Full opinion text
CURTIN, Chief Judge. I. On May 16, 1985, the Honorable Edmund F. Maxwell, United States Magistrate, filed a report concerning the school budget dispute between the Mayor of the City of Buffalo and the City’s Board of Education. Magistrate Maxwell’s report came after a lengthy evidentiary hearing upon two motions filed by the Board. In these motions, the Board asked the court for orders compelling the City to appropriate funds which the Board contended were necessary for it to comply with prior orders of this court concerning the desegregation of the Buffalo Public Schools. The disputed funds related to the 1983-84 and 1984-85 school years. The court designated Magistrate Maxwell to serve as a special master in connection with these motions pursuant to Fed.R.Civ.P. 53(a) and 28 U.S.C. § 636(b)(2). See, Order of July 25, 1984. Today the court announces that it shall adopt the findings and recommendations set forth in Magistrate Maxwell’s comprehensive and careful report. II. The long history of this case can be gleaned from various orders of the court, and there is no need for a detailed reiteration of it here. Only certain aspects of this lawsuit’s recent history need be recounted. In the summer of 1982, the court held an evidentiary hearing upon the plaintiffs’ motion (joined by the Board) to compel the City to make an additional $7,400,000 available to the Board for the purpose of operating the Buffalo Public Schools during the 1982-83 school year. On August 27, 1982, the court issued its decision granting this motion. 547 F.Supp. 468. This order was the first of its kind in this case. There had been budget disputes between the Board and the City before, but these had been resolved without the court’s intervention. It was with great reluctance that I issued that order. See, id., at 484 n. 17. The City appealed from the August 1982 order. While the appeal was pending, the Board filed another motion, this time asking for more money for the 1983-84 school year. The Court of Appeals affirmed this court’s decision, but noted that the findings upon which my decision was based were only “marginally sufficient.” 712 F.2d 809, 814 (2d Cir.1983). This statement, and others made by the Second Circuit, heightened my already great reluctance to see the present budget battles left unresolved by the principals engaged in them. Negotiations between the City and the Board continued from the time the Court of Appeals issued its decision affirming my order (i.e., July 22,1983) until the following summer, when I referred the matter to Magistrate Maxwell. The court met several times with lawyers for the City and the Board. Staff members of the Mayor’s office and the Board, along with members of the Common Council, attended and participated in some of the meetings with the court. Eventually, I became dissatisifed with the progress of these negotiations. My determination to have this matter resolved without a hearing was expressed in an order creating a Budget Review Committee headed by the Honorable Charles S. Desmond, retired Chief Judge of the New York Court of Appeals. This order was issued on April 10, 1984. In addition to Judge Desmond, the Committee’s members were attorney James L. Magavern, William D. Mahaney, C.P.A.; Randolph A. Marks, retired president of the Computer Task Group; and Robert H. Rossberg, professor of education at the State University of New York at Buffalo. The Committee’s task was to mediate the dispute. It held several meetings with the Board and the City but was unable to bring about a settlement. Nonetheless, the Committee issued a most insightful report, discussing what it perceived as the central issues in this dispute. The Committee’s substantial contribution to the court’s effort is discussed at pages 829-830 of Magistrate Maxwell’s report. The court at this time takes the opportunity to express its most sincere gratitude to the members, who assumed their tasks as mediators voluntarily and performed them effectively. It is now known that the Board and the City have reached an agreement on the budget for the 1985-86 school year. This, of course, is the most appropriate way to decide upon a school budget. This state of affairs has come about as a result of a long process, for which many persons deserve credit. The members of the Budget Review-Committee were, in the court’s mind, important factors in that process. Magistrate Maxwell presided over the proceedings on these motions from the day he was designated as Special Master until he issued his report on May 16 of this year. Evidently, the Magistrate encouraged the parties not to abandon hopes of a settlement. The Magistrate’s efforts in this regard were not very far wide of the mark: the Board, the Common Council, and the plaintiffs agreed upon a settlement which fell short of resolving the matter only because the Mayor did not concur in a settlement agreement reached by the Board and the Common Council on February 15, 1985. All parties except the Mayor agreed that $186.6 million was sufficient for operating the schools for the 1984-85 school year. Magistrate Maxwell’s report came at the conclusion of 50 days of hearing testimony. The 92-page report discusses the budget process in considerable detail. In an evenhanded manner, the Magistrate discusses the Board’s extremely deficient accounting and reporting proceedings and the City’s persistent failure to educate itself on matters relating to developing the budget of a school district which must operate under a series of desegregation orders. The Board, the Common Council, and the plaintiffs have urged the court to adopt Magistrate Maxwell’s report without modification. The Mayor has filed objections to the report and contends that these motions should be denied. Oral argument upon the Mayor’s objections was held on July 8. III. The City’s principal argument is that the Board has failed to sustain its burden of proving that it needs more money to operate the schools than the City is willing to appropriate. The City also contends that the Magistrate erroneously “shifted” the burden of proof from the Board to the City. This court’s only previous decision resolving a school budget dispute made several references to the Board’s burden on a motion of this sort. For example, the court stated that: [Bjefore this court can order the Mayor and the Common Council to provide additional funds to the Board of Education, the Board has the burden of showing that these funds are necessary to insure compliance with our orders and with the orders of the United States Court of Appeals for the Second Circuit. 547 F.Supp. at 472. It is interesting to note that the phrase “burden of proof” was not used at all by the Court of Appeals in its opinion affirming this court's order of August 1982. The statement in the panel’s opinion which comes closest to discussing “burden of proof” is the following remark concerning the kind of evidence that is required for a court to decide a motion of this sort: Should a dispute of this nature recur, we think it will normally be helpful if those who seek a court order for additional funding, and those who oppose such an order, supply the District Court with considerable detail reflecting the proposed expenditures in the absence of the additional funds claimed to be needed. Faced with such presentations, the District Court may find it useful to enlist the aid of a neutral auditor, experienced in school budgeting, to assist in analysis of the figures presented. 