Proposed Fiscal Year 2002–2003 Budget

Posted: 15 May 2002

Proposed Budget–Fiscal Year 2002-2003
(July 1, 2002 to June 30, 2003)

CONTENTS

1. Introduction
2. Issues for FY2002-2003
3. Background
4. Budget Process for FY2002-2003
5. Budget Priorities for FY2002-2003
   a. What is Excluded from this Proposed Final Budget
   b. Building the Reserves
6. Comments on 2001-2002 Projections
7. Proposed Final Budget Schedule and Accompanying Notes
8. Staffing for FY2002-2003
Schedule 1: TLD Assumptions

1. Introduction

This document has been prepared by the President to provide background materials for discussion of ICANN's 2002-2003 proposed Final Budget. This proposed Final Budget builds on the Preliminary Budget that was posted March 30, 2002, and is based on community feedback that was received on the Preliminary Budget and on advice received from the ICANN Finance Committee and from the Budget Advisory Group. It is being posted for public comment prior to its consideration for adoption by the ICANN Board at its June 28, 2002 meeting as the approved Final Budget for 2002-2003. To comment on this document, please e-mail to budget-comments@icann.org.

All financial figures in this document are in US$.

2. Budget Issues for FY2002-2003

This Proposed Final 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". Regardless of the need for structural reform in ICANN, that document highlighted the point that ICANN is seriously underfunded even within the current structural framework given what ICANN is expected to do.

Although there is currently discussion underway within the community and the ICANN Board as to the future mission of ICANN, in the absence of any conclusion to this discussion at this time, this proposed Final Budget necessarily assumes that ICANN will be expected to do in 2002-2003 what it is currently doing (see, for example, the staff paper, "Toward a Statement of ICANN's Mission"). The proposed Final Budget does not provide, however, for any additional costs that might be incurred as a result of any adjustment of ICANN's mission, or from any additional concepts proposed in The Case for Reform or in any of the documents issued by the Board's Committee on ICANN Evolution and Reform. Neither does it contain any provision for any transition costs that may be associated with any reforms ultimately adopted by the Board. Nor does the proposed Final Budget introduce any new sources of revenue. All of this would be premature at this time.

Although this proposed Final Budget does not fully address the concerns in the President's recent document regarding 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 work driven by contractual obligations can be completed in a thorough and timely manner, and so that services for which ICANN is responsible can be rendered effectively and efficiently. 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. 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 proposed Final Budget therefore assumes that the present workload and scope of ICANN's activities continues as is. The dialog now underway regarding the mission of ICANN is a very healthy first step towards re-assessing this situation (see "Toward a Statement of the ICANN Mission" and "Working Paper on ICANN Mission and Core Values").

This proposed Final Budget envisages a significant 25%¹ increase in expenditures over the 2001-2002 budget. This is driven by the need to:

• Bring funding more into balance with current assigned responsibilities.
  
  
• Continue activities launched over the past year that were not included in last year's budget, such as the IDN Committee (or, more precisely, work that may arise from recommendations of that Committee once the work of the Committee itself is completed²) and the Security Committee.
  
  
• Recognize inflation and known increases in costs (such as, for example, a 250% increase in insurance costs that has been experienced this past year).
  
  
• Build reserves as discussed in the section on "Building the Reserves".

There are, however, many items that are not provided for in this proposed Final Budget; see "What is Excluded from this Proposed Final Budget".

One critical factor driving this Proposed Final 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 ignore this problem.

This proposed Final Budget, therefore, plans for there to be a reasonable Contribution to the Reserves even if the ccTLD contributions are significantly less than what would be budgeted under the splitting formula. In fact, there would be a small Contribution to the Reserves even were those ccTLDs with whom there is no agreement choose not to contribute anything at all. The gTLD Registries and Registrars have communicated through their representatives on the Budget Advisory Group that they wish to ensure the viability of ICANN without there being any dependency on uncertain contributions from those ccTLDs with whom there is no agreement.

The need for a larger budgeted reserve is further underscored by the projected financial performance for the current fiscal year, 2001-2002. The latest budget projection indicates that there would be a Contribution to the Reserves of $848,000 if the ccTLDs voluntarily contribute the full budgeted amount of $1,184,000³. This, of course, is not likely to happen. To date, those contributions total $176,000. If there are no further contributions this year, there would be a $276,000 deficit. The year will likely end somewhere in between. (See "Comments on 2001-2002 Projections" for more details).

It should be pointed out that the contributions received to date are all from non-CENTR countries (CENTR is the organization of mostly European ccTLDs), and is ahead of total contributions from non-CENTR countries last year. In 2001-2002, CENTR countries contributed over $710,000. It should be noted that the reason given by some CENTR members for not yet having decided on their contributions for the present year is that the requests were not sent out until March 2002. All ccTLD contributions are made generously by many countries around the world, including many that house small registries compared with some of the much larger, well-established registries.

