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Decision No. 14,906

Appeals of FREDERICK J. GORMAN from actions of the Board of Education of the Sachem Central School District regarding financial practices.


Decision No. 14,906


(July 22, 2003)


Ingerman Smith, L.L.P., attorneys for respondent, Neil M. Block, Esq., of counsel


MILLS, Commissioner.--Petitioner, in two separate appeals, challenges the financial practices of the Board of Education of the Sachem Central School District ("respondent") in developing the district"s budgets for the 2001-2002 and 2002-2003 school years.  Because the appeals involve common issues of law and fact, they are consolidated for decision.  The first appeal ("Gorman I") must be sustained in part.  The second appeal ("Gorman II") must be dismissed.

Gorman I

After voters twice defeated respondent"s proposed budget for the 2001-2002 school year, respondent approved a contingency budget of $197,577,566 on June 23, 2001.  In determining the contingency budget, respondent included $3,837,430 for the costs of a projected enrollment increase of 361 students.  Petitioner alleges that by overestimating the projected enrollment by 173 students, respondent created a budget surplus of $1,838,990 and improperly carried this surplus into the 2002-2003 school year.  Petitioner also contends that in October 2002, respondent knowingly and capriciously increased the tax levy from $102,904,181 to $106,099,181 (an increase of $3,195,000), thereby raising more taxes than it needed to operate.  Petitioner asserts that respondent knew the actual enrollment number at that time but continued to overestimate it.  He contends further that respondent deliberately violated Real Property Tax Law ("RPTL") "1318 by improperly creating an unbudgeted "compensated absence accrual" of $3.9 million rather than returning the surplus to the taxpayers.  He also states that respondent created the accrual to improve its bond rating.  Petitioner seeks orders requiring respondent, among other things, to correct the difference between enrollment projections and actual enrollment figures when it adopts future contingency budgets; to base budget increases on actual, rather than estimated expenses; and to obtain voter approval before funding a reserve or encumbered liability.

In response to Gorman I, respondent contends that the petition fails to state a claim upon which relief may be granted and is untimely.  Respondent denies that it intentionally overestimated enrollment to increase the 2001-2002 contingency budget.  It also states that additional revenue generated by using a high projected enrollment was returned to district residents during the 2001-2002 school year.  Respondent contends that it increased the tax levy for legitimate reasons generated by unforeseen events, including the late state budget, that affected state aid to school districts.  Moreover, it asserts that the increase did not result in a surplus in excess of 2% in violation of RPTL "1318.  Respondent also denies that it created an improper reserve fund, maintaining that it merely identified "compensated absence accrual" as a projected liability in 2001-2002 and designated $3,925,000 for that liability.  Finally, respondent admits that it collected an additional $703,566 in revenue over the contingent budget amount, but states that this excess was the result of unexpected state aid that will be returned to taxpayers.

Gorman II

The voters again defeated respondent"s proposed budget for the 2002-2003 school year. Respondent approved a contingency budget of $210,079,331 on June 18, 2002.  In developing a contingency budget, districts use the prior year"s budget as a base (see Education Law "2023).  Petitioner alleges that because the 2001-2002 contingency budget included a surplus of $1,838,990 based on inaccurate enrollment projections, the 2002-2003 contingency budget was also inflated and taxpayers are being "charged" a second time for the inaccurate 2001-2002 projection.  He also contends that the 2002-2003 budget includes an additional surplus of $2,168,532 for the costs of a projected increase in enrollment of 194 students.  Petitioner seeks an order requiring respondent to use the actual enrollment figures as of October 1 of each year to determine the amount of the tax warrant, or to adjust the following year"s budget to reflect the difference between projected and actual enrollment.  He also asks me to reprimand respondent for its allegedly arbitrary and capricious appropriations.

In response to Gorman II, respondent again asserts that the petition fails to state a claim upon which relief may be granted and that several claims relating to enrollment projections, the budget and the tax levy for the 2001-2002 school year are untimely.  Respondent also denies that its projection of increased student enrollment for the 2002-2003 budget was arbitrary, capricious or unreasonable, or that it intentionally over-projected enrollment in order to increase revenues.

I will first address the procedural issue of timeliness.  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 excused by the Commissioner for good cause shown (8 NYCRR "275.16).  In Gorman I, the petition was served on June 17, 2002.  In Gorman II, the petition was served on June 28, 2002. Respondent contends that the petitions are untimely because each was initiated almost a year after respondent adopted the contingency budget on June 23, 2001, and more than 8 months after respondent issued the tax levy on October 3, 2001.  To the extent that petitioner alleges that respondent utilized erroneous data from 1999-2000, improperly developed the contingency budget in June 2001, and improperly prepared the tax warrant in October 2001, those claims must be dismissed as untimely.  However, petitioner"s challenge to the 2002-2003 contingency budget in Gorman II is timely because the appeal was commenced within 30 days of the budget"s adoption.  In addition, an appeal under RPTL "1318(1) is timely if it is brought within the fiscal year during which unexpended surplus funds are improperly retained (Appeal of Schadtle, 40 Ed Dept Rep 60, Decision No. 14,421; Appeal of Siver, 37 id. 498, Decision No. 13,912).  Thus, petitioner"s claim in Gorman I that respondent improperly retained surplus funds in the 2001-2002 school year is timely because the appeal was initiated prior to the end of that school year. 

