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Decision No. 13,604

Appeal of ANTHONY W. MORO from action of the Board of Education of the Johnsburg Central School District regarding the retention of unexpended surplus funds.

Decision No. 13,604

(April 30, 1996)

Judge & Duffy, Esqs., attorneys for respondent, Monica A. Duffy, Esq., of counsel

MILLS, Commissioner.--Petitioner, a resident of the Johnsburg Central School District ("district"), appeals respondent's alleged retention of excess surplus funds in connection with its 1995-96 school district budget. The appeal must be sustained in part.

On June 20, 1995, the district voters approved a budget of $5,756,590. As of June 30, 1995, the unaudited balance in the district's general fund was $1,213,000, $13,000 of which was reserved for encumbrances. On August 16, 1995, respondent resolved "to roll over $123,910 which will make the tax levy $2,698,314, or the same as the 1994-95 school year, which relates to a 0% tax increase." As a result of this resolution, $674,000 was appropriated to reduce the 1995-96 tax levy, leaving an undesignated fund balance of $526,000. Petitioner alleges that the undesignated fund balance should be no more than $115,132 and, therefore, an additional $411,000 of surplus funds should have been applied to reduce the 1995-96 tax levy.

Petitioner commenced this appeal on August 21, 1995 and requested a stay of the district's tax levy for the 1995-96 fiscal year. Acting Commissioner Thomas Sheldon denied petitioner's stay request on September 1, 1995.

Petitioner contends that respondent has retained unappropriated surplus funds in violation of Real Property Tax Law ("RPTL") '1318. Petitioner asks that I direct respondent to apply the sum of $411,000 to the 1995-96 budget expenditure and order respondent to comply with RPTL '1318 in the future. In addition, petitioner alleges that in fiscal years 1993-94 and 1994-95, respondent over-budgeted expenditures and under-budgeted income. Accordingly, petitioner requests that I order respondent to cease such practice. Finally, petitioner asks that I prohibit respondent from using school district funds in any way to defend its conduct.

Respondent maintains that it acted in good faith with respect to its budgetary process and has attempted to minimize the tax levy increases to district taxpayers. Respondent argues that it carried an excess fund balance in the 1995-96 fiscal year to minimize any increase in the district tax levy for the next fiscal year, 1996-97. In addition, respondent alleges that any undesignated fund balance remaining at the end of fiscal year 1995-96 will be applied to the 1996-97 tax levy.

Initially, I must address a procedural matter. I note that '275.16 of the Commissioner's regulations requires that an appeal to the Commissioner of Education be commenced within 30 days from the making of the decision or the performance of the act complained of. Petitioner commenced this appeal on August 21, 1995, more than 30 days after the close of the district's 1993-94 and 1994-95 fiscal years. Consequently, those portions of the appeal that relate to respondent's fiscal practices in those years are untimely. Petitioner's claim with respect to the 1995-96 fiscal year, however, is timely, since he commenced this appeal within 30 days of respondent's August 16, 1995 resolution.

Real Property Tax Law '1318 requires a board of education, at the conclusion of each fiscal year, to apply any unexpended surplus funds to reduce its upcoming tax levy for the current school year (Application of Brennan, 35 Ed Dept Rep 214; Appeal of Moessinger, 34 id. 246). "Surplus funds" is defined as "any operating funds in excess of two percent of the current school year budget, and shall not include funds properly retained under other sections of law" (RPTL '1318). Accordingly, at the end of each school year, a board of education may not retain more than 2% of its surplus funds for expenditures the following year, and must use the remaining surplus funds to offset its upcoming tax levy (Application of Brennan, supra; Appeal of Moessinger, supra).

Respondent admits that it retained surplus funds in an amount exceeding the 2% limit imposed by RPTL '1318, but argues that it did so to minimize any tax increase for the 1996-97 fiscal year. Regardless of respondent's intentions, RPTL '1318 requires the district to apply any unappropriated surplus funds in excess of 2% to the district's tax levy. Moreover, while respondent claims that it acted in good faith at all times, the record indicates otherwise. The district's independent auditor indicated that in the 1991-92, 1992-93 and 1993-94 fiscal years, the fund balance exceeded the 2% limit. In addition, the State Education Department issued an audit review memorandum to respondent's board president indicating that in the 1991-92 fiscal year the fund balance retained by the district exceeded the 2% limit permitted under RPTL '1318. Respondent was requested to take steps to insure that, in the future, funds retained were only those permitted by statute. Respondent failed to take those recommended corrective measures.

Accordingly, I admonish respondent and its officers to abide by the requirements of RPTL '1318 hereafter. Moreover, I direct respondent to apply unexpended surplus funds which exist at the end of the 1995-96 fiscal year to the reduction of the school tax levy for the 1996-97 fiscal year, as required by RPTL '1318, and to prepare its tax warrants in strict adherence to that provision. The State Education Department will closely monitor respondent's compliance.

Finally, I note that petitioner seeks an order prohibiting respondent from using school district funds to defend this appeal. Petitioner, however, has not cited any legal basis for this relief. Moreover, I note that section 275.15 of the Commissioner's regulations requires a school district to appear by an attorney in an appeal before the Commissioner.

THE APPEAL IS SUSTAINED IN PART.

IT IS ORDERED that respondent henceforth fully comply with Real Property Tax Law '1318 and that it approve its tax warrants in strict adherence to the statutory requirements.

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