The problem of uncertain voluntary contributions from the ccTLDs and their effect on ICANN's financial operating performance and on building adequate reserves is addressed in the proposed Final Budget. Acting on the advice of the Budget Advisory Group, these voluntary contributions are handled in a new way in this proposed Final Budget. One result is that, all other items in the budget being equal – at least in aggregate – ICANN would no longer be dependent on ccTLD voluntary (that is, excluding those ccTLDs with whom we have agreements) contributions for its financial operating performance. That is, (a) ccTLD contributions would at the end of the year largely affect the size of the Contribution to the Reserve even though programmatically they are not intended for this purpose. (b) According to the size of the ccTLD contributions, management would also make tradeoffs between expanding services that support ccTLDs and increasing the size of that Contribution to the Reserves. This is discussed in greater detail in "Building the Reserves".

Given that ongoing discussions to define more specifically ICANN's mission are incomplete, this proposed Final Budget for FY2002-2003 necessarily is guided by the existing, more general, statements of ICANN's mission, along with specific resolutions of the Board. In assessing what should be covered in the proposed Final Budget, the fundamental guide is the summary of ICANN's purposes in ICANN's Articles of Incorporation. The key question is the extent to which this Proposed Final Budget properly supports these stated responsibilities. Those Articles state ICANN's purposes as:

". . . promoting the global public interest in the operational stability of the Internet by (i) coordinating the assignment of Internet technical parameters as need to maintain universal connectivity on the Internet; (ii) performing and overseeing functions related to the coordination of the Internet Protocol ("IP") address space; (iii) performing and overseeing functions related to the coordination of the Internet domain name system ("DNS"), including the development of policies for determining the circumstances under which new top-level domains are added to the DNS root system; (iv) overseeing operation of the authoritative Internet root server system; and (v) engaging in any other related lawful activity in furtherance of items (i) through (iv)."

3. Background

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 the members were nominated by the various constituencies, the Budget Advisory Group's advice to the President is based on their individual perceptions and may or may not be representative of each member's constituency as a whole.

The FY2002-2003 members of the Budget Advisory Group and their affiliations are:

• Sabine Dolderer [.de – ccTLD Registries]
• Hartmut Glaser [.br – ccTLD Registries]
• Bernard Turcotte [.ca – ccTLD Registries]
• Elana Broitman [register.com – Accredited Registrars]
• Bryan Evans [InterAccess – Accredited Registrars]
• Rob Hall [Momentus – Accredited Registrars]
• Sloan Gaon [registry.pro – gTLD Registries]
• Chuck Gomes [VeriSign – gTLD Registries]
• Steve Juarez [MusDOMA – gTLD Registries]
• Axel Pawlik [RIPE-NCC – Address Registries]
• Robert Stratton [ARIN – Address Registries]
• Paul Wilson [APNIC – Address Registries]

4. Budget Process for FY2002-2003

The ICANN Bylaws require that the President submit a proposed Final Budget to the Board of Directors at least forty-five days in advance of the beginning of the fiscal year, or approximately May 15. This proposed Final Budget is posted in response to that requirement. For 2002-2003, the Board expects to act on the proposed Final 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. However, this year, completion of this phase was delayed. Posting of the six-month figures did not occur until March, 2002, because of the need to reconcile with the final audited figures for the year 2000-2001; 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. The 6 month figures have now been posted, and can be reconciled with the information presented in the Preliminary Budget and this document, when adjusted for differences in format and different modes of accounting for deferred revenues⁴.

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 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 full Preliminary Budget was posted on March 30, 2002.

Comments have been received through the mailbox set up for the purpose. Of the 71 comments received, 68 were off-topic; 2 pointed out a typo regarding the 2-letter code used for a particular ccTLD; and one was from a constituency expressing general support for the overall budget, but emphasizing their view that greater priority should be given to the need for improved contract monitoring and compliance, and that lower priority should be assigned to providing funds for the DNSO Secretariat (as presented in the Preliminary Budget) or for support of "at large" activities.

The third phase includes preparation of the proposed Final Budget for the next fiscal year, based on review of the Preliminary Budget. The proposed Final 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. The posting of this document, the proposed Final Budget, complies with that requirement.

The proposed Final Budget, modified as appropriate from analysis of comments received, is presented to the Board for adoption as the approved Final Budget 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.

5. Budget Priorities for FY2002-2003

This proposed Final Budget assumes an ICANN as currently structured. As stated earlier (see "Budget Issues for FY2002-2003"), 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. As already noted, re-examination of the ICANN mission could affect this budget.

This proposed Final 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 proposed Final Budget was discussed earlier in this document (see "Budget Issues for FY2002-2003"). From a workload perspective, this proposed Final Budget builds on the ongoing and highlight priorities as follows (see also "Toward a Statement of the ICANN Mission"):

Ongoing Priorities:

• Provide timely and responsive support to the policy-making activities of the Board and Supporting Organizations, other advisory bodies, and Board Committees, including policy and legal analysis, drafting and implementation, preparation of legal agreements and other materials, etc.
  
  
• Ensure responsive services to meet operational commitments of service programs, including IANA services to support address and name registries, assignment of protocol parameters, registrar accreditation, etc.
  
