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Decision No. 13,136

Appeal of KARL AARSETH against the Board of Education of the Malverne Union Free School District regarding the issuance of tax anticipation notes.

Decision No. 13,136

(March 24, 1994)

Ehrlich, Frazer & Feldman, Esqs., attorneys for respondent, Florence T. Frazer, Esq., of counsel

SOBOL, Commissioner.--Petitioner seeks an order rescinding the authorization of the issuance of tax anticipation notes ("TANS") by the Board of Education of the Malverne Union Free School District ("respondent"). The appeal must be dismissed.

On July 13, 1993, respondent conducted its first public meeting of the 1993-94 fiscal year. At that meeting, respondent distributed copies of the district's balance sheet for the year ending June 30, 1993. That balance sheet revealed, after payment of disbursements, a total cash balance of $2,092,391.22. However, the payment of $16 million of anticipated property tax revenues for the 1993-94 fiscal year is spread over a nine-month period and anticipated State aid payments for the year are received over a ten-month period. The district's bi-weekly payroll is approximately $500,000 during the school year.

Because tax revenues and State aid are received over nine and ten months respectively, to remedy this anticipated shortfall in cash resources, on July 13, 1993, respondent passed a resolution approving the offering of $6,000,000 of TANS. The portion of the TANS proceeds which were not immediately needed were invested in interest-bearing accounts. The interest earned would be used to offset the interest paid on the TAN's. When respondent did not accede to petitioner's request to rescind the resolution authorizing the issuance of the TAN's, this appeal followed.

Petitioner alleges that respondent's issuance of the TANS is contrary to New York Local Finance Law '24.00 and that the investment of TANS proceeds is illegal. Respondent contends that its actions are specifically authorized by statute.

Before addressing the merits, I must address a procedural matter. Respondent contends that the reply sets forth new issues and material which was not previously in the petition, and which does not respond to allegations contained in respondent's answer. My review of the record supports respondent's argument. The purpose of a reply is to respond to new material or affirmative defenses set forth in the answer (8 NYCRR 275.14). A reply is not meant to buttress allegations in the petition or to belatedly add assertions which should have been included in the petition (Appeal of Verity, 31 Ed Dept Rep 485; Matter of Pronin, 27 id. 203). Therefore, I will not consider the material belatedly added by petitioner in the reply.

Turning to the merits, petitioner errs in asserting that respondent's issuance of the TANS is contrary to Local Finance Law '24.00. The Local Finance Law '24.00 reads, in pertinent part:

a.1. Tax anticipation notes may be issued by any municipality, school district...

(a) During a fiscal year in anticipation of taxes or assessments levied for such fiscal year...

i. For the purpose of this section, taxes or assessments shall be deemed to be uncollected and not received by a municipality, school district or district corporation until cash is paid to such municipality, school district or district corporation for such taxes or assessments and such taxes or assessments are canceled or the title to such taxes or assessments is transferred by such municipality, school district or district corporation, or until real property has been sold for such taxes or assessments and has been acquired by such municipality, school district or district corporation and such municipality, school district or district corporation has realized cash by the sale of such real property. For the purpose of this section the term `taxes' or the term `assessments' shall not include interest or penalties upon uncollected taxes or assessments.

The record reflects that although sufficient money had been budgeted and is due to be received during the fiscal year, respondent lacked sufficient funds to meet its immediate obligations. At the beginning of the 1993-94 fiscal year, respondent had $2,092,391.00 dollars to meet the district's obligations. The initial State aid payment of $465,852 was due to be received on September 7, 1993. Tax revenues would not be received until after October 1993. Therefore, the available cash in September was $2,558,243. The record indicates, however, that respondent's anticipated expenditures for July, August and September greatly exceeded its available cash. Because respondent authorized the issuance of TANS to borrow the cash necessary to meet its expenses prior to the collection of taxes, I find that respondent specifically complied with the law (Local Finance Law '24.a.1(a); 9 Op. St. Compt. 52; 7 Op. St. Compt. 263; Financial Management Guide, New York State Comptroller, December 1992, Update No. 7).

Petitioner's assertion that respondent's practice of investing portions of the TANS proceeds is illegal is also without merit. New York's General Municipal Law '11 provides:

2. The governing board of any local government or, if the governing board so delegates, the chief fiscal officer or other officer having custody of the moneys may temporarily invest moneys not required for immediate expenditure, except moneys the investment of which is otherwise provided for by law, in special time deposit accounts in, or certificates of deposit issued by, a bank or trust company located and authorized to do business in this state, provided however, that such time deposit account or certificate of deposit shall be payable within such time as the proceeds shall be needed to meet expenditures for which such moneys were obtained...

Short-term investment of a portion of the TANS proceeds not immediately required for use is a common practice that is specifically authorized by statute and condoned by the Office of State Comptroller (General Municipal Law '11; Op. St. Compt. 82-211). What is not condoned by the Office of State Comptroller is the issuance of TANS for the sole purpose of investment (Op. St. Compt. 82-211). One criteria used by the Internal Revenue Service to ascertain whether a municipality has issued TANS solely for investment purposes is to determine whether the amount of the TANS exceeds the maximum cash flow deficit during the period in which the notes will be outstanding (Op. St. Compt. 82-211; Title 26 USC '103(c); 26 CFR '1.148-10). This limit is imposed to preclude the interest on the TANS from being included in gross income for federal income tax purposes. Whether an issuance meets the federal requirements for tax exempt status is a matter to be decided by the Internal Revenue Service (26 CFR '1.148-10).

In this case, the record reflects that respondent's investments are to defray operating expenses, not for the sole purpose of investment. Respondent only invested the TANS proceeds not immediately required in certificates of deposit. Those deposits are timed to become due and payable at times when the district will require the cash. The record reflects that the principal amount of the TANS will not exceed the school district's greatest cash flow deficit during the term of the TANS. Therefore, I find respondent's issuance of the TANS and its investment of the proceeds to comply with applicable law (General Municipal Law '11; Op. St. compt. 82-211).

THE APPEAL IS DISMISSED.

END OF FILE