Preliminary Fiscal Year 20022003 Budget
Posted: 30 March 2002
Preliminary BudgetFiscal Year
This document has been prepared by the President to provide background materials for discussion of ICANN's 2002-2003 budget. An earlier version was briefly reviewed with the ICANN Finance Committee and the Budget Advisory Group at their joint meeting on March 12, 2002 in Accra, Ghana, but the document was not available sufficiently far in advance of that meeting to permit a full and meaningful discussion. Nevertheless, this version does reflect some, but not all, suggestions of those two bodies at that meeting. It is now being posted for public comment. To comment on this document, please e-mail to email@example.com.
A final Proposed Budget, informed by such public comment and by further advice from the Finance Committee, the Budget Advisory Group, and the Board, will be posted in accordance with ICANN Bylaws on or before May 15, 2002 in advance of the Public Forum in Bucharest, Romania on June 25, 2002. The Board of Directors will act to approve the 2002-2003 Budget at its meeting on June 28, 2002 (see "Budget Process for FY2002-2003").
All financial figures in this document are in US$.
This Preliminary Budget is an aggressive budget that proposes significant increases in staff and expenditures reflecting some of the issues and precepts reflected in the recent document posted by the President, "ICANN: The Case for Reform". Although it is heavily influenced by the concerns expressed in that document, this Preliminary Budget is nevertheless cast within the current ICANN structural framework. As such, it does not include funding for some of the concepts of that document, such as an Ombudsman function or the proposed Manager of Public Participation, or for any funding of the root name server operators should that prove desirable. Neither does it broaden sources of funding from current sources (as is proposed in that document), but places the entire burden of increased funding on those current sources.
Athough this Preliminary Budget does not fully address the concerns in the President's recent document concerning reform, it does reflect management's view of what it takes to run ICANN more effectively and stably so that work currently assigned by the ICANN Board of Directors and by contractual oblications can be completed in a thorough and timely manner, and so that services for which ICANN is responsible can be effectively and efficiently rendered. Over the years ICANN's staff has not increased commensurate with increases in workload, and ICANN has been considerably understaffed since its inception. As workload has "piled on", this implies that work is done in a less timely and thorough manner and that mistakes occur. That may be all very well for "start-up" mode, but the current level of intensity cannot continue.
There is a clear need to re-assess ICANN's mission and goals and to align the scope of ICANN's to be commensurate with funding available. Either the scope of ICANN's activities must be reduced or funding must be found to provide for adequate resources to support the current workload.
Although a reduction or adjustment of the scope of ICANN's responsibilities may emerge from the ongoing discussion regarding ICANN reform, pending completion of that discussion it is management's responsibility to ensure that staffing and funding levels are reasonably commensurate with assigned workload. This budget therefore assumes that the present workload and scope of ICANN's activities continues as is. The current dialog regarding the mission of ICANN is a very healthy first step towards re-assessing this situation (see "Towards a Statement of the ICANN Mission"). This Preliminary Budget envisages a significant 28% increase in expenditures over the 2001-2002 budget. This is driven by the need to:
There are, however, many items that are not provided for in this Preliminary Budget; see "What is Excluded from this Preliminary Budget".
One critical factor driving this Preliminary Budget is the continuing need to build ICANN's financial reserves to acceptable levels. Without such reserves, ICANN remains in a financially precarious position. This cannot continue. One key reason behind ICANN's inability to accumulate reserves is that contributions from ccTLDs while generously donated in the absence of any agreements between ICANN and most of the ccTLDs fall far short of what has been budgeted under the formula followed for splitting financial responsibility between gTLDs and ccTLDs. This results in actual revenues falling far short of budgeted revenues, and as a consequence budgeted contributions to the reserves do not materialize. In the past, this built-in discrepancy has not been resolved. We can no longer afford to avoid this problem.
This Preliminary Budget, therefore, plans for much higher contributions to the reserves than has been the case in the past, providing a hedge against this budget shortfall in ccTLD contributions. One consequence is that this strategy drives gTLD commitments to a much higher level than would be the case if the ccTLDs could find a way to contribute in aggregate up to the full amount budgeted.
The need for a larger budgeted reserve is further underscored by the projected financial performance for the current fiscal year, 2001-2002. Although the projected surplus or contribution to reserves is now projected to be $389,000, this surplus could readily turn into a significant loss if a shortfall in ccTLD contributions comparable to or greater than historic levels is experienced, and if RIR agreements are not concluded so that contributions are received from that source (see "Comments on 2001-2002 Projections" for more details).