712 F.2d at 814 (emphasis added). It is clear that evidentiary burdens are imposed upon both the Board and the City. In a typical lawsuit, the plaintiff has the burden of producing evidence sufficient to state a prima facie case for the claim it attempts to assert. This is sometimes referred to as the burden of production. Additionally, a plaintiff has the burden of persuasion. Normally, this burden is borne only when the plaintiff’s evidence persuades the factfinder, by a preponderance of the evidence, that the plaintiff has proven the case it has stated. When a plaintiff fails even to state its case, the case can be dismissed summarily, without the defendant being required to submit any proof. This case, especially in its present posture, is not a typical lawsuit. Both of the principal antagonists on these motions are defendants. Both the Board and the City were found to have intentionally maintained a segregated school system. See, Arthur v. Nyquist, 415 F.Supp. 904 (W.D.N.Y.1976), aff'd in relevant part, 573 F.2d 134 (2d Cir.), cert. denied sub nom. Manch v. Arthur, 439 U.S. 860, 99 S.Ct. 179, 58 L.Ed.2d 169 (1978). Subsequently, both of these defendants were obligated to remedy their prior unconstitutional acts. The defendant-codefendant relationship between the Board and the City, with the obligation to desegregate the schools imposed upon both, supports the view that evidentiary burdens should be imposed upon the City as well as the Board. The Court of Appeals and Magistrate Maxwell both have noted that Buffalo is a “dependent” school district. As such, it has no taxing power and is completely dependent upon the City for funding. See, 712 F.2d at 811; Magistrate’s Report at -. The normal budgetary process consists of the Board devising programs, determining the cost of implementing them, and then asking the City for the funds deemed necessary to operate the schools. The City and the Board then negotiate and agree upon a final figure. The City has the final word on how much money it will appropriate for education, but it has no power to dictate how the money will be spent. Thus, some conflict between the Board and the City is inevitable, even in the absence of complications inherent in a school desegregation program. The relationship between the Board and the City and their status as codefendants make it difficult to apply burden of proof rules in the ordinary fashion. The task was made even more difficult by what Magistrate Maxwell found to be the Board’s woefully inadequate management of budget information. Magistrate Maxwell also found that the Board’s habits of transferring funds from one budget line to another and encumbering large amounts of money towards the end of a fiscal year raised suspicions about the Board’s candor. See Magistrate’s Report at 819-826. My own review of the evidence has brought me to the same conclusions. I would only add that upon reviewing the record, I do not believe that the Board’s budgetary misfeasance is a deliberate attempt to undermine the City’s attempts to review the budget. Nor do I find that the Board has invoked the aid of the court for funds it does not actually believe were necessary to implement the desegregation program. Magistrate Maxwell also repeated a statement I made three years ago (547 F.Supp. at 478) concerning the City’s lack of knowledge about the school budget. The City’s task of learning the process is made more difficult by the Board’s out-of-date reporting and poor management. However, I agree with Magistrate Maxwell’s conclusion that the City’s continued lack of knowledge is inexcusable. See, Magistrate’s Report at 828-829 and n. 24. In my order resolving the 1982-83 dispute, I noted that the Mayor’s Board of Education Review Committee had not performed its function of providing information to the Mayor. In fact, the Committee apparently has not even met since the summer of 1982. This state of affairs has persisted to the present day. The Mayor’s efforts at understanding the requirements of the Board and the desegregation program are inadequate and must be upgraded. Burden of proof principles can only be applied with the aforementioned background in mind. My review of'the record leads me to the conclusion that Magistrate Maxwell applied appropriate burden of proof principles to the motions he was asked to resolve. The Board’s burden was to produce substantial evidence showing that the additional funds it requested were necessary to continue the desegregation effort, as distinguished from funds which would enhance that effort only remotely or not at all. Ultimately, the Board also has the burden to persuade the court that extra funding is necessary. Once the Board sustained its burden of production, the City could not rest and obtain a summary denial of the motions. The City’s burden was to produce substantial evidence challenging the Board’s case so that the court could, if proper, reach a reasoned conclusion in the City’s favor. The evidence before Magistrate Maxwell brought him to the conclusion that the Board had sustained the burden of stating its case for increased funding. My review of the record leads me to the same conclusion. However, I also share the Magistrate’s view {see, Report at 828) that the Board’s success at sustaining its burden was far from overwhelming. The analysis of William D. Mahaney, the court-appointed expert, was of considerable assistance to the Board in its effort to state its case. The Mahaney reports and the agreement reached between the Board, the plaintiffs, and the Common Council concerning 1984-85 are the major factors distinguishing the case made by the Board during these proceedings from the case it presented during the hearing before me in 1982. The Mahaney reports, the testimony of Associate Superintendent Joseph Murray, and the agreement among all parties except the Mayor concerning the 1984-85 school year constitute a consistent and persuasive basis for the conclusions reached by Magistrate Maxwell. Accordingly, I accept and adopt the Magistrate’s conclusions. The City notes that the Board failed to provide it with a line-by-line hypothetical budget showing how the Board would spend the amount of money approved by the City. The Magistrate’s report (pp. 826-828) explains the Board’s unhelpful manner of explaining how it would spend a lesser amount of funds. The report also explains that the Board’s record-keeping is so inadequate that providing more useful and complete detail to the City is not readily possible. This is a deficiency which cannot persist and which the court will not tolerate if the Board seeks judicial intervention in any subsequent year. However, for the present dispute, I do not think it is appropriate to deny the requests for funds because of the Board’s shortcomings on this point. The Court of Appeals stated that both the Board and the City must supply the court with considerable detail. 