  
• Actively monitor and ensure compliance with all agreements entered into by ICANN.
  
  
• Implement agreements with constituent bodies to formalize the delegation of ICANN responsibilities and to create an institutionalized framework of agreements.
  
  
• Conduct an active education and outreach program to further openness and transparency and to support public participation in ICANN policy-making activities, including public meetings, public forums, electronic and hardcopy publications, support of an accessible website, etc.
  
  
• Ensure efficient and effective planning of three ICANN meetings per year.
  
  
• Operate robust and secure technical services to support operation of the L-root name server, registries operated by ICANN, the InterNIC, and internal operations.
  
  
• Fulfill other requirements of the Memorandum of Understanding with the United States Government as prerequisites to the transition of DNS technical coordination to international private-sector management.
  
  
• Execute the general management and administrative responsibilities of the corporation in an efficient and effective manner.
  

Highlight Priorities:

Specific priorities for 2002-2003 that fit within the above framework include (subject to adequate staffing levels):

• Continue to improve IANA operations and technical services.
  
  
• Improve services to gTLD registries and registrars.
  
  
• Provide support to the ICANN Security and IDN Committees, and implement recommendations arising from the work of those Committees as approved by the Board.
  
  
• Support work under the Cooperative Research and Development Agreement on study of the performance and security needs for the root-nameserver system and development and implementation of an enhanced architecture for that system, including preparation of plans and reports.
  
  
• Improve ICANN's capability for monitoring agreements and ensuring compliance.
  
  
• Improve the security and robustness of ICANN's technical operations.
  
  
• Coordinate evaluation of the present round of new gTLDs and, subject to Board decisions, provide for a further round of new gTLDs (but see the list of excluded items below).
  
  
• Improve the effectiveness and timeliness of ICANN's mechanisms for openness and transparency, including reorganization of the ICANN website, mechanisms for public input and comment, and other communications.
  
  
• Provide temporary support to help jumpstart self-forming "at large" activities and groups, subject to available funding.
  
  
• To the extent possible, continue to negotiate with ccTLDs to enter into agreements where feasible.
  
  
• Enter into agreements with root nameserver operators to the extent feasible.
  
  
• Strengthen ICANN as an operating organization, including normalization of financial support, staffing, and administrative operations.

5(a). What is Excluded from this Proposed Budget

Although this budget provides for higher expenditures than previous years, there are many exclusions. For example, it does not provide for:

• Any one-time costs that may be incurred with any possible reform and restructuring.
  
  
• Any continuing costs that may arise as a result of reform. For example, there is no provision for an Ombudsman program, should that concept be included in any final reform.
  
  
• The costs of launching any new gTLDs that may be approved by the Board (it is assumed that this is likely to be a self-funding activity), although it does provide for a staff member to oversee a planning process associated with evaluating the recent round of new gTLDs and planning for future rounds. However it does not provide for any extensive evaluation beyond what can be funded with the balance of approximately $323,000 remaining at the end of the 2001-2002 fiscal year from the new gTLD funds. In addition, ICANN must provide for a hedge against potential litigation involving the new gTLDs.
  
  
• Contracting for services to provide support for the technical monitoring support of the root nameservers in coordination with the RSSAC, since there has been no formal recommendation by the RSSAC.
  
  
• Funding any Security Committee recommendations (as approved by the ICANN Board), resulting from the Security Committee charter "to undertake any audit activity to assess the current status of DNS and address allocation security in relation to identified risks and threats". The budgetary implications of this cannot be assessed absent a recommendation from the Security Committee and action by the Board. The proposed Final Budget does contain funding for staff and travel support for the Committee itself, but not for any additional work.
  
  
• Funding for staff support for a DNSO Secretariat as requested by the Names Council. This request (that was included in the Preliminary Budget) was not endorsed by the Budget Advisory Group composed of representatives of those constituencies responsible for providing all of ICANN's funding (see "Budget Process for FY2002-2003"). The main reason for this lack of endorsement was the view that the DNSO should provide funding for its own secretariat as is done by the ASO and the PSO. Funding of staff support for the SOs (or possible successor organizations) is one of the topics for consideration in the ICANN reform process now underway.
  
  
• Funding for any unforeseen increase in litigation that may be associated with the increased levels of ICANN's activities.

5(b). Building the Reserves

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." Approval of the 1999-2000 budget by the Board implied that the Board also adopted the statement about the level of reserves.

We have made 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 the only agreements with ccTLDs are with .au and .jp (that is, two⁵ ccTLDs out of over 240), most ccTLDs are under no legal obligation to support ICANN financially. Most of the larger ccTLD registries and many of the smaller, however, have generously made 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 such agreements, 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 proposed Final Budget, this reality is recognized by separating off the ccTLD contributions (other than those three ccTLDs with whom ICANN has agreements) into its own category, and formally estimating what the actual voluntary ccTLD contributions might be, based on historical experience, instead of unrealistically assuming that these voluntary contributions will total what is proposed in the Task Force on Funding Report. This is a different approach than what was taken in the Preliminary Budget. Further, the proposed Final Budget has been adjusted so that there would still be a small Contribution to the Reserve even in the unlikely event that there were no contributions from the ccTLDs, provided all other budgetary goals were met in aggregate.