Given the incomplete (indeed, formative) stage of the ongoing discussions to define more specifically ICANN's mission, this Preliminary Budget for FY2002-2003 necessarily is guided by the existing, more general, statements of ICANN's mission, along with specific resolutions of the Board. Thus, the fundamental guide in assessing what ICANN responsibilities should be covered in the Preliminary Budget is the summary of ICANN's purposes in ICANN's Articles of Incorporation. The key question is the extent to which this Preliminary Budget properly supports these stated responsibilities:
Fiscal Year 2002-2003 is the fourth full budget year for the corporation, and is based on significant operating experience obtained over the previous three years.
In the fall of 1999, the ICANN Board adopted the recommendations of its Task Force on Funding (TFF) which included a number of provisions relating to the annual budget cycle. These recommendations were the basis of the detailed annual budget process that has since been followed and, with minor procedural revisions, are continued in the 2002-2003 budget cycle. The TFF report is available at http://www.icann.org/committees/tff/tff.htm. Although this is framed as a draft report, the Board resolution adopting the recommendations of the TFF accepted it as a final report.
In December, 2000, the ICANN Board appointed a Finance Committee. Its charter provides that the committee is "responsible for consulting with the President on the annual budget process of the corporation; for reviewing and making recommendations on the annual budget submitted by the President; and for developing and recommending long range financial objectives for the corporation."
The membership of the Finance Committee for 2001-2002 is Directors Linda Wilson (chair), Jonathan Cohen, Ivan Moura Campos, and Helmut Schink. Additional information about the Finance Committee is posted at http://www.icann.org/committees/finance.
In December 2001, ICANN's President appointed the members of what is now termed the Budget Advisory Group for FY2002-2003 in accordance with the recommendations of the TFF Report and based on nominations from Domain Name and Address Registries and Registrars. Although nominated by the various constituencies, the Budget Advisory Group's advice to the President is based on the perceptions of the individual members and may or may not be representative of the constituency as a whole.
The FY2002-2003 members of the Budget Advisory Group and their affiliations are:
The ICANN Bylaws require that the President submit a proposed budget to the Board of Directors at least forty-five days in advance of the beginning of the fiscal year, or approximately May 15. For 2002-2003, the Board expects to act on the proposed budget at its meeting on June 28, 2002 in Bucharest, Romania.
The ICANN annual budget-development cycle follows three general phases. The first involves review of the financial results for the first six months of the current fiscal year, and the development of an updated forecast of actual results for the entire fiscal year. This cycle is nominally completed in January. Posting of official six-month figures, however, has been delayed this year because of the need to reconcile with the final audited figures for 2001-2002. For reasons described at the beginning of the corrected Audited Financial Report for Fiscal Year Ending 30 June 2001, the final audit was not complete until January. Management estimates of the six-month results and of projections for the full year have, however, been regularly shared with the Finance Committee and (at a combined meeting of the Finance Committee and the Budget Advisory Group in Accra, Ghana on March 12, 2002) with the Budget Advisory Group. The 6 month figures have now been posted, and can be reconciled with the information presented in this document, when adjusted for differences in format and different modes of accounting for deferred revenues2)
As an extra step in the process this year, the President and the Finance Committee solicited input from ICANN's Supporting Organizations and constituent units in the Open Forum at the meeting in Montevideo in September 2001, and in a widely distributed written solicitation in December 2001. Although response was very limited, consideration has been given to what was received.
The second phase of the budget-development cycle includes the preparation of a Preliminary Budget for the next fiscal year based on the updated forecast for the current year, plus other known variables affecting the next year's budget. The Preliminary Budget Document then becomes the basis for general review and discussion at the first quarterly ICANN meeting of the calendar year. A summary of this document was presented at the Open Forum that was held in Accra, Ghana on March 13, 2002. The full Preliminary Budget, however, was not available at that time, and only a first draft was shared with the Finance Committee and the Budget Advisory Group.
The third phase includes preparation of the Proposed Budget for the next fiscal year, based on review of the Preliminary Budget. The Proposed Budget, after internal review and development by ICANN management, the Budget Advisory Group, and the Finance Committee, is posted for public comment at least three weeks before the second quarterly meeting, but no later than 45 days before the beginning of the next fiscal year. In the case of the Proposed Budget for 2002-2003, this will occur on or before May 15, 2002.
The Proposed Budget, modified as appropriate from analysis of comments received, is presented to the Board for adoption at its second quarterly meeting. This year, that will occur on June 28, 2002 in Bucharest, Romania.
The calendar of currently scheduled budget related meetings and teleconferences for the FY2002-2003 budget is as follows. The Finance Committee also meets as needed during the budget process in addition to the meetings listed below.
This Preliminary Budget assumes an ICANN as currently structured. It does not include the effects of any possible reforms or restructuring that are currently under consideration. Nor does it provide for funding any transition, since what is necessary is unknown at this time.