712 F.2d at 814. The Board’s deficient showing should mean that a court would accept a somewhat less detailed showing by the City in rebuttal. Here, however, the Magistrate found that the City made virtually no showing at all. The Magistrate also found that the City’s failure in this regard was not entirely attributable to the Board’s deficiencies. Inexcusable unfamiliarity with the budget process and the desegregation program contributed greatly to the City’s failure of proof. I find no basis in the record to reach a conclusion different from that reached by Magistrate Maxwell. IV. On factual issues, a district court must accept the findings of a special master unless the findings are clearly erroneous. Fed.R.Civ.P. 53(e)(2). I have reviewed the record on these motions, and I find no basis for rejecting any of Magistrate Maxwell’s findings of fact. I have also considered the legal arguments presented by counsel for the Mayor, particularly those concerning burden of proof. I find no legal error in the Magistrate’s report. Accordingly, the Magistrate’s Report and Recommendation is approved and adopted by the court without modification. The court’s approval of the Magistrate’s report specifically incorporates the recommendations offered by the Magistrate regarding the Board’s budgetary processes and the City’s efforts to become informed with the requirements of the schools and the desegregation program. See, Report at 838-842. The City is perhaps not obligated to familiarize itself with the Board’s procedures under ordinary circumstances. But, these are not ordinary circumstances. The City’s increased involvement is essential to avoid further disagreements resulting in petitions to the court. It is also essential in aiding the court if it is called upon to decide another motion of this sort. V. In addition to announcing the court’s approval of the Magistrate’s report, today’s order shall require the City (including the Mayor and the Common Council) and the Board to demonstrate to the court what actions will be taken in order to improve their respective performances regarding the budget problem. The court notes that shortly after the Magistrate’s report was filed, the Board announced that it was going to undertake a program to update its budgetary and accounting equipment and procedures. The orderly funding of the schools is essential to carry out the letter and the spirit of the desegregation program. Therefore, it is essential that the court and the other parties be informed of the process which the Board is designing to carry out this important function. On or before October 15, 1985, the Board is directed to submit a statement to the court setting forth its proposal in regard to this difficult and complicated problem. A meeting will then be held in my chambers on November 1, 1985, at 1:30 p.m. with counsel for the Board, the Mayor, and the Common Council. Attorneys for the plaintiffs and the intervenors are encouraged to attend; however, their presence is not required. If it is the intention of the Board to put into place a permanent plan to attend to the deficiencies described in the Magistrate’s report about the budgetary system, immediate notice should be given to the court so that an earlier meeting may be held before the plan is formally adopted. Finally, I note that the Board has stated its intention to ask this court to terminate this lawsuit. The Board means to make this application “as soon as possible.” See, Court Exhibit K to these proceedings, dated February 19, 1985. As a codefendant in this lawsuit, the City would, perhaps, be inclined to join the Board in this endeavor. Ending the court’s involvement in this lawsuit has long been an objective of the court. I have stated this objective before. See, e.g., 547 F.Supp. at 484 n. 17. (“It is obvious that the limited role of the court ought to and must come to an end.”) The-present status of the school funding issue may present an opportunity for the Board and the City to explore this path together. However, I must note that termination is a difficult process which requires careful planning and preparation, as well as thorough knowledge of the legal principles that must be applied. A recent unsuccessful attempt at terminating a school desegregation case was made in Denver. See, Keyes v. School District No. 1, Denver, Colorado, 609 F.Supp. 1491 (D.Colorado 1985). If a unitary system is found to exist in Buffalo, this court’s involvement must end. If and when the defendants in this case, including the Board of Education, believe that the facts and law entitle them to an order terminating this lawsuit, a careful, considered, and thorough presentation to the court should be considered. Conclusion The report of Magistrate Maxwell, acting as special master pursuant to Fed.R.Civ.P. 53 and 28 U.S.C. § 636(b)(2), is adopted and approved without modification. Counsel for the Board, the Mayor, and the Common Council shall meet with the court in chambers on November 1, 1985, at 1:30 p.m. A copy of Magistrate Maxwell’s Report and Recommendation is set forth in its entirety as an appendix to this order. So ordered. APPENDIX REPORT AND RECOMMENDATION OF HONORABLE EDMUND F. MAXWELL UNITED STATES MAGISTRATE TABLE OF CONTENTS Page PREFACE ......................................................-812 I. Background of the Buffalo Desegregation Case ...............-812 A. Earlier Proceedings .....................................-812 B. Hearings Before the Magistrate .........................814 II. Preliminary Issues ..........................................814 A. Relationship of the Board and City ......................814 1. Board’s Fiscal Relationship to the City................814 APPENDIX — Continued Page 2. Affordability of Court’s Desegregation Orders......... 815 3. The City’s Budget Reduction Approaches.............. 816 B. Identification of Desegregation Related Costs ............ 816 C. Transfers, Encumbrances and Financial Reporting ........ 819 1. Transfers............................................819 2. Encumbrances....................................... 823 3. Financial Reporting.................................. 825 III. Burden of Proof ............................................826 IV. Alternative Approaches ......................................829 A. The Desmond Committee Report .........................829 B. The Assumed Model ....................................830 V. The Budget Requests .......................................831 A. The 1984-85 Budget ....................................831 B. The 1983-84 Budget ....................................836 VI. Comments ..................................................838 RECOMMENDATION ........................■...................842 PREFACE On June 16, 1983, the defendant Buffalo Board of Education (Board) filed a motion requesting that the defendants Mayor and Common Council of the City of Buffalo (City) be directed to provide to the Board $172,335,379 ($172.3M) of Operation and Maintenance (0 & M) funds for the 1983-84 school year. The City had previously appropriated $158,840,503 ($158.8M) for that year. One year later, on June 15, 1984, the Board filed a similar motion requesting that the Court direct the City to provide $192,853,446 ($192.8M) for the 1984-85 school year, approximately $16M more than the $176,145,147 ($176.1M) which the City had previously appropriated. By order of the Hon. John. T. Curtin dated July 25, 1984, these matters were referred to me to hold evidentiary hearings and prepare a report and recommendation as provided in .28 U.S.C. § 636(b)(2). The following constitutes my findings of fact, conclusions of law, and recommendations. 