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Decision No. 15,219

Appeal of KEN UY and ARTHUR NORDEN from action of the Board of Education of the Sullivan West Central School District regarding a capital reserve fund.

Decision No. 15,219

(May 12, 2005)

Shaw & Perelson, LLP, attorneys for respondent, David Shaw, Esq., of counsel

MILLS, Commissioner.--Petitioners challenge certain actions of the Board of Education of the Sullivan West Central School District ("respondent") relating to a capital reserve fund. The appeal must be sustained in part.

Although the record is somewhat unclear, it appears that at respondent's May 16, 2000 annual election, district voters authorized respondent to establish a capital reserve fund with an ultimate amount of $3,000,000 "for the purpose of paying part of the costs of the new High School construction and reconstruction of other District buildings." In addition, at a June 22, 2000 special district meeting, district voters approved the following proposition:

RESOLVED, that the Board of Education of Sullivan West Central School District at Callicoon-Jeffersonville-Youngsville-Narrowsburg, Sullivan and Delaware Counties, New York, is hereby authorized to purchase real property at a maximum estimated cost of $40,000 and construct and reconstruct school buildings, including site improvement, original furnishings, equipment, machinery, apparatus and other improvements and costs incidental thereto, at a maximum estimated cost of $49,898,453; and for such construction and reconstruction to expend up to $3,000,000 (plus accrued interest) from the "District-wide Construction and Reconstruction Reserve Fund"; and that the sum of $49,938,453, being the aggregate of the aforesaid costs, or so much thereof as may be necessary after taking into account the expenditure of Reserve Fund moneys, shall be raised by the levy of a tax upon the taxable property of said School District and collected in annual installments as provided by Section 416 of the Education Law; and, in anticipation of such tax, obligations of said School District shall be issued.

Respondent apparently expended the funds in its capital reserve fund during the 2001-2002 school year. This appeal ensued.

Petitioners essentially claim that respondent improperly expended monies from its capital reserve fund without voter authorization. Petitioners also maintain that at its December 4, 2003 meeting, respondent improperly accepted an inaccurate revised financial statement for the year ending June 30, 2002. Petitioners request, among other things, that I order respondent to rescind its acceptance of the revised financial statement, restore the capital reserve fund and comply with Education Law �3651 in the future.

Respondent objects to petitioners' reply and alleges that petitioners have failed to name as necessary parties certain unnamed State Education Department ("Department") officials who advised respondent on certain capital expenditures, reporting and State Aid issues. Respondent admits that it expended $1,037,477.28 from the Capital Reserve fund during the 2001-2002 school year, thereby depleting it, and asserts that district voters authorized this action by their approval of the June 22, 2000 proposition. Further, respondent explains that it properly accepted the revised financial statement to correct an earlier accounting error concerning the capital reserve expenditure.

Initially, I will address respondent's procedural objections.  The purpose of a reply is to respond to new material or affirmative defenses set forth in an answer (8 NYCRR ��275.3 and 275.14). A reply is not meant to buttress allegations in the petition or to belatedly add assertions that should have been in the petition (Appeal of General, 43 Ed Dept Rep 146, Decision No. 14,948). Therefore, while I have reviewed petitioners' reply, I have not considered those portions containing new allegations or exhibits that are not responsive to new material or affirmative defenses set forth in the answer.

A party whose rights would be adversely affected by a determination of an appeal in favor of petitioners is a necessary party and must be joined as such (Appeal of Hoffman, 43 Ed Dept Rep 160, Decision No. 14,953; Appeals of Branch, et al., 41 id. 334, Decision No. 14,704). Although respondent received advice from Department staff concerning the reserve fund, it is respondent's actions that petitioners challenge. Moreover, respondent fails to demonstrate how these unnamed State officials would be adversely affected by a determination in petitioners favor. Additionally, Education Law �310 does not authorize an appeal to the Commissioner from actions taken by staff of the State Education Department (Appeal of Karpen, 40 Ed Dept Rep 199, Decision No. 14,460; Appeal of Molloy College, 33 id. 361, Decision No. 13,078; Matter of the Bd. of Educ. of the City School Dist. of the City of Rome, 23 id. 382, Decision No. 11,253, affdsub nom.Bd. of Educ. of the City School Dist. of the City of Rome v. Ambach, 118 AD2d 932). Under these circumstances, I find no merit to respondent's claim that petitioners have failed to name necessary parties.

