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Decision No. 16,224

Appeal of FREDERICK THURNHERR, STEPHEN WELK and LAWRENCE KRZEMINSKI from actions of the Board of Education of the Holland Central School District regarding surplus funds.

Decision No. 16,224

(April 5, 2011)

Hodgson Russ LLP, attorneys for respondent, David A. Farmelo, Esq., of counsel

STEINER, Commissioner.--Petitioners, members of the Board of Education of the Holland Central School District (“respondent” or “board”), challenge the actions of the board in retaining unreserved funds in excess of four percent of its 2009-2010 operating budget.  The appeal must be sustained in part.

On May 18, 2010, district voters approved the 2010-2011 budget.  At a meeting on August 23, 2010, the board approved two measures by votes of four to three, with petitioners casting the three dissenting votes.  Specifically, the board approved the 2010-2011 tax warrant and the transfer of $521,000 from the General Fund to the Unappropriated Fund Balance.  Petitioners assert that the board improperly transferred and retained the $521,000 in surplus funds from the 2009-2010 school year in violation of Real Property Tax Law (“RPTL”) §1318(1), and contend that these funds should have been applied to reduce the 2010-2011 tax levy.  They seek assessment of a proper tax levy for 2010-2011.  Petitioners’ request for interim relief was denied on September 8, 2010.

Respondent contends that petitioners failed to establish the facts upon which they seek relief and that the appeal must be dismissed as moot.

I must first address several procedural issues.  I note that petitioners submit a “reply” to respondent’s papers responding to their request for interim relief.  The Commissioner’s regulations do not provide for such a pleading, therefore, I did not consider it.  Petitioners also submit two exhibits with their memorandum of law:  minutes of the August 23, 2010 board meeting and an affidavit.  A memorandum of law should consist of arguments of law (8 NYCRR §276.4).  It may not be used to add belated assertions or exhibits that are not part of the pleadings (Appeal of Bruning and Coburn-Bruning, 48 Ed Dept Rep 84, Decision No. 15,799; Appeal of Wright, 47 id. 202, Decision No. 15,668).  Petitioners contend that the minutes only became available at the time the memorandum was served but make no such contention regarding the affidavit.  Therefore, I have not considered the affidavit in this appeal.

An appeal may only be maintained on behalf of a class where the class is so numerous that joinder of all members is impracticable and where all questions of fact and law are common to all members of the class (8 NYCRR §275.2; Appeal of Pollicino, et al., 48 Ed Dept Rep 279, Decision No. 15,858; Appeal of Strade, et al., 48 id. 73, Decision No. 15,797).  A petitioner must set forth the number of individuals he or she seeks to represent and must show that all questions of law and fact would be common to all members of the class (Appeal of Pollicino, et al., 48 Ed Dept Rep 279, Decision No. 15,858; Appeal of Strade, et al., 48 id. 73, Decision No. 15,797).  Petitioners’ pleadings are devoid of any allegations addressing those criteria.  Therefore, to the extent petitioners seek to bring this appeal on behalf of “residents of the Holland School District,” their request for class status is denied.

The Commissioner will only decide matters in actual controversy and will not render a decision on a state of facts which no longer exist or which subsequent events have laid to rest (Appeal of a Student with a Disability, 48 Ed Dept Rep 532, Decision No. 15,940; Appeal of M.M., 48 id. 527, Decision No. 15,937; Appeal of Embro, 48 id. 204, Decision No. 15,836).  To the extent petitioners seek a revision of the tax levy for 2010, such relief is not available.  According to respondent, the 2010 tax warrant for the tax levy was transmitted on August 24, 2010 to the counties that collect the taxes on behalf of the school district, and the bills had been printed on September 2, 2010.  This appeal was commenced on August 30, 2010, and by the time all the necessary papers were filed in this appeal, the taxes had been levied and the tax bills printed.  There is no mechanism for returning a pro rata share of funds to the taxpayers once the tax levy has been made (Appeal of Muench, 44 Ed Dept Rep 398, Decision No. 15,210; Appeal of Liberatore, 42 id. 321, Decision No. 14,869).  However, "[i]t is settled doctrine that an appeal will, nevertheless, be entertained where, as here, the controversy is of a character which is likely to recur not only with respect to the [same] parties ... but with respect to others as well" (East Meadow Community Concerts Ass’n v. Bd. of Educ., Union Free School Dist. No. 3, County of Nassau, 18 NY2d 129, 135; (Appeal of Muench, 45 Ed Dept Rep 508, Decision No. 15,397).  Accordingly, I decline to dismiss this appeal as moot because, in view of respondent’s statutory interpretation, the matter is likely to be repeated and also raises important legal issues that affect all districts and taxpayers statewide.

Turning to the merits, under RPTL §1318(1), 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 four percent of the current school year budget, and shall not include funds properly retained under other sections of law" (RPTL §1318[1]).[1]  Accordingly, the Commissioner has repeatedly held that, at the end of each school year, all unexpended operating funds in excess of the statutorily permitted percent of the amount of the budget for the upcoming school year must be applied to reduce the tax levy (Appeal of Uy and Norden, 44 Ed Dept Rep 368, Decision No. 15,201; Appeals of Gorman, 43 id. 32, Decision No. 14,906).