1. Background of the Buffalo Desegregation Case. A. Earlier Proceedings. In April 1976 the Board and City were found to have engaged in deliberate and unconstitutional segregation of the Buffalo Public School System (BPSS). Arthur v. Nyquist, 415 F.Supp. 904 (W.D.N.Y.1976) aff'd in part, rev’d in part, remanded in part, 573 F.2d 134 (2nd Cir.1978). As a result of the many hearings which were subsequently held, a final plan for desegregation of the BPSS, known as Phase IIIx, was put into effect in September 1981. Over the next four school years, the Board and City differed as to the amount necessary to fund the Board’s 0 & M budget. As the figures in Table 1 illustrate, the magnitude of the difference between the Board’s initial request and the City’s initial appropriation has remained substantial. For the year 1981-82 the Board filed a motion similar to the two instant motions requesting that the Court direct the City to increase its initial appropriation. Eventually, the Board and City settled on an appropriation of $141.2M in 0 & M funds. For the year 1982-83 the Board again sought Court intervention to increase its appropriation from the City. This time the parties could not agree on a compromise figure, so after conducting hearings, Judge Curtin ordered the City to appropriate an additional $7.4M which brought the total appropriation to $156.5M. Arthur v. Nyquist, 547 F.Supp. 468 (W.D.N.Y.1982). For the year 1983-84, the by now familiar routine began again. This time, however, the motion was not resolved before the school year began, and the Board operated through the year on a spending plan which called for expenditures in the amount of its $172.3M request. In May 1984, one month before the end of the Board’s 1983-84 fiscal year, the Board had exhausted the City’s initial $158.8M appropriation and sought relief from the Court to permit it to complete the last month of school. As an interim solution, the parties agreed, and the Court ordered, that an additional amount of $8.7M be made available to the Board for the balance of that fiscal year. That order specifically did not determine the rights of the parties with respect to the original 1983-84 motion, which is presently before me. Finally, the cycle repeated itself for the 1984-85 school year, with minor variations. The Board’s initial budget request was for $192.8M, and the City’s initial appropriation was $176.1M. After the hearings before me had begun, in August 1984 the parties agreed to a compromise measure in which the Board reduced its request to $189.2M and the City raised its initial appropriation to $179.7M. The Board advised, however, that it intended to spend at the rate of its request of $189.2M rather than at the rate of the appropriation. Short term fears that this practice would place the Board in a similar cash-short position at the end of 1984-85, as it faced the previous year, were expressed by some parties. However, it appears that the Board has established its accounting records such that the shortfall, if it appears, will occur after the close of the fiscal year, thus permitting the completion of the ‘84-85 school year. B. Hearings Before the Magistrate. Formal hearings began before me in August 1984. During these early sessions, the lack of information in a format which could be easily used by the parties became apparent. Despite suggestions from the Second Circuit, no party indicated any intention of calling its own expert witness to assist in interpreting the information. Accordingly, I appointed Mr. William Mahaney, a certified public accountant with broad experience in the area of public school financing, as an expert under Rule 706 of the Federal Rules of Evidence. Mr. Mahaney and his staff then began the lengthy process of evaluating the information needs of the parties and the court, and gathering the necessary information so it could be presented in a useful format. Through the autumn there were frequent recesses to accommodate settlement discussions and to await receipt of necessary information from Mr. Mahaney. By mid-October, settlement discussions had essentially stalemated. Thereafter, a more rigid hearing schedule was established, and ultimately testimony was completed on February 19, 1985, after 50 days of hearings. At the hearings, the Board presented its witnesses in support of its budget request, and the bulk of the testimony came from cross-examination of these witnesses. The City offered some evidence in support of its claim that the amount it had appropriated was sufficient. In addition, various persons appeared to testify on related matters such as the teachers’ bargaining agreements and handicapped education. Finally, the court-appointed expert, Mr. Mahaney, testified at the conclusion of the hearing as to the substance of his findings. II. Preliminary Issues. A. Relationship of the Board and City. Prior to a detailed analysis of the evidence in this case, I believe some observations are necessary to put the complexity of this issue in perspective. 1. Board’s Fiscal Relationship to the City. The Board of Education is a dependent school board under New York State law. As such, it has no independent taxing authority; it cannot generate its own revenues. The Board is completely dependent on the City for its funding. From the City’s perspective, the public school system administered by the Board requires a major portion of the City’s revenues. While the Board is treated as any other department of the City for funding purposes, the Board is unique in its independence from any fiscal control or oversight by the City once the funds are appropriated. State law requires the City to appropriate funds for the Board, but also gives the Board exclusive control over the expenditure of those funds. This requirement, to appropriate funds over which it has no expenditure control, is a sore point with the City and plays a major role in these annual funding disputes. The City, which has taken some pride over the years in restraining the growth of various city departments, has been frustrated in its attempts to impose its own fiscal restraints on the Board. On the other hand, the Board is in a fiscal position unique among the various city agencies. It is operating under a Federal court order to maintain a desegregated school system and it is under continuing and increasingly costly mandates relative to handicapped and bilingual education. The question of whether the Court orders and State mandates are used by the Board as a lever to obtain additional funding in excess of the amounts necessary to comply with these various requirements is an issue underlying the annual failure of the City and Board to reach an agreement on an appropriate School Board budget. The Board’s 0 & M budget has increased over the years to the point where it is now larger than all other City departments combined, comprising over half of the City’s annual budget. The Board is quick to make the point that of its total budget request for ‘84-85 of $189M, the amount contributed directly by the City from real property tax revenues is only $45M,- and that while Board requirements have increased because of desegregation, the increase in direct City funding has not been proportionately as great because of increases in State and Federal aid. The Board’s budget also has an impact aside from the allocation of resources among various City departments. Particularly in the bond market, the ability of the City to obtain favorable interest rates is directly dependent upon outside analysts’ assessment of the fiscal management of the City as a whole. Since the bond market does not distinguish the Board from the City for purposes of its evaluation, the City must accept the impact of the Board on the City budget without being