The purpose of a �3651 reserve fund is to permit a school district to set aside a sum of money for a future expenditure, rather than fund the expenditure through the current year's budget or through issuing bonds at the time of the expenditure. The reserve fund must be created for specific purpose(s), which must be disclosed to the voters at the time they approve the establishment of the fund. As I stated in Appeal of Kackmeister (40 Ed Dept Rep 577, Decision No. 14,560):

[T]he expenditures from reserve funds should be for the specific purpose(s) for which the fund was established, and the proposition to approve the expenditure should explicitly state the purpose of the proposed expenditure (Education Law �3651[3]). Although the stated purpose(s) of a reserve fund may be somewhat broad, the spending authorization should be specific and give the voters adequate notice of the particular intended use of the funds. A proposition authorizing the funding of a reserve fund or an expenditure from a reserve fund is limited to the fiscal year for which the voters approved the proposition, and may not contain language purporting to continue such authorization indefinitely into future fiscal years (accord, Opn. State Comptr. 83-223 [it is improper to use a single proposition to authorize a series of annual expenditures of a certain amount from a reserve fund]). As the Comptroller noted in Opinion 83-223, the statutory requirement of "specific purpose" mandates that each and every expenditure must be authorized separately by the voters, so that the voters can evaluate the expenditure in light of circumstances existing at the time each expenditure is to be made.

Based on the foregoing, I find that the June 23, 2000 referendum was insufficient to authorize respondent's expenditure from its capital reserve fund. First, the proposition fails to specifically identify the purpose for which the funds are sought (seeAppeal of Kackmeister, supra). Further, the proposition improperly requests authorization to spend "up to" the ultimate amount of the reserve fund, rather than specifying a dollar figure. Such an open-ended request is improper. Respondent's failure to specify the amount and proposed use of the funds deprived the voters of their ability to properly evaluate respondent's request.

In addition, because voter authorization must be obtained during the same school year in which the board proposes to expend the funds, the June 22, 2000 proposition was insufficient to authorize the expenditure of reserve funds during the 2001-2002 school year (Appeal of Kackmeister, supra). Moreover, the record reflects that respondent did not have $3 million in reserve on June 22, 2000. Accordingly, respondent improperly sought approval to spend more than was actually available in the reserve fund.

I find no merit, however, to petitioners' claim that the revised financial statement is inaccurate. In an appeal to the Commissioner, petitioner has the burden of demonstrating a clear legal right to the relief requested and the burden of establishing the facts upon which she seeks relief (8 NYCRR �275.10; Appeal of M.F. and J.F., 43 Ed Dept Rep 174, Decision No. 14,960; Appeal of Kessler, 43 id. 170, Decision No. 14,958). I find that petitioners have failed to meet this burden.

Finally, I remind respondent that a reserve fund is intended as a mechanism to reserve and accumulate funds over time for a future project, not as a vehicle to finance a current project or current needs. There is no sense whatsoever in depositing money received from current tax levies into a reserve fund, and then conveying the money via an interfund transfer to the district's capital fund to expend the money during the same fiscal year. If there is money from current tax levies available for such current needs, the money should simply be deposited directly into the capital fund for expenditure (Appeal of Kackmeister, supra).

THE APPEAL IS SUSTAINED TO THE EXTENT INDICATED.

IT IS ORDERED that respondent henceforth fully comply with the reserve fund requirements of Education Law �3651.

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