This revised approach to budgeting was taken with the advice of the Budget Advisory Group. It implies that there will be no dependency on voluntary contributions for ICANN to fund its budgeted expenditures although the amount of such contributions may affect the level of reserves. The level of contributions also undoubtedly will affect management decisions as to the appropriate levels of staff and other support for certain areas of activity in tradeoffs to be made against the necessity to expand the level of reserves.

In this revised approach, the amounts that would be expected from those ccTLDs with whom we do not have agreements according to the Task Force on Funding report adopted by the Board is termed "Fair Share Contribution". As in the past, individual ccTLDs will be requested to make contributions to ICANN using their portion of the Fair Share Contribution as a guide, but they will, of course, contribute any amount as they see fit in the absence of any agreements.

One proposed change, however, is that consideration will be given to whether and how to seek contributions individually from non-contracted Tier 1 (fewer than 5,000 domain names) ccTLDs. Any contribution can be a severe burden on most of these registries. In any event, the cost of such a solicitation in terms of staff time exceeds the revenues obtained. Few Tier 1 registries are able to contribute, largely because they have no source of revenue themselves, and others are unwilling to pay.

This approach and the budgeted increases in ICANN expenditures necessarily increases the budgeted amounts that the gTLD registries and registrars are being expected to contribute to ICANN and, to a lesser extent, increases the budgeted contribution from the RIRs. The members of these constituencies on the Budget Advisory Group have, however, generously indicated their strong support for this approach, and have indicated that their constituencies would do so as well. This has particular significance in the case of the Registrars Constituency: by virtue of agreements with gTLD registrars, the registrar contributions to the Final Budget must be approved by them in a vote representing two-thirds of all gTLD domain names.

The upshot of these actions will certainly relieve the pressure on the operating budget as far as current activities are concerned, but may not result in any significant growth in the reserves. Reserves are an essential component of financial stability of any organization. They are needed, for example, to provide funding for unforeseen events, such as funding a transition to a changed ICANN resulting from the discussion on reform, to weather downturns in the economy that could affect contributions to ICANN's funding or for the costs of defending against lawsuits. This problem still needs to be addressed.

6. Comments on 2001-2002 Projections

Column B of the following Budget Schedule 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 $276,000 deficit against a budgeted surplus of $750,000.

The final figure will actually lie somewhere in between, since this projected deficit assumes that no further contributions will be received from ccTLDs between now and the end of the financial year, which is unlikely. That is, the projection assumes that the voluntary contributions from ccTLDs in 2001-2002 will total $176,000 in contrast with the budgeted total of $1,124,000 (these figures exclude budgeted contributions from .au and .jp, with whom we have agreements and whose contributions are included elsewhere in the forecast). As already noted, the contributions received thus far are entirely from non-CENTR countries and collectively exceed such contributions received in total in 2000-2001. However, the majority of contributions in the past have come from CENTR countries that collectively house about 70% of the ccTLD domain names; these countries have indicated that they will not make any decisions about contributions until after the CENTR meeting at the end of May.

In the unlikely event that the total voluntary contributions from the ccTLDs achieved the budgeted, but unrealistic, figure of $1,124,000, the projected $276,000 deficit would in fact change to a projected surplus of $672,000, slightly less than the budgeted Contribution to the Reserves of $750,000.

The primary reasons for this shortfall occur in both expense and revenue categories:

• Higher-than-anticipated meeting costs attributable to (a) higher travel costs than projected, (b) extra security and other costs for the Marina del Rey meeting, (c) Board planning retreats, and (d) lower-than-planned levels of meeting sponsorship.
  
  
• Higher administrative costs caused by a 250% increase in insurance costs and extra expenditures to provide for improved security of technical operations.
  
  
• Lower revenues from new gTLD initial fees because agreements with these new gTLDs were not completed by July 1, 2001. This meant that fees from those registries where agreements were completed after July 1, 2001 were pro-rated between 2001-2002 and 2002-2003 (the latter included in this Final Proposed Budget).

These higher costs have largely been offset by freezing staff hiring and limiting staff travel. They have also been offset by higher-than-budgeted revenues from registrar accreditation application and renewal fees.

Furthermore, at time of posting of this proposed Final Budget, there is no agreement between ICANN and the RIRs. The RIRs in the past took the position that they would not contribute to ICANN until an agreement is signed with each RIR, although they pledged these contributions and escrowed the associated funds in anticipation of an agreement. Such agreements have now been negotiated among staffs, but have not yet been approved by the ICANN and RIR Boards of Directors. The RIR Boards have understandably taken the position that it would not be wise to sign these agreements at least until the outcome of the ICANN reform process is more certain, since this may require some modification to the agreements. The RIRs have, however, signed pledges to pay the outstanding funds (that, under the accounting practices that govern ICANN, enable ICANN to book these pledges as revenues), and have indicated that they will renew these pledges. Furthermore, as a sign of good faith, the RIRs have generously paid ICANN half of what was pledged covering the years 1999-2002.