able to directly control it. This, too, has contributed to the friction between the City fathers and the leadership of the Board. Despite the serious impact the Board’s budget has on the City’s financial health, the Mayor and Common Council devote relatively little time to reviewing the Board’s annual budget request. The Board Superintendent develops the next year’s budget request between October and January of the current fiscal year. The budget proposal is adopted by the Board members in late January and presented to the Mayor in early February. Subsequently, the Mayor holds a series of hearings in which his staff and members of the public can question the Board’s proposed budget. The Mayor then determines the amount of money which he will propose to the Common Council as the Board’s budget, and makes his presentation of the entire City budget by May 1st. The Council holds public hearings on the entire budget, including the Board’s portion, and thereafter acts on the budget, making additions or reductions within its authority under the City charter. This budgeting process, applied to the Board, results in the exchange of very little information between the Board and City. In other City departments, such as the Streets Department, the Mayor, as the executive in overall charge of their operation, has had day-to-day contact throughout the year with the managers of those departments and has had an opportunity to keep himself apprised of their needs. However, because of the Board’s independence from City supervision, no similar communication has gone on during the year. The possibilities for differences of opinion over appropriate funding levels caused by this lack of communication cannot be overstated. 2. Affordability of the Court’s Desegregation Orders. During the hearings, attempts were made to introduce evidence as to the capability of the City to fund the Board’s request, and the impact on the City of any Court orders directing expenditures of funds in excess of those already appropriated. The City sought to prove that its short term borrowing ability might be affected or that its constitutional limits of taxation might be exceeded if it appropriated the amount requested by the Board. The Board claimed that the City in fact has been withholding some of the State and Federal aid intended for the BPSS by failing to pass it on to the Board. The Board claimed that if all the State and Federal aid allocated for the schools was in fact applied to the school needs, there would be no impact on City property taxes or the City’s financial standing. For the limited purposes of these hearings, however, the issue of affordability is not before me. The Board and City, as co-defendants in this suit, are required to insure that sufficient funds are available to maintain the desegregation orders of the Court. Surely, the proper allocation of earmarked school aid from State or Federal sources is a part of that responsibility. But the limited purpose of my participation in this case is to recommend to the Court a sufficient budget amount for the years ‘88-84 and ‘84-85, and such a recommendation is independent of the affordability of the amount and the proper distribution of the State and Federal aid intended for the schools. 3. The City’s Budget Reduction Approaches. The City at times appeared to be arguing that the Board could reduce its funding needs by eliminating certain programs, such as the pre-kindergarten programs. At other times, the City argued that the Board could reduce its funding needs by operating the existing programs more efficiently. These arguments were not clearly focused by the City, but deserve to be distinguished. The issue of efficiency in operating the existing school system was a major focus in the hearings. The City properly tried to identify areas in which the Board could save money through increased efficiency without impacting the overall desegregation plan. However, the City’s argument that the Board should consider elimination of certain programs involved in the desegregation plan is inappropriate in this proceeding. The Board and the City were found equally guilty of the illegal segregation of the BPSS. As a remedy, the Board and the City agreed to the existing voluntary desegregation plan. The key to the success of the existing plan is its voluntary nature. 547 F.Supp. at 470. This voluntary plan is the preferred method of accomplishing the desegregation requirements. Id. at 472. The City in fact did not dispute that the quality of education within the BPSS is directly related to the success of this voluntary desegregation plan. Id. at 472 n. 5. As noted by Judge Curtin, the City and Board are committed to a continuation of the existing voluntary system by the history of this litigation and past Court orders. Id. at 477. Having committed to the voluntary plan, the City must accept the fact that a voluntary plan is inevitably a more expensive method of desegregation. 712 F.2d 809, 811. An alternative desegregation plan may have proven less expensive, but there is no way of knowing if that is so, and in any event it is not a feasible alternative at this time. 547 F.Supp. at 472, n. 4. If the City wants to pursue arguments that major portions of the voluntary desegregation plan be eliminated, the appropriate vehicle is by a separate proceeding in front of Judge Curtin. The Board and City, in the meantime, have an affirmative duty to carry out the desegregation plan as it now stands, notwithstanding that it may well be more expensive. The City’s present suggestions before me to radically alter the existing plan must be rejected. B. Identification of Desegregation Related Costs. A major bone of contention throughout these hearings has been the question of how to distinguish between increased costs in support of the desegregation program, and increased costs whose only purpose was to improve the overall quality of the education system in the BPSS. In its decision, the Second Circuit noted that it was directly confronted with this problem when plaintiffs counsel on appeal, Mr. Atkins from the NAACP, stated that he could not support Judge Curtin’s decision because the Board had failed to provide sufficient detail to distinguish the desegregation related costs from other costs. Mr. Atkins’ concern, apparently on a nationwide basis, was that boards of education were using court desegregation orders to pursue many of the unmet educational needs of the system, not merely those related to desegregation, and in so doing were causing the proponents of desegregation to endure the wrath of the community for the increased costs of education. 712 F.2d at 813. The Second Circuit dealt at length with the limits to a court’s power in ordering expenditures for desegregation. The Circuit suggested the issue involved determining whether or not the additional money was ordered by a district court only to the extent necessary to implement desegregation needs. In that analysis, a program necessary for desegregation would not be excluded merely because it had the additional benefit of improving the overall school system. However, if the proposed expenditure would affect the school system in a way only remotely connected to the desegregation plan, the court could not order the additional funds. Striking this balance between remote and direct connection to the desegregation efforts required deference to the judgment of the school officials. 