Neither does it provide for any expansion or contraction of mission as currently perceived; that is, it is consistent with policy or mission scope decisions already made by the Board (except for the Names Council request for support for DNSO Secretariat funding). As already noted, re-examination of the ICANN mission could affect this budget.
This Preliminary Budget also does not anticipate any reduction in expenditures that may result from growth in the use of higher-level naming systems that may relieve or replace pressure on the DNS to provide solutions to problems for which it was not originally designed. Any shift from the DNS to these higher-level naming systems could conceptually provide relief to ICANN because they are outside of ICANN's scope. However, it is premature to make any assumptions at this time.
The basic philosophy driving this Preliminary Budget was discussed earlier in this document (see " Budget Issues for FY2002-2003"). From a workload perspective, this Preliminary Budget builds on the ongoing and highlight priorities as follows (see also " Towards a Staement of the ICANN Mission"):
Specific priorities for 2002-2003 that fit within the above framework include (subject to adequate staffing levels):
Although this budget represents an expansion from previous years, there are many exclusions. For example, it does not provide for:
Two years ago as part of the approval of the 1999-2000 budget, the Board stated: "It is the intention of the ICANN Board to create a reserve account of at least one year's operating expenditures, to be funded over several fiscal years." That budget, which was premised on this guiding principle, was adopted by the Board at its meeting in Berlin.
We have made no essentially no progress towards this goal. The primary reason is that full budgeted contributions to reserves never materialize, largely because ccTLD revenues always fall considerably short of budgeted levels. Since there are no agreements with ccTLDs (other than .au and .jp), ccTLDs are under no legal obligation to support ICANN financially. Most generously make contributions. In aggregate, however, these contributions total considerably less than the share budgeted for all ccTLDs based on the allocation of costs recommended by the Task Force on Funding report adopted by the Board. In 2000-2001, for example, budgeted ccTLD revenues were $1,277,000 whereas actual revenues were approximately $880,000.
This perennial shortfall is an institutionalized reality that needs to be recognized until such time that there are sufficient agreements with the ccTLD registries. With or without that, the budgeted amounts are allocated across all ccTLD registries in spite of the clear fact that many smaller registries are simply not in a position to pay because they do not charge for domain names.
In the 2002-2003 Preliminary Budget, this reality is recognized by raising the planned "contribution to reserves" to a sufficient level (about $1.6 million) so that, even with a shortfall in realizing budgeted ccTLD revenues commensurate with historical experience, there would still remain a meaningful "contribution to reserves" at the end of the financial year.
One important effect of planning for a larger budgeted contribution to reserves is that the amount that must be allocated between the gTLD and ccTLD registries is correspondingly larger, resulting in a significant increase between 2001-2002 and 2002-2003.
Column B of the Budget Schedule displayed in the following section summarizes the projected financial performance for the current year 2001-2002 displayed in the format adopted for these budgeting purposes. It projects a $389,000 surplus against a budgeted surplus of $750,000.
The primary reasons for this shortfall occur in both expense and revenue categories:
These higher costs were offset to some extent by freezing staff hiring and limiting staff travel.
The projected surplus stated in Column B, however, does not account for likely shortfalls in revenue. It assumes that ccTLDs will contribute the full budgeted amount of $1,300,000. Since, except for .au and .jp, there are no contracts between ICANN and the ccTLDs, there is no guarantee that this amount will be collected. ICANN depends upon the generous contributions of ccTLDs voluntarily given (again, except now for .jp and .au which give pursuant to agreement). As already noted, past performance indicates that the aggregate of these contributions falls considerably short of the budgeted amount. There will likely be a similar shortfall in 2001-2002, the exact size of which is difficult to predict at this time (in 2001-2002, the shortfall was about $400,000). This shortfall will significantly lower the projected surplus and, depending on the size of the shortfall, may result in a deficit.
Furthermore, at time of posting this Preliminary Budget, there is no agreement between ICANN and the RIRs. The RIRs have taken the position that they will not contribute to ICANN until an agreement is signed. An agreement has been negotiated among staffs, but is awaiting approval from the RIR Boards of Directors, following which it will require ICANN Board approval after a suitable period allowed for posting and public comment. There is no guarantee that an agreement will be signed in this fiscal year.
Should no RIR funding be received, ICANN will not only need to reduce even further the projected surplus for 2001-2002 by the $496,000 revenues budgeted during that year from the RIRs, but will also need to write-off the $856,000 in accounts receivable attributed to revenues from RIRs booked from the past two financial years. The combined reduction of $1,352,000 would obviously result in a significant loss, regardless of what the ccTLDs contribute in 2001-2002.
These situations underscore the precariousness of ICANN's finances.