Gorman I 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]).  Accordingly, 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 Schadtle, supra; Appeal of Siver, supra; Appeal of Clark, 37 Ed Dept Rep 386, Decision No. 13,885).

Petitioner alleges that respondent improperly allocated $3.9 million in surplus money to fund future payments to employees for unused leave, rather than returning the surplus to the taxpayers.  Respondent acknowledges that it designated "compensated absence accrual" as a projected liability and earmarked $3,925,000 for that liability.  This did not constitute full compliance with RPTL "1318(1).  While that provision 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 applies only to reserve funds specifically authorized by law (Appeal of Simons, 39 Ed Dept Rep 744, Decision No. 14,367; Appeal of Mills, 34 id. 92, Decision No. 13,243).  If surplus money is to be used to establish a reserve fund, the fund should be established before the tax levy (Appeal of Simons, supra).  General Municipal Law "6-p authorizes the establishment of an employee benefit accrued liability reserve fund.  Therefore, respondent had authority to create such a reserve fund.  However, it did not do so.  I remind respondent of its obligations to comply fully with all the requirements of RPTL "1318.

Applying RPTL "1318"s statutory formula to the 2001-2002 budget, respondent was authorized to retain unexpended operating funds in the amount of 2% of $197,577,566, or $3,951,511.  Although respondent admits that the tax levy was $106,099,181, neither party has submitted the tax warrant approved by respondent or other evidence demonstrating the actual amount of other unexpended surplus funds, if any, retained by respondent, or the actual amount of surplus funds applied to reduce the tax levy.

However, respondent admits that it had excess revenue in the amount of $703,566.  Although respondent claims that this excess was returned to the taxpayers, there is nothing in the record to substantiate respondent"s claim.  Even if this surplus revenue is not in excess of the two-percent limit, respondent should adjust its subsequent budgets to avoid levying taxes in excess of need. 

Petitioner"s claims regarding the 2002-2003 budget relate in large part to projected increases in enrollment.    Education Law "2023(1) authorizes school districts to adopt a contingency budget if the voters reject a proposed budget.  Section 2023(4)(a) limits total spending under a contingency budget and "2023(4)(b) specifies certain expenditures that may be disregarded in determining total spending.  These include:

expenditures in the contingency budget attributable to projected increases in public school enrollment, which, for the purpose of this subdivision, may include increases attributable to the enrollment of students attending a pre-kindergarten program. . ., to be computed based upon an increase in enrollment from the year prior to the base year for which the budget is being adopted to the base year for which the budget is being adopted, provided that where the trustees or board of education have documented evidence that a further increase in enrollment will occur during the school year for which the contingency budget is prepared because of new construction, inception of a pre-kindergarten program, growth  or similar factors, the expenditures attributable to such additional enrollment may also be disregarded. (Education Law "2023(4)(b)(v), emphasis added.)

Respondent used enrollment projection figures developed by Bishop Associates ("Bishop") in formulating both the 2001-2002 and 2002-2003 budgets.  Bishop used a ten-year projection period (2000-2001 to 2010-2011) providing low, average and high forecasts for each year.  Petitioner contends that respondent supplied Bishop with inaccurate base figures for the 1999-2000 and 2000-2001 school years, and that these inflated base figures further increased the projected enrollment for future years.  Petitioner also alleges that respondent deliberately chose to use the high forecast to inflate enrollment projections and manipulate the budget.  Specifically, in Gorman I, petitioner asserts that the actual increase in enrollment for the 2001-2002 school year was only 188 students, 173 fewer than the projected 361.  Respondent calculated the expense of the projected increase in enrollment for that year based on a per student cost of $10,630.  Petitioner alleges that the overestimate produced a budget surplus of $1,838,990, which was then carried over as part of the 2002-2003 budget.

Respondent used Bishop"s average projected enrollment increase for 2002-2003.  The forecast predicted 194 additional students at a per pupil cost of $11,178, which resulted in a budget increase of $2,168,532.  Petitioner contends that respondent should have used the actual enrollment figures contained in reports submitted to the State Education Department ("BEDS reports"), rather than Bishop"s allegedly erroneous and inflated enrollment projections to determine its budgets.

Respondent admits that it used Bishop"s high enrollment projection in developing the 2000-2001 and 2001-2002 budgets, but contends that it had legitimate reasons for doing so, including the fact that construction of a 440-home development in the district was expected to increase enrollment.  Respondent contends, however, that it adjusted its projections by using Bishop"s average, rather than the high, forecast in the 2002-2003 budget.  Respondent also asserts that any surplus revenue the district received during 2001-2002 was returned to  taxpayers by an increase in the appropriated fund balance in 2002-2003.

Petitioner has failed to meet his burden of proving that respondent acted arbitrarily or fraudulently in preparing the 2002-2003 budget.  Education Law "2023 provides that expenditures attributed to projected enrollment increases may be excluded from total spending in calculating a contingency budget.  Accordingly, I may not require respondent to rely solely on actual enrollment figures.  I need not address the parties" interpretations of the Bishop data or the effect of housing construction on enrollment to conclude that in these difficult fiscal times, it would be irresponsible for respondent to continue to use high projections when history and experience reveal that its projections are excessive.  I note that respondent laudably determined to use Bishop"s average, rather than high, forecast for 2002-2003 year.  Respondent should continue to examine its actual enrollment figures and adjust projections to avoid creating surpluses in any future contingency budgets (see, Education Law "2023[4][d][ii]).

In light of this disposition, I need not address the parties" remaining arguments.



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