712 F.2d at 813. In his decision, Judge Curtin framed the issue similarly, observing that if the only impact of a failure to provide additional funds to the Board was to have a deleterious effect on the overall school system, without negatively impacting the desegregation program, then the Court was without power to order the City to pay the additional funds. 547 F.Supp. at 473. On January 20, 1984, in response to the City’s motion to compel the Board to answer certain interrogatories in this action concerning what the City called “desegregation items” in the 1983-84 budget request, Judge Curtin said: There is some difficulty with the City’s use of the term "desegregation item.” In a desegregation plan which relies primarily upon voluntary pupil assignments, it is difficult to define which budget items are “desegregation items” and which are not. However, it is possible that various items are more, or less, directly related to the Board’s ability to implement the court’s school desegregation orders. It may also be that some budget items are only remotely related to achieving the goal of a unitary system, and still others that are not at all related to that goal. This court must avoid imposing an order requiring the city to appropriate money for such items. Id. at 813. The Board apparently believes that every budget item is necessary to implement the court’s desegregation orders. If that is the case, then the Board’s response to the City’s interrogatories ... might be a line-by-line spending plan in accordance with the limits imposed by the City’s $158.8 million appropriation. If the Board determines that some items are unrelated or only remotely related to carrying out the court’s desegregation orders, then its response would reflect that determination. J. Curtin order 1/20/84 pp. '4-5. In response to this order, Superintendent Reville submitted an affidavit detailing a list of cuts he would make to bring the Board’s budget in line with the City’s appropriation. This document was similar in presentation to City Exhibit E relating to the 1984-85 budget request which was presented at the hearings before me. The most significant part of that affidavit was the assumption that Mr. Reville stated was implicit before any of the cuts he proposed were made. His stated assumption was that prior to any cut being made, the Court would have to give the BPSS permission to discontinue implementation of the desegregation plan until sufficient funds are provided to restore all programs which have been operated as a part of the systemwide desegregation effort. Mr. Reville clearly took the ominous position that any cut he made in the Board’s ‘83-84 budget of $172.3M or the next year’s budget of $192.8M would have a direct and deleterious impact on the desegregation plan. While at first glance the list of cuts provided by Mr. Reville might be interpreted as the Board’s best judgment as to which items could be reduced in cost without adversely affecting the desegregation plan, that is clearly not the implication the Board intends to convey. Rather, the Board maintains its position that because the success of the voluntary desegregation plan depends on the attractiveness of the school system, the entire operating budget of the Board is in effect directly related to the desegregation orders of the court. The Board also took this position in the meetings with the Desmond Committee. In his order of April 10, 1984 impapaneling the Committee, Judge Curtin directed that “[t]he parties shall aid the committee ... by identifying those budget items which, in their view, are most closely and most distantly related to the goal of desegregating the BPSS.” The Committee thereupon asked the Board to provide specifics as to non-personnel items which: a.) were required to implement desegregation; b.) were required by Federal or State mandates; c.) would serve to maintain the quality of education; d.) would serve to enhance the quality of education; or e.) were necessary for other reasons. The Committee felt that the latter two categories would not come within the court’s purview. The Board in its response claimed all of the items in its budget request were in the first three categories. (See City Exhibit J; Tr. 8-153.) The Second Circuit’s suggested deference to the judgment of the school officials on what is remotely and what is directly connected to desegregation becomes difficult to apply under these circumstances. The City’s counterargument — that even without a desegregation plan the Board would still incur a host of basic expenses in operating the schools — sounds simple in the abstract. However, if determination of the additional costs associated with desegregation is dependent on the judgment of the school officials, and those officials take the position that such differentiation is impossible in a complex integrated school system, then an obvious dilemma is created. In an attempt to resolve this problem, I specifically sought argument from counsel in their post-hearing briefs addressing the issue of what standards a court should use in making the determination between items directly and remotely related to the costs of desegregation, or, alternatively, whether the Board’s position that making such distinction is impossible ought to be accepted. In a joint preliminary statement, all parties except the Mayor claimed that the Board’s position was correct — the costs could not be fairly differentiated. The Mayor made the point that at least some City services, such as school crossing guards and fire protection, not funded through the Board, were equally as important to desegregation as some of the items in the Board’s budget. However, the Mayor failed to suggest any way in which the distinction between items directly and remotely connected to desegregation could be determined, and failed to give any examples of any areas so remotely related. Rather, he argued the Board had an affirmative duty to make available some method of distinguishing, and that it had failed to do so. Faced with this inflexibility in positions, I am compelled to make a determination on this issue without benefit of reasoned argument from the many counsel who participated in these hearings. On the one hand, common sense indicates that the Board would require a budget much in excess of $100M regardless of any court desegregation orders. On the other hand, the desegregation of the BPSS has involved such a sweeping change in the system that, in many ways, every facet of the Board’s operation is in support of the desegregation program. Undeniably there are expenditures in the BPSS which have the effect of improving the overall quality of education. To the extent those expenditures contribute to the success of the desegregation plan, they are proper improvements. However, I am convinced that there are some areas in which lesser amounts than those originally requested could be spent without having a deleterious effect on the desegregation plan. The Board’s position hinges on the presumption that any negative impact on the school system as a whole has a negative impact on the desegregation plan. This argument places the City in a quandry. In theory, a deleterious impact on the school system as a whole could affect majority and minority children equally, resulting in a non-discriminatory negative impact. The Court has no power to prevent a budget cut if the only effect of the cut is to have a deleterious impact on the quality of the school system. 