Respondent’s superintendent avers that the district’s auditors did not inform him until mid-August 2010 that the fund balance surplus would exceed $500,000 over the four percent limit.  Thereafter, based on the auditors’ advice, he proposed three options for the board to address this issue, taking into account that the amount of State aid payable to the district had not been finally determined at that time.  He recommended that the board underestimate the anticipated revenue from State aid at an amount less than that contained in the Governor’s budget and apply the excess surplus to increase the appropriated fund balance revenue.  Alternatively, he suggested that the board could maintain the State aid amount but retain the excess surplus funds of $521,000, or, lower the projected 2010-2011 tax levy.

Respondent admits that it adopted the second option, namely, to adopt the tax warrant as previously approved by the voters and to transfer the excess surplus into the unappropriated fund balance, thereby retaining $521,000 in unappropriated, unreserved funds in excess of the four percent limit permitted under RPTL §1318(1), and did not apply this $521,000 surplus to reduce the tax levy.  Respondent’s president avers that he believes the board’s action was taken in good faith over its concern that it would not receive its projected revenue from State aid and sales tax, and to avoid potential mid-year reductions in programs or personnel.[2]  Respondent contends that the effect of retaining the surplus was consistent with the requirements of RPTL §1318(1) because it essentially applied the unappropriated fund balance to the revenues for the 2010-2011 fiscal year, placing the district and the taxpayers in the same position as if the money had been applied to the tax levy.

However, while RPTL §1318(1) permits 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 by informally deciding to hold them for future expenses (Appeals of Gorman, 43 Ed Dept Rep 32, Decision No. 14,906; Appeal of Schadtle, Jr., 40 id. 60, Decision No. 14,421).  As noted above, RPTL §1318(1) requires that, at the end of each school year, all unexpended operating funds in excess of four percent of the amount of the budget for the upcoming school year must be applied to reduce the tax levy (Appeal of Uy and Norden, 44 Ed Dept Rep 368, Decision No. 15,201; Appeals of Gorman, 43 id. 32, Decision No. 14,906).

In this instance, although the 2010-2011 Education Labor and Family Assistance (“ELFA”) Budget, Chapter 53 of the Laws of 2010, was enacted in July 2010, the accompanying Article VII bill, S.6607-B/A.9707-C had been vetoed.  As a consequence, projections of the exact amount of State aid payable to each school district could not be published immediately following enactment of the budget, as is normally the case.  It was not until August 24, 2010, the day after respondent had approved the tax warrant on August 23, 2010, that respondent was provided access to updated data on the amount of its 2010-2011 State aid. Respondent’s uncertainty about the exact amount of its 2010-2011 State aid is understandable under these circumstances, but respondent was obligated to rely upon the best estimate of State aid available at the time of the levy and to justify any deviation from that amount.  Its determination must be rational, reasonable and consistent with law (Appeal of Muench, 45 Ed Dept Rep 508, Decision No. 15,397; Appeals of Gorman, 43 id. 32, Decision No. 14,906).

Respondent has not attempted to justify its retention of funds based upon a rational and reasonable projection of State aid due to the district.  Respondent was not free to make a unilateral determination that more than four percent of its current year budget should be retained as an unreserved fund balance based upon its fears that a future reduction in its State aid might occur.  Whether a school district should be permitted to retain more than four percent in these circumstances is for the State Legislature to decide.  I am thus constrained to find that respondent improperly retained the excess surplus funds.  I therefore direct respondent to apply any unexpended, unreserved surplus funds that exist at the end of the 2010-2011 school year to the reduction of the school tax levy for 2011-2012 school year as required by RPTL §1318.  I further direct respondent to abide by the requirements of RPTL §1318 hereafter (seeAppeal of Uy and Norden, 44 Ed Dept Rep 368, Decision No. 15,201; Appeals of Gorman, 43 id. 32, Decision No. 14,906; Appeal of Astafan, 36 id. 463, Decision No. 13,776).

THE APPEAL IS SUSTAINED TO THE EXTENT INDICATED.

IT IS ORDERED that respondent henceforth fully comply with Real Property Tax Law §1318 in strict compliance with the statutory requirements.

IT IS FURTHER ORDERED that respondent apply any unexpended, unreserved surplus funds that remain at the end of the 2010-2011 school year to the reduction of the tax levy for the 2011-2012 school year.

END OF FILE.

[1] In 2007, the definition of surplus funds was amended to mean “in excess of three percent” for the 2007-2008 school year, and “in excess of four percent for the 2008-2009 school year and thereafter (L.2007, ch.238).  Prior to 2007, surplus funds meant those in excess of two percent.

[2] Respondent asserts that it received notification of its State aid allocation on August 24, 2010, the day after the board meeting.