banks and other financial institutions. While that transaction is a contract between the city and the purchaser of the notes, I do not think it is the kind of "contract" contemplated by Section 6 of the city charter, which requires that, "all action obligating the city on contracts involving amounts in excess of $5,000 ... shall be by ordinance." Even if it were, the Local Government Public Obligations Act of 1986 would supersede it.

However, generally after a city borrows money via a capital outlay note, it uses the proceeds of the note to buy supplies and equipment under a separate contract. With respect to the swimming pool, the city will undoubtedly enter into a contract with a contractor (or perhaps several contractors) to rebuild it. I think it is this/these contract/contracts Section 6 of the city's charter requires being done by ordinance. In that respect Section 6 of the city charter is neither inconsistent with, nor superseded by, the Local Government Public Obligations Act of 1986.

Question 2

Tennessee Code Annotated, section 12-3-1001 provides that municipalities can purchase supplies and equipment thought state contracts, and expressly declares that:

Where any local or private act, charter or general law requires that a local governmental unit purchase by competitive bidding, the local unit of government may, notwithstanding the local or private act, charter or general law, purchase without public advertisement or competitive bidding, under the provisions of contracts or price agreements entered into by the department [of general services].

That provision does eliminate the requirement for competitive bidding under the city's charter, but it does not eliminate the requirement under Section 6 of the city's charter that "all actions on contracts involving amounts in excess of $5,000.00 ... shall be by ordinance." Because of the answer to question 1, it makes no difference whether the contract is preceded by the issuance of a capital outlay note to finance the purchase of the police cars.

As I have said before, Section 6 of the city's charter with respect to the ordinance requirement for contracts costing over $5,000 is highly burdensome, and the city should give some thought to changing or eliminating it.

Sincerely,

Sidney D. Hemsley
Senior Law Consultant
SDH/

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