(See appended notes for explanations; all items are in US$)
|ICANN PRELIMINARY BUDGET
|2001-02 Approved Budget||2001-02 Year-End Projection||Difference Budget to Projection||2002-03 Base Budget||2002-03 Proposed Changes||2002-03 Preliminary Budget||Notes|
Staff Full-Time Equivalents
|Professional and Technical Services||734||644||(90)||676||50||726||(2)|
|Board & Public Meetings||450||1,001||551||800||(200)||600||(3)|
|Other Travel & Meetings||425||301||(124)||320||75||395||(4)|
|Administrative & Systems||704||902||198||929||50||978||(5)|
|Subtotal: Base Expenditures||$4,530||$4,731||$201||$5,019||$482||$5,501|
|Public Meetings - sponsored events||250||134||(116)||200||(50)||150||(6)|
|At Large Activities||250||250||0||0||200||200||(7)|
|Support for DNSO Secretariat||0||0||0||0||170||170||(9)|
|Subtotal: Other Expenditures||$500||$484||($16)||$200||$720||$920|
|Variable Registry/Registrar Revenues|
|TLD Name Registries/Registrars|
|ccTLDs (Tier 3)||1,031||1,080||49||1,080||710||1,790||(12)|
|Subtotal: TLD Name Registries/Registrars||$3,400||$3,449||$49||$3,449||$2,127||$5,576|
IP Address Registries
|Subtotal : Variable Registry/Registrar Revenues||$3,896||$3,945||$49||$3,945||$2,166||$6,111|
|Other Registry/Registrar Revenues|
|Fixed TLD Registry Fees|
|Tier 1 (ccTLDs & gTLDs))||89||89||0||92||0||92||(14)|
|Tier 2 (ccTLDs)||180||180||0||155||0||155||(15)|
Tier 3 (gTLDs)
|Tier 3 (gTLD Initial Fixed Fees)||490||345||(145)||78||0||78||(17)|
|Subtotal Fixed TLD Registry Fees||1,059||914||(145)||965||0||965|
|Registrar Accreditation Application Fees||25||62||37||25||10||35||(18)|
Annual Registrar Accreditation Fees
|Subtotal: Other Registry/Registrar Revenues||$1,584||$1,663||$79||$1,490||$210||$1,700|
|Subtotal: Base Revenues||$5,480||$5,608||$128||$5,435||$2,376||$7,811|
Public Meetings Sponsored Events
Contributions and Other
At Large Activities
|Subtotal: Other Revenues||$300||$151||($149)||$230||$150||$380|
|Less:Bad Debts or Bad Debt Allowance||0||(158)||(158)||(165)||0||(165)||(23)|
|CONTRIBUTION TO OPERATING RESERVE||$750||$386||($364)||$280||$1,324||$1,605||(24)|
NEW gTLD OPERATING RESERVE
Balance brought forward
Balance carried forward
Explanation of Columns:
The following notes detail the assumptions underlying the proposed Preliminary Budget:
Present and proposed staffing levels are summarized in Figure 1.
Endnotes to Preliminary Budget discussion:
2. Official accounting reports defer revenues associated with services that are rendered across the fiscal year and across fiscal year boundaries. For example, Annual Registrar Accreditation Fees are distributed throughout the period of accreditation, regardless of when they are actually received. Management practice for budgetary purposes, however, is to include and project income at the time it is invoiced. This is to provide for greater clarity of understanding.
Schedule 1: TLD Assumptions
The following tables detail the assumptions made regarding domain name counts for purposes of the Preliminary Budget. These assumptions are important since they form the basis for allocating budgeted revenues among gTLDs and ccTLDs (see Notes (11) and (12)). The counts used will need to be refined between posting of the Preliminary Budget and of the Proposed Budgeted. This will require the cooperation of those TLDs affected by these counts.
As was mentioned in Note (12), the counts for ccTLDs have jumped 48% over the numbers used last year. Some of this is attributable to growth in registrations; in other cases it is attributable to in the data used for 2001-2002. Since gTLD counts have not increased as much, the net result is that the ccTLD share has increased from 27.6% to 32.1% of the total.
The Tier 3 ccTLDs counts used for purposes of the Preliminary Budget are:
The gTLD counts are estimated below. They will need to be updated to reflect July 1, 2002 estimates or actual. The three sponsored new gTLDs (.museum, .aero, and .coop) will not have sufficient doman name counts as of July 1, 2002 to qualify for Tier 3:
The split between gTLDs and ccTLDs is thus calculated as follows:
Tier 2 registries are those estimated to house between 5,000 and 50,000 domain names. The budget assumes that each of these would be requested to contribute $5,000. The 31 registries assumed to be in this category are listed in the table at the end of this Schedule.
The remaining 192 registries (including .museum, .aero, and .coop) are
assumed to be Tier 1 for purposes of this Preliminary Budget.
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