Nevertheless, the uncertainty of ccTLD funding and the final disposition of RIR funding underscore the precariousness of ICANN's financial situation, particularly in the absence of any reserves. The steps taken in the proposed Final Budget, as previously discussed, will be of great help to relieve operating pressures, but may still leave ICANN without any significant financial reserves.

7. Proposed Final Budget Schedule and Accompanying Notes

(See appended notes for explanations; all items are in US$)

Staff Full-Time Equivalents

IP Address Registries

Tier 3

Annual Registrar Accreditation Fees

Other Revenues

Public Meetings Sponsored Events

At Large Activities

Miscellaneous

NEW gTLD OPERATING RESERVE

Balance brought forward

Expenditures

Balance carried forward

Explanation of Columns:

Column A is the approved 2001-2002 Budget.

Column B is the 2001-2002 Year-End Projection as of 5/15/02. This has been updated since the Preliminary Budget was posted.

Column C is the difference between Columns B and A. Negative numbers imply lower than budget (lower expenses or lower revenues), positive numbers mean higher than budget (higher expenses or higher revenues).

Column D is the base budget for 2002-2003. It includes all previously authorized expenses and revenues, projected to cover inflation and other known factors. As such it includes no staff additions beyond the approved 2001-2002 levels.

Column E includes proposed changes in expenses and revenues for reasons described in the body of this document.

Column F is the sum of Columns D and E.

Notes:

The following notes detail the assumptions underlying the proposed Final Budget:

(1) (1) ICANN was authorized 21 FTE in the approved 2001-02 budget. As of 3/15/02, only 17 of those positions have been filled; 4 remain vacant for reasons of anticipated cash flow and shortfall in predicted revenues. Beyond the 4 unfilled positions, 6 new positions are requested. A summary of staffing is to be found at the end of these notes (see Figure 1).

It is assumed for purposes of this Proposed Final Budget that all positions will be filled for the full 12 months, except that an aggregate allowance of $100,000 in salary savings has been assumed

The justification for the positions already approved can be found as part of the 2001-2002 Final Budget. A summary of the requirements for the additional positions is as follows. Note that positions are considered fulltime staff positions even though they may be filled by contract personnel according to management judgment.

Contract Monitor: There are insufficient staff budgeted to provide adequate oversight of all old and new gTLD and other agreements, to provide adequate liaison activity, to analyze information provided, to follow through in establishing a data escrow program, and to respond appropriately to the increasing flow of community complaints. This position will complement the two existing Registrar Liaison positions and the currently unfilled Registry Liaison.

Technical SysAdmin: ICANN needs to strengthen its technical support environment to ensure its can operate a hardened, secure, reliable 7 x 24 facility environment to accommodate its emerging responsibilities in operating one of the root servers and the Internic, and to be able to assume responsibility in the future for the master distribution server. ICANN also needs to evolve the introduction of backup capabilities for the IANA function, which will involve appropriate technical planning. Current senior staff are too consumed by operational responsibilities and emergency support to have time for appropriate planning.

Security Technical Analyst: A Security Committee has been formed and its charter has been approved by the Board. Although much of the work of the Committee will be carried out by volunteers, experience has shown that committees can be more productive when supported by fulltime staff.

New gTLD Planning/Evaluation: There is now very little time to engage in serious planning for the possible introduction of new gTLDs in consultation with the community. Neither is there time to organize evaluation of the current environment. Whereas most aspects of any evaluation will be contracted out, the definition of what evaluation needs to be done in consultation with the community and the ICANN Board, and the overall management of such a contract, needs to be properly staffed.

Junior Counsel (ccTLD and IANA Support): This position is required to strengthen IANA services and provide additional support for negotiating agreements with ccTLDs. Existing staff cannot cope with a continuing flow of IANA requests for redelegations and other IANA matters - which can be extremely time-consuming - and simultaneously negotiate agreements with ccTLDs. A decision to fill this position will ultimately depend on management's perception that ccTLD funding is forthcoming and that there is indeed progress to be made in negotiating additional ccTLD agreements.

Financial Analyst: ICANN's financial and budgeting has become increasingly complex given the additional gTLDs, the increased demands for financial planning and analysis, and the need to convert to programmatic budgeting. There is also the need to provide some relief to current staff to allow time to convert to a more robust accounting system that can better accommodate ICANN's needs.

Other potential staff or contract personnel not included in this line item: Two more temporary staff or contract personnel are included in line items elsewhere in the Proposed Final Budget to support (a) activities associated with nurturing the formation of at large groups consistent with the ICANN Board resolution on March 14, 2002 (see Note (7)); and (b) potential continuing support for the activities of the IDN Committee (see Note (8)).

(2) Professional and Technical Service costs are projected to decline in 2002-03 because some technical support functions previously handled by outside contract services have now been accommodated by hiring internal technical staff. The budgeted figure, however, makes no allowance for any increase in litigation, or any costs that may be associated with any restructuring of ICANN.

