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Decision No. 13,885

Appeal of PAUL A. CLARK, JR. from action of the Board of Education of the Eldred Central School District and Lance Rozsa, Superintendent, regarding the retention of unexpended surplus funds.

Decision No. 13,885

(March 13, 1998)

Anderson, Banks, Curran & Donoghue, Esqs., attorneys for respondent, Rochelle J. Auslander, Esq., of counsel

MILLS, Commissioner.--Petitioner, a resident of the Eldred Central School District ("district") and, at the time this appeal was commenced, a member of respondent board of education, appeals the board’s allegedly improper use of unexpended surplus funds, which he asserts should have been used to reduce the district’s tax levy for the 1996-97 school year. The appeal must be sustained in part.

On May 8, 1996, the voters of the district approved a budget for the 1996-97 school year in the amount of $6,803,660.00. On its school tax warrant dated September 1, 1996, respondent board estimated the amount of its unexpended surplus funds available for appropriations to be $749,332.00. The warrant also indicates that $617,332.00 of that surplus was withheld -- that is, not applied to reduce the 1996-97 tax levy.

Petitioner contends that by retaining $617,332.00, respondents violated Real Property Tax Law ("RPTL") "1318(1). He requests that respondents be admonished for retaining excess operating funds from the 1995-96 school year, that respondents be ordered to cease their allegedly deceitful budget practices, and that respondents be required to reduce future taxes by the amount improperly retained by respondents at the beginning of the 1996-97 school year.

Respondents deny that they acted improperly, asserting that the amounts petitioner believed to be improperly retained were applied to ordinary contingent expenses.

Under RPTL "1318, at the conclusion of each fiscal year, a board of education must apply any unexpended surplus funds to reduce its tax levy for the upcoming school year. Surplus funds are 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[1]). Accordingly, at the end of each school year, all unexpended operating funds in excess of 2% of the amount of the budget for the upcoming school year must be applied to reduce the upcoming tax levy (Appeal of Moro, 35 Ed Dept Rep 474).

Applying the statutory formula to its 1996-97 budget, respondent board was authorized to retain unexpended operating funds in the amount of 2% of its $6,803.660.00 budget, or $136,073.20. It appears from the record in this appeal, however, that respondent board withheld $617,332.00, which is $481,258.80 more than 2% of its budget.

Respondents contend that they legitimately retained unexpended operating funds in excess of 2% of the district's 1996-97 budget because the amounts retained in excess of 2% were used for ordinary contingent expenses. This argument is without merit. While RPTL "1318(1) does authorize a board of education to retain additional unexpended operating funds when authorized to do so under other sections of law, it does not authorize a board to retain such funds any time they will be applied to ordinary contingent expenses. The authority to exceed the 2% limit on retaining unexpended funds applies only to reserve funds specifically authorized by law (Appeal of Sumner, et al., 27 Ed Dept Rep 250; Appeal of Smelter, et al., 26 Ed Dept Rep 418). Adopting respondents’ interpretation of RPTL "1318(1) would render that statute virtually meaningless. Since the vast majority of school district expenditures are for ordinary contingent expenses, authorizing boards to exceed the 2% limit whenever ordinary contingent expenses are involved would effectively result in no limit at all.

Moreover, there is no statutory authority for a board of education to create an unofficial reserve fund to carry over unexpended surplus funds to pay for previously unbudgeted ordinary contingent expenses. Rather, the proper procedure for the funding of ordinary contingent expenses is to include them in the budget for the voters' consideration. If the budget is defeated, the board may, of course, adopt a contingency budget and levy any taxes necessary to pay for such expenses (Education Law "2023).

RPTL "1318(1) provides that "[t]he warrant of the collecting officer...shall state the amount of unexpended surplus funds in the custody of the board and shall further state that except as authorized or required by law, such unexpended surplus funds have been applied in determining the amount of the school tax levy." While petitioner does not explicitly raise the issue, I note that the September 1, 1996 warrant of respondent board fails to include the required statement. In the future, respondent board must assure that its warrants explicitly state that except as authorized or required by law, all unexpended surplus funds have been applied in determining the amount of the tax levy.

With regard to petitioner's allegations concerning deceitful budget practices, I find that petitioner has not established that respondents have purposely engaged in any such practices. Accordingly, it is not necessary for me to order them to refrain from doing so in the future. I also decline petitioner’s request that respondents be required to reduce future taxes by the amount improperly retained by respondents at the beginning of the 1996-97 school year. After all, even if respondent board had retained only the proper amount of unexpended operating funds, it could have increased the amount of the budget and the tax levy as needed to cover ordinary contingent expenses.

THE APPEAL IS SUSTAINED TO THE EXTENT INDICATED.

IT IS ORDERED that respondents 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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