THE FLEECING OF COMMACK TAXPAYER'S - PART II

As a follow-up to my last article, http://commack.patch.com/groups/jim-tampellinis-blog/p/the-fleecing-of-commack-school-district-taxpayers#comment-41497457, the recent audit by the NYS Comptroller’s Office of the Vestal School District is noteworthy, since it criticizes the similar type budgeting practices I wrote about regarding the Commack School District. http://www.osc.state.ny.us/localgov/audits/schools/2014/vestal.pdf

The District (and my critics) continue to have the temerity to contend there is nothing wrong with a budgeting practice that results in annual multi-million dollar surpluses because such surpluses are applied to reduce the ensuing year’s tax levy. That contention is nothing more than a red herring and immaterial, because the violation of law stems in the first instance from padding the budget in order to circumvent the 4% limit for contingent expenses imposed by Real Property Tax Law § 1318(1) (“RPTL”). Simply put, the fact that the surpluses are applied to reduce the following year’s tax levy does not make the practice of over-budgeting legal.  The practice also undermines the District's obligation to provide transparency about its finances to taxpayers.

In my opinion, the District's denial that it does not intentionally over-budget is incredulous in light of its Planned Contingency memo, which clearly shows the District’s initial intention to pad this upcoming year’s budget (FY 2014/15) to the tune of $4.5 Million in various line items.  (That $4.5M number has purportedly since been reduced) https://drive.google.com/file/d/0B3cbjRc1NY_pTGNrX0ZReFV0TXc/edit?usp=sharing  

In addition, past history shows these multi-million dollar surpluses are not the exception but rather the norm as shown by the past three fiscal years surpluses of $9.8M FY-2012/13; $5.8M FY 2011/12; and $6M FY-2010/11. Although only $172.2M of FY 2013/14's $179.3M budget is expected to be spent by end of this FY, the proposed budget adopted by the Board for FY 2014/15 is $183.3M or an $11.1M increase. The District anticipates appropriating another $11.85M dollars for the FY 2014/15 budget of which nearly $7M is surplus from the $9.6M appropriated from FY 2013/14 (see total appropriated fund balance at p. 25 at https://www.commack.k12.ny.us/budget14/BudgetAdoption4-10-14.pdf ). So, instead of annual budget surpluses (or appropriations) decreasing they have instead increased, suggesting the District has made little to no effort to avoid over anticipating expenditures so as to not unnecessarily burden its taxpayers.

The following excepts from the Vestal School District Audit are particularly note worthy:

“While District officials have maintained unexpended surplus funds in compliance with the statutory limit each year, the process of consistently overestimating expenditures and appropriating fund balance that will not be used serves as a means to circumvent the law and is not transparent to taxpayers. Consequently, the District’s effective unexpended surplus funds have exceeded 4 percent of the ensuing year’s budget each year during our audit.”

“District officials also stated that they budget to recover the amount of surplus funds used to finance the ensuing year’s operations. Increasing budget estimates in order to recover surpluses the Board planned to use as a financing source only serves to circumvent the legal restriction to retain up to 4 percent of the ensuing year’s appropriations. Because the Board consistently adopted budgets with higher than necessary expenditure estimates, there was no need for its planned use of surplus funds. Instead, for the five-year fiscal period, the District’s general fund generated approximately $4.5 million in operating surpluses while the real property tax levy increased by nearly $4.8 million during the same period. If District officials budgeted for the actual revenues and expenditures that were anticipated, fund balance or reserves could be used to finance any unforeseen events. More accurate budget estimates may have also reduced, or eliminated, the need to increase the real property tax levy."

“However District officials did not include actual historical expenditures as compared to the proposed budget for the District taxpayers’ consideration. For example, District officials’ budget presentations for fiscal year 2013-14 included a report that the District may be facing a $1.9 million budget gap. This gap was calculated in part by applying known contractual increases to fiscal year 2012-13 budgeted appropriations, such as health insurance and pension costs. However, for the fiscal year ended 2012-13, the District realized an operating surplus of over $1 million, with actual expenditures of $66.2 million, or $6.1 million less than budgeted. District officials stated that they attempt to provide as much budget information as possible to taxpayers. However, by not presenting actual expenditure trends, taxpayers may be mislead as to the District’s current financial position because the prior year budget information includes overly conservative estimates and a “recapture” of the appropriated fund balance. “

The Commissioner of Education has held that a board of education has a fiduciary duty to the school district, residents, and taxpayers to produce budgets that are fair and accurate pursuant to Education Law §§1716 and 2022.  Appeal of Frank J. Russo, Decision No. 15,504 (December 22, 2006).  This obligation includes the estimate of surplus fund balance in proposed budgets. Appeal of Sumner, 27 Ed Dept Rep 250.  In Appeal of Gorman, Decision No. 14,906 (July 22, 2003), the petitioner claimed that the board violated RPTL § 1318(1) by intentionally overestimating budget expenditures to create a planned budget surplus in excess of the statutory limit.  The Commissioner of Education sustained the appeal and admonished the school district not to levy taxes in excess of need.

The New York State Comptroller has issued a numerous audits of school districts finding that school districts overestimated their expenditures thereby creating surpluses in excess of the statutory limit.  In the Audit of Mount Sinai Union Free School District 2013M-227, the Comptroller found that the school district had intentionally overestimated budgets over a five-year period.  (Id. at 5).  Although the board of education appropriated the excess amount to help fund the ensuing year's budget, the Comptroller found that less than $1 million actually funded operations. As a result, the Comptroller concluded that the amount of surplus appropriated from year to year constituted a retained surplus in excess of the statutory limit. (Id.)  Similarly, the Commissioner of Education has routinely held that the retention of surplus funds in excess of 4% of the upcoming year's budget is a violation of RPTL § 1318(1). Appeal of Thurnherr, Dec. No. 16,224 (April 5, 2011).

The New York State Comptroller has plainly criticized school districts for overestimating school expenditures in the Audit of the Hinsdale Central School District 2010M-212; the Audit of Sweet Home Central School District 2009M-40; the Audit of the Niagara Wheatfield Central School District 2008M-255; and the Audit of the Albion Central School District 2008 M-211.  The Comptroller has noted that an accumulation of funds in excess of what is needed to fund operations places an unnecessary burden on district taxpayers. Audit of the Pine Bush Central School District 2012M-238.  The Comptroller has stated that such budget practices "results in the board and district management compromising the transparency of the district finances to taxpayers." Audit of the Waverly Central School District 2013M-148.

In conclusion, it is crystal clear that the intentional overestimation of expenditures in a school district's budget constitutes a violation of a board of education's fiduciary duty to produce fair and accurate budgets. The appropriation of surplus funds from year to year when those funds will not finance actual expenditures and such amount when added to the unreserved fund balance exceeds 4% of the upcoming year's budget constitutes the improper retention of funds in violation of RPTL §1318(1).