(3) Costs of meetings have increased substantially over the past two years, and sponsorship (see Note (6)) per meeting has declined when the meetings are not in the United States. The total cost per meeting now averages almost $200,000 - plus an additional $50,000 that can be expected to be offset through sponsorship. The Proposed Final Budget reflects the Board decision to reduce from 4 to 3 meetings per year. The proposed Final Budget also includes an allowance for contracting out for meeting management services to relieve staff workload. Such a service could be provided from outside of the United States.

(4) Other Travel & Meeting costs are projected to increase to support the travel costs of members of the IDN and Security Committees to meetings and to support additional staff costs.

(5) Administrative & Systems costs are projected to increase to allow for three factors: (a) inflation (b) costs of supporting an increased staff; and (c) costs of additional "hardening" of the L-root server" through contracting with an external professional facilities provider.

(6) This is the portion of meeting expenses that is projected to be offset by external sponsorship (see Note (3) and the line item corresponding to Note (20)). The budgeted amount for 2002-03 is lower than the corresponding amount for 2001-02 because (a) there is one fewer meeting, and (b) sponsorship per meeting has been lower than earlier expectations.

(7) The proposed Final Budgeted amount is to support the formation of at large⁶ (that is, "public interest") organizations to "jumpstart" the process. This follows the Board resolution on this matter at the recent ICANN meeting in Accra, Ghana. The amount includes temporary support for one fulltime staff member or contract personnel to work with nascent organizations to help catalyze and institutionalize the process, continuing a process that has been started in the last quarter of 2001-2002. These costs would be funded from external contributions (see Note (21)).

(8) The IDN Committee is an ad hoc committee of the Board. It anticipates completing its work in June 2002, but this is not certain. Even if it does complete its work, the Board may accept recommendations from the Committee that may have implications for further ICANN activities in this area. At the time of construction of this Proposed Final Budget, the future is unknown. This amount, therefore, must be considered a "placemarker" at this time, pending further clarification by the Board before or at its meeting in Bucharest on June 28, 2002. The funding could provide for continuing temporary staff support if required.

(9) Every year projects arise in mid-year that are not anticipated when the budget is approved. For example, in 2000-2001, the IDN and Security Committees were formed. The indicated figure is a contingency amount to recognize this factor. It is not labeled "Contingency" as might be more customary because it is proposed that expenditures from this line item cannot be approved by the President, but require Board approval. Board approval must also require recognition of any continuing implications beyond the 2002-2003 fiscal year. This contingency for unforeseen projects does not provide for any potential costs associated with the Reform Process.

(10) This line item is revenue budgeted to be received from name registries (gTLDs and ccTLDs) who have entered into an agreement with ICANN that is calculated on a per domain name basis. The domain name counts are as estimated on 3/1/02 but will need to be updated to be as of 7/1/02. This will be after the Final Budget is approved. The adjusted counts, however, will not affect the Final Budget, but only how the amount is sub-allocated among the different name registries.

Using the 3/1/02 estimated counts, however, the amount per domain name is 12.69 cents. This figure is also used for setting the "Fair Share" contribution (see Note (18)).

(11) An agreement yet to be approved (see discussion in "Building the Reserves") but that nevertheless guides budget considerations, provides for the IP address registries to pay ICANN the lesser of (a) 15% growth over the previous year's payment, or (b) 25% growth over the payment three years prior to the year under consideration. Under the proposed Final Budget, the latter calculation would obtain and is indeed what is assumed (the amount budgeted three years prior was $428,000).

(12) These are budgeted fixed fees for Tier 1 &2 gTLDs (following the same classification as is used for ccTLDs). As of July 1, 2002, the Tier 1 gTLDs will be .museum, .aero, and .coop. It is not likely that there will be any Tier 2 gTLDs as of that date. The annual fixed fee per Tier 1 gTLD is $500. As these gTLDs grow past 5,000 domain names per registry, it is possible that one or more could become Tier 2 (between 5,000 and 50,000 domain names) registries or eventually become Tier 3 (more than 50,000 domain names) registries.

(13) This represents the annual fixed fees (paid in quarterly installments) associated with the Tier 3 gTLDs as follows:

Operator		Registry	Amount
Verisign		.com	$ 100,000
		.net	100,000
		.org	100,000	(*)
Affilias		.info	100,000
GNR		.name	80,000
NeuLevel		.biz	80,000
Registry.Pro		.pro	80,000
		Total	$ 640,000
* .org may be assigned to another operator during the course of the fiscal year, in which case this fee will be split between VeriSign and the new operator

Although ICANN's registry agreements with these gTLDs allow a 15% increase in the above fixed fees, it is not proposed to budget that increase for this year given that the new gTLDs have only relatively recently been introduced.

(14) In 2001-2002 the initial fixed fees to be paid to ICANN by the new gTLDs were treated separately in the Final Budget. Because of the timing of signing of agreements, the amount received fell short of what was budgeted – the 2001-2002 Final Budget assumed that all agreements would be in place by 7/1/01.

