Proposed Fiscal Year 20022003 Budget
Posted: 15 May 2002
Proposed BudgetFiscal Year 2002-2003
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 firstname.lastname@example.org.
All financial figures in this document are in US$.
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:
There are, however, many items that are not provided for in this proposed
Final Budget; see "What is Excluded from this Proposed
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:
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:
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.
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"):
Specific priorities for 2002-2003 that fit within the above framework include (subject to adequate staffing levels):
Although this budget provides for higher expenditures than 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." 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.
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 $750,000.
The primary reasons for this shortfall occur in both expense and revenue categories:
These higher costs have largely been offset by freezing staff hiring and limiting staff travel. They have also been offset by higher-than-budgeted revenues from registrar accreditation application and renewal fees.
Furthermore, at time of posting of this proposed Final Budget, there is no agreement between ICANN and the RIRs. The RIRs in the past took the position that they would not contribute to ICANN until an agreement is signed with each RIR, although they pledged these contributions and escrowed the associated funds in anticipation of an agreement. Such agreements have now been negotiated among staffs, but have not yet been approved by the ICANN and RIR Boards of Directors. The RIR Boards have understandably taken the position that it would not be wise to sign these agreements at least until the outcome of the ICANN reform process is more certain, since this may require some modification to the agreements. The RIRs have, however, signed pledges to pay the outstanding funds (that, under the accounting practices that govern ICANN, enable ICANN to book these pledges as revenues), and have indicated that they will renew these pledges. Furthermore, as a sign of good faith, the RIRs have generously paid ICANN half of what was pledged covering the years 1999-2002.
Nevertheless, the uncertainty of ccTLD funding and the final disposition of RIR funding underscore the precariousness of ICANN's financial situation, particularly in the absence of any reserves. The steps taken in the proposed Final Budget, as previously discussed, will be of great help to relieve operating pressures, but may still leave ICANN without any significant financial reserves.
(See appended notes for explanations; all items are in US$)
|ICANN PROPOSED BUDGET
|2001-02 Approved Budget||2001-02 Year-End Projection
(as of May 1, 2002)
|Difference Budget to Projection||2002-03 Base Budget||2002-03 Proposed Changes||2002-03 Proposed Budget||Notes|
Staff Full-Time Equivalents
|Professional and Technical Services||734||644||(90)||665||50||715||(2)|
|Board & Public Meetings||450||920||470||800||(250)||550||(3)|
|Other Travel & Meetings||425||268||(157)||320||75||395||(4)|
|Administrative & Systems||704||766||62||789||189||978||(5)|
|Subtotal: Base Expenditures||$4,530||$4,518||($12)||$4,868||$482||$5,340|
|Public Meetings - sponsored events||250||144||(106)||200||(50)||150||(6)|
|At Large Activities||250||247||(3)||0||200||200||(7)|
|Subtotal: Other Expenditures||$500||$458||($42)||$200||$475||$675|
|Variable Registry/Registrar Revenues|
|TLD Name Registries/Registrars (with agreements)||$2,369||$2,425||$56||$2,425||$1,447||$3,872||(10)|
IP Address Registries
|Subtotal : Variable Registry/Registrar Revenues||$2,865||$2,921||$56||$2,921||$1,486||$4,407|
|Fixed gTLD Registry Fees (with agreements)|
|Tiers 1 & 2||0||0||0||2||0||2||(12)|
|New gTLD Initial Fixed Fees||490||345||(145)||58||0||58||(14)|
|Subtotal Fixed TLD Registry Fees||$790||$645||($145)||$700||$0||$700|
|Other Registrar Revenues|
|Registrar Accreditation Application Fees||25||75||50||25||10||35||(15)|
Annual Registrar Accreditation Fees
|Subtotal: Other Registrar Revenues||$525||$955||$430||$525||$210||$735|
|Less: Bad Debts or Bad Debt Allowance||0||(158)||(158)||(165)||0||(165)||(17)|
|Subtotal: Base Revenues||$4,180||$4,363||$183||$3,981||$1,696||$5,677|
|ccTLD Voluntary Contributions|
|Fair Share Contribution||1,300||176||(1,124)||0||2,153||2,153||(18)|
|Less: Estimated Difference||0||0||0||0||(1,353)||(1,353)||(19)|
|Subtotal: ccTLD Voluntary Contributions||$1,300||$176||($1,124)||$0||$800||$800|
Public Meetings Sponsored Events
At Large Activities
|Subtotal: Other Revenues||$300||$161||($139)||$230||$150||$380|
|CONTRIBUTION TO OPERATING RESERVE||$750||($276)||($1,026)||($857)||$1,700||$843||(23)|
NEW gTLD OPERATING RESERVE
Balance brought forward
Balance carried forward
The following notes detail the assumptions underlying the proposed Final Budget:
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.
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.
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:
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.
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:
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