(1) Interest savings method.

In this method the annual contributions, previously determined, are based on the savings in interest charges on the indebtedness of the local agency to the State of New York arising out of the periodical reductions, by way of amortization, of that indebtedness in accordance with the terms of the loan contract. This saving is the difference between the amount charged, on the accrual basis, to account 4716, Interest on Indebtedness, for a given fiscal year and the amount of the annual interest charge on the original indebtedness. The annual provision, under this method, will ordinarily, be equal to the interest saving for the year, but is subject to adjustment at the direction of the division, or with its prior authorization and approval, as a result of the periodical review of the adequacy of the reserve. The interest savings method results in a level maximum rent charge, particularly during the early years of operation, but has the disadvantage of being only incidentally related to the replacement requirements. It cannot be used if the interest rate is too low.

(2) Sinking fund method.

In this method, the annual contributions, previously determined, are based on an analysis of the life expectancies of the various classes of assets to be replaced over the statutory life of the project, as described in subdivision (b) of section 1647-4.3. The annual provision, under this method, is also subject to adjustment at the direction of the division, or with its prior authorization and approval, as a result of the periodical review of the adequacy of the reserve. The sinking fund method results in higher initial rent charges which may later be offset by interest savings, but has the advantage of being directly related to the replacement requirements.