In the 2002-2003 proposed Final Budget, the situation is different between the Tier 1 Unsponsored gTLDs and the Tier 3 Sponsored gTLDS as follows:

• Any residual initial fixed fee from an unsponsored new gTLD is in fact folded into its continuing Tier 3 fixed fee obligation (see Note (13)). Thus, an unsponsored new gTLD that had an initial fixed fee of, say, $80,000 and an annual fixed fee of $80,000 in effect is paying $20,000 per quarter from the signing of the agreement.
  
  
• On the other hand, a Tier 1 sponsored new gTLD (.museum, .aero, .coop) is obligated to pay an initial fixed fee of $50,000 for its first twelve months of operation, but an annual Tier 1 fee of $500 – until at least they grow into a Tier 2 or Tier 3 registry should that happen. Thus, any portion of the initial fixed fee that was unpaid in 2001-2002 because of the timing of signing of the agreement would be payable in 2002-2003 along with the payment of the annual fixed fee of $500.

This explains why the total amount of residual initial fees to be collected in 2002-2003, namely $58,000, is less than the uncollected amount in 2001-2002, namely $145,000. The latter figure applies to all new gTLDs, while the former figure only applies to the Tier 1 sponsored new gTLDs.

(15) These are projected fixed fees to be realized from new applications by potential gTLD registrars. It is assumed there will be a decline in new applications in 2002-2003. This assumption could be changed if new gTLDs are introduced during the course of the year.

(16) These are the annual fees paid by registrars to renew accreditation by ICANN. Growth is expected for 2002-03 over 2001-02 to reflect the increased number of applications that were received in 2001-02.

(17) Previous budgets have not provided for bad debts. Based on operating experience, it seems wise that such a provision should now be included. The level is set based on such operating experience. This item includes only non-payment of legally enforceable obligations such as contracts with gTLDs. Shortfalls in budgeted voluntary contributions are considered in setting the Contribution to Operating Reserve. See Note (23).

(18) This number indicates the balance (that is, excluding those ccTLDs who have entered into an agreement with ICANN) of the variable revenues that would be allocated to ccTLDs as a "fair share" placeholder for voluntary contributions, following the recommendation of the Task Force on Funding report as modified to reflect the tiering concept agreed to as part of the 2001-2002 Final Budget. The latter modification requires that Tier 1 ccTLDs (fewer than 5,000 domain names) be allocated a fair share of $500 and Tier 2 ccTLDs (between 5,000 and 50,000 domain names) be allocated a fair share of $5,000. Tier 3 countries (greater than 50,000 domain names) are allocated a fair share based on the number of domain names, using the same figure of 12.69 cents per domain names as is used for those name registries with whom ICANN has an agreement (see Note (10)). It is unlikely that management will seek to collect from Tier 1 ccTLDs, since most are unable to pay (many do not charge for domain names) and, in any event, the cost of collection in staff time exceeds the financial benefit.

(19) This number is the difference, in aggregate, between what is designated in Note (18) as the aggregate "Fair Share" and what may reasonably be expected to be voluntarily contributed, a calculation that is based on historical experience.

(20) See Note (6).

(21) See Note (7). The expenditures for at large (see footnote to Note (7)) support will be made only to the extent that separate external funding support is received.

(22) This category includes interest income and other miscellaneous income, including other contributions. No contributions have been budgeted for 2002-03 that have not already been explicitly budgeted elsewhere in this Proposed Final Budget.

(23) See "Building the Reserves" in the text of this proposed Final Budget for a full explanation of the issues underlying this line item.

(24) This indicates that a balance of $323,000 will be brought forward from 2001-02 to 2002-03 as a management reserve dedicated to the new gTLD program.

(25) The proposed Final Budget assumes that the $323,000 balance will in fact be spent in 2002-03 to cover the costs of any evaluation that is performed, as well as some possible legal costs.

8. Staffing for FY2002-2003

Present and proposed staffing levels are summarized in Figure 1.

Endnotes to Proposed Budget discussion:

1. Percent increases always depend on choices of numerators and denominators. In the calculation behind the 25% figure, self-funding activities (such as expenditures for at large activities, or sponsorship of optional ICANN meeting activities) have been omitted from both the numerator and the denominator.

2. The Committee is currently scheduled to complete its recommendations before the end of June. There may, however, be some spillover until early in the year, 2002-2003.

3. This figure excludes the contributions from .au and .jp obligated by their agreements with ICANN.

4. 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.

5. Another agreement will soon be signed for the .bi (Burundi) ccTLD.

6. The term "at large" has become abused in ICANNSpeak and has come to mean something different from its original meaning of Board seats elected from no designated constituency.

Schedule 1: TLD Assumptions

The following tables detail the assumptions made regarding domain name counts for purposes of the proposed Final Budget. These assumptions are important since they form the basis for allocating budgeted revenues among gTLDs and ccTLDs with whom ICANN has agreements, and for calculating "fair share" contributions for other ccTLDs (see Notes (10), (18), and (19)).

The actual calculation of contributions for each TLD would be based on data available for July 1, 2002.

