Using Trust and Capital Reserve Funds to Make Lease Payments: Can It Be Done?

By Kimberly Hallquist, Esq.

The town’s old plow truck is still running due only to the dedication and considerable mechanical talents of the highway department crew who have so far been able to work miracles to keep the truck on the road. Unfortunately, the town’s best mechanic has just given his notice and is moving south to enjoy semi-retirement in the sun. The selectmen know that without their ace mechanic, the town’s luck in keeping this plow truck running until town meeting probably won’t last. The decision is made to replace the old truck with a truck that doesn’t need hours of repairs after every use or, worse, that leaves the crew stranded on the side of the road at the worst possible moment, like the middle of a snowstorm. The selectmen review the highway equipment trust and capital reserve account balances and wonder how these monies might be used to ease the pressure on their highway crew.

Q. The town created a trust fund for the purpose of purchasing highway equipment. Can that money be used to immediately buy the plow truck outright?
A. Yes, if town meeting voted to name the selectmen agents to expend the funds, the selectmen can use the funds to purchase the plow truck just as soon as they can find a truck that will fit the town’s needs. RSA 31-19-a. In this case, there is no need to wait for a town meeting vote because, by naming the selectmen agents to expend the money in the trust fund, town meeting authorized the future expenditure of funds for the purpose of the fund. As agents to expend the funds, the selectmen are limited to spending the funds only for the purpose stated when the fund was created. Thus, the highway equipment trust fund can only be spent on highway equipment, the town hall repair trust fund can only be used to make repairs on the town hall and so on. This is also true of capital reserve funds created pursuant to RSA 34:1-a, 35:1 or 35:1-c. If town meeting did not name agents to expend the money in the trust or capital reserve funds, the selectmen will not be able to use the money without first getting voter approval.

Q. Instead of purchasing the truck outright, can the town enter into a lease/purchase agreement to acquire the truck?
A. Yes, the governing body may enter into leases of equipment as required by the municipality. RSA 33:7-e. If the lease includes a non-appropriation clause, also known as an escape clause, the appropriation to fund the lease may be approved by a simple majority of the voters. In this case, voters authorize the selectmen to enter into the lease agreement and vote to appropriate one year of the lease payment. Subsequent years’ lease payments can then be included in the operating budget or in a separate warrant article. If voters in future years fail to appropriate the funds necessary to make the lease payment, the equipment is returned and the town has no further financial obligation.

On the other hand, if the lease does not contain an escape clause, it creates a debt obligation on the part of the town and is subject to Chapter 33, the Municipal Finance Act, requiring a two-thirds ballot vote of the annual or special town meeting (three-fifths vote in official ballot referendum towns).

Q. Can trust or capital reserve funds be used to make the lease payments?
A. Yes, but only if the lease agreement does not contain a non-appropriation, or escape, clause and is ratified by a two-thirds ballot vote at the annual or special meeting (three-fifths in official ballot referendum towns). RSA 35:15, III.

Q. What about the prohibition against sinking funds and debt retirement funds?
A. A sinking fund is defined as a sum set apart out of current net revenue to meet a present obligation that has not yet matured but will mature at some set future date. Such funds are prohibited pursuant to RSA 33:2. Using trust and capital reserve funds to make the lease payment does not violate the law against sinking and debt retirement funds because they are specifically exempt from the provisions of RSA 33:2. RSA 35:15, III (a).

Q. If the selectmen are named agents to expend the trust or capital reserve fund, can a town meeting vote be avoided by using trust or capital reserve funds to pay the lease?
A. No. While trust or capital reserve monies can be used to make lease payments, they can only be used when the lease does not include a non-appropriation, or escape, clause and when the lease/purchase agreement has been ratified by a two-thirds ballot vote (three-fifths in official ballot referendum towns) at the annual or special meeting. RSA 35:15, III. Thus, a town meeting vote must be held in order to use the funds to make lease payments, notwithstanding the designation of the selectmen as agents to expend.

Q. What can be done if the plow truck gives up for good and there is not enough money in the trust or capital reserve funds, or if agents to expend have not been appointed?
A. There are a few options to consider in this unfortunate scenario. If the operating budget contains an appropriation for the lease of highway equipment, and the overall budget can handle the expense, the selectmen may enter into a short-term lease to acquire the truck. If the budget does not already contain an appropriation, the selectmen can apply to the Department of Revenue Administration, pursuant to RSA 32:11, for permission for an emergency expenditure. This request will be approved only if the town has sufficient funds available to cover the cost. If funds are not available, a special town meeting would be necessary to appropriate the funds needed. A special town meeting may be granted upon petition to the superior court and a finding that the request meets the emergency requirements of RSA 31:5.

While selectmen may be named agents to expend trust and capital reserve funds, authorizing them to spend those funds without a vote of town meeting, they cannot use the funds to make lease payments without first getting authorization from town meeting. Using trust and capital reserve funds to make lease payments is permitted only when the lease does not contain a non-appropriation clause and when the voters have ratified the lease by a two-thirds ballot vote (three-fifths in official ballot referendum towns).