547 F.Supp. at 473. In this case the City has been thwarted from showing such an effect by the Board’s adamant linking of the overall quality of education to the success of the desegregation plan. The City has been unable, from examination of the Board’s personnel, to make such a showing, and has not taken any affirmative alternative steps of its own to do so. In my judgment, the City failed to adequately challenge the Board’s position on this issue. Despite the years this lawsuit has been in existence, the City has never sought an outside expert to help it challenge the Board’s position, nor has the City suggested any method by which the Court could make that determination on its own. The judgment of the Board officials is that the costs cannot be effectively differentiated, and those officials are the only persons with any expertise on the subject to have presented evidence in this hearing. For that reason, on the basis of the present record, I am compelled to adopt the position of the Board that all of the programs for which the Board seeks funding materially aid the success of the overall desegregation effort. This shifts the primary issue for resolution in these hearings to the question of whether or not the amount of money requested for each of the various items is in fact necessary. C. Transfers, Encumbrances, and Financial Reporting. Much of the confusion during the hearings and settlement conferences arose in part because of the unfamiliarity of the participants with the Board’s accounting system, and in part because of the Board’s delinquent reports of their financial situation. A brief summary of some of the major points is appropriate here. 1. Transfers. In the past, after the Common Council had made its appropriation, the Board developed an operating budget based on the appropriation. In the past two years, because of the disputes, the Board has instead prepared a “spending plan” for each year. In theory, the Board’s operating budget or spending plan reflects the way the Board intends to spend the money appropriated by the City. It is not obligated to spend the money as it originally indicated in its budget request, but historically the Board’s actual spending plan has generally followed its budget request for that year. At the beginning of the fiscal year, each line item is given an initial appropriation which reflects the Board’s best estimate of the amount of money the programs or services covered by that line will require, and the total of those lines normally equals the City’s appropriation. During the year, circumstances occur which require the expenditure of more funds from one line than originally allocated by the Board. In those circumstances, transfers from one line to another are recommended by the Superintendent’s staff and entered in the Board’s records. If the transfer is between two lines within the same general account, the Board’s approval is not necessary, but the Board is notified of the transfer at the next Board meeting. In principle, there is nothing wrong with the concept of transfers because reallocation of resources may be necessary in order to accommodate unforeseen contingencies which may arise. However, problems do arise in the way those transfers are recorded and reported. There are instances where the Board would consistently, over a period of years, indicate in their budget request that for a particular line item a certain amount of money was needed, yet would consistently transfer out some portion of that money to different accounts. Conversely, there were also instances where the Board would consistently spend more in a particular line than it had requested, yet not adjust its future year’s request upward to reflect the actual costs. This gives the impression of poor management and poor fiscal controls to the City which believes that the Board should modify its annual requests to accurately reflect the amount of money actually spent in a particular line. It also makes it difficult for the City or a reviewing court to determine whether the amount sought is actually needed to comply with the desegregation plan. For example, pages 1 and 2 of Court Exhibit B , which is Mr. Mahaney’s Special Report # 1, show the history of expenditures for a number of line items, including lines 1010-501 and 1010-475, as excerpted below in Table 2.A. and B. In the case of 1010-501, as shown in Table 2.A., there is a history of overfunding of that line. As a result of this point being made during the hearings, the Board’s 1985-86 budget request (Plaintiffs Exhibit 21) shows the Board has adjusted their request to reflect actual use, for the first time in at least five years. Conversely, in 1010-475, as shown in Table 2.B., there is a history of underfunding that line. This underfunding continued from 1981-82 through 1984-85 until the Board, evidently reacting to criticism at these hearings, adjusted its budgeting procedure for 1985-86 to reflect the actual costs. The Board continued to assert that there was nothing illegal or otherwise improper in their budgeting procedure, and I do not disagree. Some transfers, specifically the end of the year transfers between accounts to balance out the over and under expenditures, are a normal part of accounting. However, from the standpoint of justifying its budget needs to the City and to the Court the system is particularly confusing and raises doubts about the Board’s ability to efficiently manage the money entrusted to it by the City. The questions most frequently asked in the hearings were: 1) where was the money which was transferred out of a particular line ultimately spent; 2) what was the source of the money that was transferred into a particular line; and 3) what criteria had the Board used in determining that some funds would not be used for a particular item and could be reallocated. In order to help the parties answer those questions, Mr. Mahaney prepared in Exhibit B to each of the three Court Exhibits A-81/82 through A-83/84, which are the analyses of the Board’s Budget and Expenditure Reports for the years 1981-82, 1982-83, and 1983-84. Exhibit B to each of the three reports assigns a chronological reference number to a particular transfer as recorded in the Board’s records. This approach permits partial tracing of the timing and of the amount of transfers. For example, referring to pages IV and 16 of Court Exhibit A-83/84, the transfers which affected line 1010-501 in the 1983-84 year can be traced. The result is set out in Table 3. From this relatively simple example, some of the questions and concerns raised in the hearings can be understood. Since the $3500 was transferred from a supplies account into a travel account, to someone outside the Board it could appear that the Board was using this system to avoid defending a large travel budget to the City. The $2500 reallocation from 1314-165 was part of over $39,000 transferred out of that account during the year, with no transfers back into the account. This suggests the possibility that the 1314-165 account might have been intentionally overfunded so that shortages in other accounts could be made up during the year. To a suspicious reviewing or funding body, the Board’s methods of handling transfers do not promote confidence in the Board’s efficiency. A related problem was brought up on cross-examination of Mr. Reville with respect to transfers brought before the Board in September 1984 which affected the 1984-85 budget. In particular, City Exhibit PP shows the documents presented to the Board concerning transfers from line 2100-535 into line 2610-541, and a simultaneous transfer from line 2610-541 into 2610-400. Attempts by counsel to obtain explanations as to why the transfer was not made directly from 2100-535 into 2610-400 consumed a lengthy period of testimony and did not yield a definitive answer. The point here, which the Board would be well advised to accommodate, is not that the Board is doing anything improper, but that review of this system by the City or any court is hampered by a combination of the complexity of the system used and the inability of the Board’s representatives to clearly articulate explanations when they are requested. 