Size of TLDs. The domain name counts for Tier 3 ccTLDs have jumped 48% over the numbers used last year. This is attributable in part to growth in registrations, but is probably most attributable to a significant undercount 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 number of domain names.

The gTLD counts are estimated below. These counts will need to be updated to reflect July 1, 2002 data (estimated or actual). The three sponsored new gTLDs (.museum, .aero, and .coop) will not have sufficient domain name counts as of July 1, 2002 to qualify for Tier 3:

The Tier 3 ccTLD counts used for purposes of the proposed Final Budget are:

The following is the current list of Tier 2 ccTLDs. All other ccTLDs are currently Tier 1.

Contributions from TLDs having agreements. Each TLD with which ICANN has an agreement would be allocated a contribution according to the following method. New TLDs for their first twelve months would pay the initial maximum fixed fee according to their agreement ($100,000 for unrestricted uTLDs, $80,000 for restricted uTLDs, and $50,000 for sTLDs). After their first twelve months, all TLDs having agreements would make contributions as follows:

• A Tier 3 gTLD registry under agreement and any registrars that make use of that registry (associated registrars) are assessed in aggregate the greater of (a) an annual fixed fee (see Note (13)), or (b) a variable fee based on a per-domain-name charge, with the number of domain names assessed as of July 1. In either case, a fixed fee is paid to ICANN directly by each registry operator (see Note (13)). In the case of a gTLD to which the variable fee applies (i.e. the fee based on the number of domain names exceeds the annual fixed fee), the amount over the fixed fee is (subject to registrar approval) paid by the registrars apportioned according to the number of domain names for which they are responsible (this apportionment, but not the total to be apportioned, is readjusted every quarter according to the number of domain names at the end of each quarter).
  
  For 2002-2003, it is projected that the .com, .net, and .org registry operator (VeriSign at least initially, but .org may move to a different registry midway through the fiscal year) will pay ICANN fixed fees totalling $300,000 according to Note (13) as part of the overall variable fee assigned to each registry and associated registrars; the associated registrars will (subject to registrar approval) pay the balance of the overall variable fee. That is, the registry and associated registrars would fall within (b) above. It is also projected that the .biz, .info, .names, and .pro registries will pay fixed fees totalling $340,000 per Note (13), but that associated registrars will not pay any variable fees since (a) above will apply – it is assumed that the registries will not have grown sufficiently by July 1.
  
  
• A Tier 3 ccTLD under agreement just pays a per-domain-name charge. (The fixed fee is not relevant for Tier 3 ccTLDs because the maximum fixed fee (Tier 1 and Tier 2) for ccTLDs is only $5,000, which will be exceeded for Tier 3 ccTLDs.) The variable charge paid by these ccTLDs is calculated at the same per-domain-name rate as the gTLD variable fee. Because ccTLDs do not employ ICANN-accredited registrars, the ccTLD manager pays the full fee.

The total amount to be recovered through variable and fixed charges to registries under agreement and associated registrars is $4,512,000. For purposes of calculating a per domain name charge, the fixed fees of $340,000 to be paid by those registries (.biz, .info, .names, .pro) where just a pre-determined fixed fee is applied must first be subtracted, leaving a balance of $4,172,000 to be recovered through variable charges. The per domain name charge is calculated by dividing this figure by the applicable number of domain names, that is the total number of domain names in the remaining registries under agreement (excluding .biz, .info, .names, .pro but including the ccTLD registries under agreement, .jp and .au). This calculation is shown in the following table.

In the Budget Schedule all the fixed fees paid by the registries are aggregated together (see Notes (13) and (14), including the $300,000 to be paid by the .com, .net, and .org registries. The total is $640,000. The balance of the variable fees, $3,872,000 to be recovered from registrars associated with these three registries is shown in the line of the Budget Schedule indicated by Note (10).

Contributions from TLDs without agreements. As noted above, most ccTLDs do not have agreements with ICANN. These ccTLDs would be asked to make voluntary "fair share" contributions according to the following method of allocation.

• All Tier 1 ccTLDs (i.e. those having up to 5,000 names under management as of July 1, 2002) would be allocated a fair share of $500. As noted in the "Building the Reserves" section of the budget, ICANN management will exercise judgment in seeking to collect these contributions.
  
  
• All Tier 2 ccTLDs (i.e. those having up to 50,000 names under management as of July 1, 2002) would be allocated a fair share of $5,000.
  
  
• Tier 3 ccTLD would be allocated a fair share based on the number of names under management as of July 1, 2002, at the same per-domain-name rate as used for the TLDs with agreements paying the variable rate.

Applying the variable rate of 12.69 cents per domain name to the remaining ccTLDs with whom ICANN has not signed agreements enables the calculation of the aggregate ccTLD "fair share" as follows:

It should be re-emphasized that this "fair share" is not an obligation but is used only as a yardstick for computing individual ccTLD "fair shares". ccTLDs not under agreement are free to make voluntary contributions as they see fit and ignore the "fair share" concept should they wish. See Notes (18) and (19).

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