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Decision No. 14,367

Appeal of JACK I. SIMONS, from action of the Board of Education of the Liberty Central School District and Brian Howard, Superintendent, regarding the retention of unexpended surplus funds.

Decision No. 14,367

(May 18, 2000)

Ferrara, Fiorenza, Larrison, Barrett & Reitz, P.C., attorneys for respondents, Frank W. Miller, Esq., of counsel

MILLS, Commissioner.--Petitioner challenges the financial practices of the superintendent and Board of Education of the Liberty Central School District ("respondent board") and seeks removal of the board members. The appeal must be sustained in part.

On May 19, 1998, district voters approved respondent board’s proposed budget of $20,870,113 for the 1998-99 school year. At its July 29, 1998 meeting, respondent board approved a number of "deductions" from the district’s estimated excess fund balance of $2,291,502. The deductions included $450,000 for a technology capital project, $434,000 to replace deferred revenue for transportation expenses and $250,000 to cover a potential claim by Sullivan County in connection with the district’s prekindergarten program. Respondent board also determined that $1,000,000 of the surplus would be used to reduce local taxes for the 1998-99 year. Accordingly, respondent calculated its excess fund balance to be $157,502. At that meeting the board also approved and signed a tax warrant dated September 1, 1998, which listed $1,000,000 as "surplus estimated to be available for appropriations."

At respondent board’s August 24, 1998 meeting, respondent superintendent proposed an amendment to the tax warrant to show the tax reduction district residents would receive under the STAR program. However, respondent board did not approve the proposed amendment. Apparently an amended warrant containing information about STAR program funds was ultimately sent to the tax collector even though the board had not approved it.

In addition, on or about September 3, 1998, the district asked its auditors to reconcile a schedule of the district’s projected unappropriated fund balance. Based on the information provided, the auditors made several adjustments to the district’s calculations and determined the estimated unappropriated fund balance to be $434,272.00.

Petitioner alleges that it is unclear which tax warrant actually is in effect but that both are defective because they do not allocate the full amount of unexpended surplus funds to tax reduction. Petitioner also argues that the first tax warrant is invalid because it was signed on July 29 but dated September 1 and does not contain the language required by Real Property Tax Law ("RPTL") "1318.

Petitioner further contends that the deductions from surplus funds approved at respondent board’s July 29, 1998 meeting were improper and that the total amount of unexpended surplus funds retained by the district was $2,291,502. Petitioner asserts that this amount greatly exceeds two percent of the district’s 1998-99 budget, which is the maximum surplus the district could retain under RPTL "1318. Petitioner urges me to remove the members of respondent board because they knowingly exceeded the two percent limit. He also asks that I direct respondents to apply the full amount of unexpended surplus funds to tax reduction.

Respondents argue that petitioner’s computation of the surplus is incorrect because he used preliminary figures and failed to take the deductions into account. Respondents further allege that the deductions were proper because the board publicly discussed and approved them. They contend that the actual amount of unexpended surplus funds retained was $434,272, which is just slightly more than two percent of the budget. Respondents also argue that they are not subject to removal because they relied on estimated revenues and expenses in calculating the surplus and did not intend to violate RPTL "1318 or any other law. Respondents claim that the first tax warrant, which was the only one the board approved, is valid and that it properly reflects the $1,000,000 allocated to tax reduction.

Preliminarily, I note that I have accepted respondents’ supplemental memorandum of law and letter dated September 4, 1998 submitted pursuant to 8 NYCRR "276.5.

The appeal must be dismissed to the extent that it seeks removal of individual board members. The individuals against whom petitioner seeks relief are clearly necessary parties, as their interests would be adversely affected if I were to decide in petitioner's favor (Appeal of Looman, 39 Ed Dept Rep ___, Decision No. 14,262; Appeal of Rider, 39 id. 282, Decision No. 14,238; Appeal of Andela, 38 id. 249, Decision No. 14,026). To join an individual as a party to an appeal, that person must be named as a respondent, served with the petition and notice of petition, and afforded an opportunity to defend his or her interests (Appeal of Board of Education of the Ardsley UFSD, 38 Ed Dept Rep 221, Decision No. 14,019). It is the notice of petition which alerts a party that he or she is required to appear in the appeal and answer the allegations contained in the petition (Appeal of Heller, 38 Ed Dept Rep 335, Decision No. 14,048; Appeal of Chechek, 37 id. 624, Decision No. 13,943). Petitioner has not named any individual board members as respondents in either the petition or the notice of petition and has not personally served any of the board members. Moreover, the notice of petition does not state that the removal of any person is sought, as required by 8 NYCRR 277.1. Thus, to the extent petitioner seeks removal of individual board members, the appeal must be dismissed for failure to join necessary parties.

Petitioner’s challenge to respondents’ financial practices, however, must be sustained in part. 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]). Thus, at the end of each school year, all unexpended operating funds in excess of two percent of the amount of the budget for the upcoming school year must be applied to reduce the upcoming tax levy (Appeal of Clark, 37 Ed Dept Rep 386, Decision No. 13,885; Appeal of Moro, 35 id. 474, Decision No. 13,604).

Applying the statutory formula to its 1998-99 budget, respondent board was authorized to retain unexpended operating funds in the amount of two percent of $20,870,113, or $417,402. Although respondents assert the district retained $434,272, it appears that the board inappropriately retained a much larger amount. Respondents contend that the board began with a balance of $2,291,502 and legitimately deducted $450,000 for a technology capital project, $434,000 to replace deferred revenue for transportation expenses and $250,000 for a potential claim by Sullivan County in connection with the district’s prekindergarten program. Thus, respondents contend, it was proper to allocate only $1,000,000 to tax reduction and retain the remaining funds. This argument is without merit.

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. The authority to exceed the two percent limit on retaining unexpended funds applies only to reserve funds specifically authorized by law (Appeal of Clark,supra; Appeal of Sumner, et al., 27 Ed Dept Rep 250, Decision No. 11,936; Appeal of Smelter, et al., 26 id. 418, Decision No. 11,808). Moreover, I note that independent audit reports filed with my Office of Educational Management Services do not support respondents' claims.

This is the second time I have explained the requirements of RPTL "1318 to respondents. In a prior appeal involving similar practices, I advised respondents that if surplus funds are to be used to establish a reserve fund, the reserve fund should be created before the tax levy (Appeal of Mills, 34 Ed Dept Rep 92, Decision No. 13,243). I noted that a school district cannot hold surplus funds indefinitely in anticipation of establishing a reserve fund and admonished respondents to abide by the requirements of RPTL "1318(1) in the future (Id.).

Respondents also failed to comply with "1318’s requirement 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." This language did not appear in either warrant.

In view of the foregoing, I admonish respondents to be scrupulous in their future budgetary practices, as another violation of RPTL "1318 may well be sufficient to warrant their removal from office.


IT IS ORDERED that respondents henceforth fully comply with Real Property Tax Law "1318 and approve tax warrants in strict compliance with the statutory requirements.