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Decision No. 16,225

Appeal of DONNA WOLFLEY and JAMES McCAULEY from action of the Board of Education of the Springville-Griffith Institute Central School District regarding surplus funds and application for the removal of the members of the Board.

Decision No. 16,225

(April 5, 2011)

Hodgson Russ LLP, attorneys for respondent, John Christopher, Esq., of counsel

STEINER, Commissioner.--Petitioners challenge actions of, and seek to remove, the Board of Education of the Springville-Griffith Institute Central School District (“respondent” or “board”) for improperly retaining unreserved funds in excess of four percent of its 2009-2010 operating budget.  The application for removal must be denied.  However, the appeal must be sustained in part.

On May 18, 2010,[1] district voters approved the district’s 2010-2011 budget.  In early August 2010, respondent approved the tax levy and tax warrants but, respondent alleges, it did not receive notification of its State aid allocation until approximately August 24, 2010.  On October 5, 2010, respondent’s outside auditors informed it that the unappropriated, unreserved fund balance for the 2009-2010 school year was approximately $1 million more than anticipated because State aid and sales tax revenue were higher than expected, totaling more than $4.3 million, or 12.57 percent.

Petitioners contend that the district’s unappropriated, unreserved fund balance violates Real Property Tax Law (“RPTL”) §1318(1) because it exceeds the four percent surplus permitted to be retained by the statute.  They also contend that this is the third consecutive year that respondent has violated RPTL §1318(1) -- that the fund balance was 9.65 percent in 2009 and 8.35 percent in 2008.  They assert that when respondent accepted the audit, it failed to discuss its implication, outline a plan to rectify the violation, or request a study to return the excess funds to the taxpayers.  Petitioners seek to remove the board for wilfully violating (“RPTL”) §1318(1).  They request that I appoint an interim board pending a special election and order respondent to refund the excess fund balance to the taxpayers.

Respondent contends that petitioners fail to establish the facts upon which they seek relief.  They assert that the appeal must be dismissed as moot, as untimely, for failure to join necessary parties and for improper notice.

An appeal to the Commissioner must be commenced within 30 days from the making of the decision or the performance of the act complained of, unless any delay is excused by the Commissioner for good cause shown (8 NYCRR §275.16; Appeal of Lippolt, 48 Ed Dept Rep 457, Decision No. 15,914; Appeal of Williams, 48 id. 343, Decision No. 15,879).  Respondent contends that the appeal is untimely because petitioners did not commence the appeal until November 8, 2010, more than three months after the tax levy was set in early August 2010 and more that four months after the close of the 2009-2010 fiscal year.

To the extent petitioners appeal the approval of the tax levy in early August 2010, that portion of the appeal, commenced on November 8, 2010, must be dismissed as untimely (Appeals of Hubbard, 46 Ed Dept Rep 533, Decision No. 15,585).  However, an appeal under RPTL §1318(1) is timely if it is brought within the fiscal year during which unexpended surplus funds are allegedly improperly retained (Appeal 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 Schadtle, Jr., 40 id. 60, Decision No. 14,421).  Therefore, since the appeal was commenced on November 8, 2010, during the 2010-2011 school year, it is timely with respect to allegations that respondent improperly retained surplus funds during that school year.

To the extent petitioners seek to remove individual board members, the application must be denied for failure to join necessary parties.  A party whose rights would be adversely affected by a determination of an appeal in favor of a petitioner is a necessary party and must be joined as such (Appeal of Murray, 48 Ed Dept Rep 517, Decision No. 15,934; Appeal of Miller, 48 id. 465, Decision No. 15,917; Appeal of Williams, 48 id. 343, Decision No. 15,879).  Joinder requires that an individual be clearly named as a respondent in the caption and served with a copy of the notice of petition and petition to inform the individual that he or she should respond to the petition and enter a defense (Appeal of Murray, 48 Ed Dept Rep 517, Decision No. 15,934; Appeal of Miller, 48 id. 465, Decision No. 15,917; Appeal of Williams, 48 id. 343, Decision No. 15,879).

The record indicates that petitioners served only the district, by personally serving its clerk.  There is no indication that any individual board members were served with a copy of the notice of petition and petition.  Accordingly, petitioners’ application to remove the board members must be denied.

In addition, petitioners’ application for removal must also be denied because the notice of petition is defective.  The notice accompanying a removal application must specifically advise a school officer that an application is being made for his or her removal from office (8 NYCRR §277.1[b]).  In this case, petitioners failed to give such notice and, instead, used the notice prescribed under §275.11(a) for appeals brought pursuant to Education Law §310.  A notice of petition which fails to contain the language required by the Commissioner’s regulation is fatally defective and does not secure jurisdiction over the intended respondents (Appeal of Hertel, 49 Ed Dept Rep 267, Decision No. 16,021; Application of Barton, 48 id. 189, Decision No. 15,832; Appeal of Catalan, 47 id. 176, Decision No. 15,660).

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 request an order that respondent refund the excess fund balance to the taxpayers, such relief is not available.  This appeal was not commenced until November 8, 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 prorata 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 the matter is likely to be repeated and it 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]).[2]  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 asserts that it only became aware of the full amount of the excess fund balance at its meeting on October 5, 2010.  Although respondent acknowledges that its actions are inconsistent with the requirements of RPTL §1318(1), it maintains that it determined to adopt a conservative approach on financial issues to assure that it would have sufficient funds to meet the expenditures authorized by district voters, and to avoid mid-year budget cuts in programs and personnel.

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, after respondent had approved its levy, 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 APPLICATION IS DENIED AND 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] Respondent’s papers mistakenly state that the voters approved the budget on May 16, 2010, a Sunday.  The Commissioner takes judicial notice that on respondent’s website, under “Board of Education,” “Exit Poll Results,” the budget vote is shown as having occurred on May 18, 2010, a Tuesday, in accordance with Education Law §2022.

[2] 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.