2. Encumbrances. A second term which is important to an understanding of the Board’s budgeting process is the encumbrance. As it was explained during the hearings, an encumbrance is a setting aside of an amount of money for obligations in the form of purchase orders or contracts where the goods or services are not going to be delivered and paid for until sometime in the future, but for which funds need to be reserved at the time of the commitment. An encumbrance might encompass only one fiscal year, in which case the good or service is delivered and paid for before the end of the current fiscal year. There will also be situations in which the good or service is not expected to be delivered in the current fiscal year, but for which a contract or other commitment with a vendor or supplier has been made in the current fiscal year. An example used in the hearings was a contract for school building repairs which were not going to be made until after the end of the fiscal year on June 30, but for which a contract was entered into before June 30. A similar situation would occur when office equipment is ordered in April, but not delivered and invoiced until August. After the work is completed, or the goods are delivered, the encumbrance is released and payment is made of the amount due. If there is an unencumbered balance in a line account at the end of a fiscal year, that fund balance is either applied to any prior deficit or returned to the City. If the balance is encumbered, it remains under the control of the Board and is in effect added to the next year’s appropriation for that line account. ■ The City has maintained all along that the Board is abusing the encumbrance system by encumbering an excessive amount of money at the end of the fiscal year so that the unencumbered balance is very low. There is also some evidence that a portion of the end of the year encumbrances cover the costs of projects which the Board would like to have performed, but were not planned for in the original budget. The effect of such procedures would be to prevent any fund balance or unencumbered balance from reverting to the City or being applied to prior deficits. A measure of the Board’s use of the encumbrance method to carry forward current year funds into the next fiscal year is available from Exhibits A, B, and C of Court Exhibit C which is Mr. Mahaney’s Special Report # 2. The Board’s encumbrance history and the fund balance ultimately returned to the City each year is shown in Table 4, below. Mr. Mahaney indicated that the total amount of encumbrances at the end of the fiscal year, considering the size of the Board’s budget, was not excessive. However, Mr. Mahaney testified that it was unusual to have fund balances as small as $17K or $21K considering the size of the budget. He suggested these numbers indicated a practice of using encumbrances to deliberately minimize the size of the fund balance. The issue raised by the City was not so much the size of the outstanding encumbrances, but the fact that many of the encumbrances seemed to have occurred toward the end of the fiscal year in an attempt to use any available funds so that none would revert to the City. There was testimony from Mr. Clapp that it was the Board’s practice and policy to encumber any available funds at the end of the year so as not to end up with a surplus. Mr. Clapp stated that the Board’s motivation was not specifically to use up the available surplus so that it would not revert to the City, but rather to take advantage of the surplus funds to meet urgent, otherwise unfunded needs of the Board. This practice of the Board, coupled with the Board’s inability to readily identify the purpose of the end of the year encumbrances, prevents the City from considering the propriety of the projects, and contributes significantly to the mistrust between the parties. While I am not unduly concerned with the accounting technicalities of this question, I am concerned with the apparent practice of the Board of encumbering all its unexpended funds at the end of the fiscal year. If the funds have been properly encumbered, as represented by appropriate purchase orders or contracts, there is no problem. Regretably, the Board was unable to produce documentation which would explain the end of the year encumbrances when this issue was raised. If these funds are encumbered merely to prevent the existence of a fund balance at the end of a fiscal year then there is cause for concern that the Board is being less than forthright in its presentation to the City and this Court. The Board may well have a legitimate. motivation for this practice. However, when it seeks a court order compelling the City to provide funding, I believe it is incumbent upon the Board to go out of its way to satisfactorily explain the issues which have caused questions to be raised. In this case, the explanation provided by the Board was not satisfactory, and as a result the year-end encumbrances are particularly suspect. 3. Financial Reporting. There were a number of instances during this proceeding when the Board’s ability to generate timely and accurate financial reports was questioned. In addition to raising feelings of distrust between the parties, the Board’s inability to provide financial reports in a timely fashion suggests the larger problem identified by Mr. Mahaney and the Deloitte Haskins’ report — that is, the absence of high quality financial reports indicates that management does not have the tools with which to exercise high quality financial management. For example, an additional issue dealing with transfers was raised concerning the Board’s internal financial management reports. Mr. Mahaney reported to the Court that it was his observation that because the Board handled much of their daily financial work manually, there was a significant delay between the occurrence of a transaction and the time when the transaction would eventually show up on a management report. He suggested that the Board should be running their financial departments on a “real-time” basis using a computerized data processing system. An illustration of this delay in reporting is provided by City Exhibit 5, a weekly account summary dubbed the “Green Monster” which bore a run date of November 23, 1984, but which did not show transfers which had been made during the year up to that date. Mr. Reville suggested that even if that particular document was not current, a person who had the responsibility for deciding from which line a transfer could be made would be able to determine the amount available in a particular line from looking at the ledger. That may well be true for any particular line item. However, it is hard to imagine how the managers at the Board are able to effec