Revised Proposed Fiscal Year 2003–2004 Budget

Posted: 17 May 2003
Revised: 14 August 2003

Revised Proposed Budget – Fiscal Year 2003-2004 (FY04)
(1 July 2003 – 30 June 2004)

Contents

Introduction
Summary of Changes from Proposed Budget
Summary of Changes from Preliminary to Proposed Budget
Budget Issues for FY04
Background
Budget Process for FY04
Budget Priorities for FY04
What is Excluded from this Preliminary Budget
Building the Reserves
Cost Allocations to ccTLDs
Comments on FY03 Projections
Proposed Budget Schedule and Accompanying Notes
Appendix 1: TLD Assumptions
Appendix 2: Proposed ICANN Outreach Program

Introduction

This Proposed FY04 Budget has been prepared by the President and CEO of ICANN, Paul D. Twomey, building on the Preliminary Budget, prepared by the prior President and CEO, Stuart Lynn, that was posted on 15 March 2003, 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 comment prior to its consideration for adoption by the ICANN Board at its 26 June 2003 meeting as the approved Financial Budget for 2003-2004. To comment on this document, please e-mail to budget-comments@icann.org.

Summary of Changes from Proposed Budget

Allocations were made for several expense items in either the FY2002-2003 base budget or in subsequent resolutions by the Board of Directors, and for various reasons detailed below, the expenses will not be incurred in FY2002-2003. At the time the Proposed Budget for FY2003-2004 was prepared, it was not anticipated that these funds would not be spent in FY2002-2003. To better reflect actual spending in FY2003-2004, we will carry forward these expense items into the FY2003-2004 fiscal budget. While this will increase the total expense budget, the increase is offset by the savings experienced in FY2002-2003 because these funds were not expended have been contributed to reserves. The expense items in FY2003-2004 will be funded by this reserve amount, which totals approximately $250,000. The specific expense items are:

• Transition expenses totaling $325,000, approved by the Board of Directors on 15 December 2002, included $35,000 for build-out of additional office space to house the staff added by the completion of the reform process. Due to the staff reorganization proposed by Paul Twomey, the costs associated with this build-out did not occur in FY2002-2003.
• The base budget included expenses of $160,000 related to infrastructure upgrades to the L-Root server operated by ICANN. The testing of equipment which would allow reasoned purchasing has taken longer than planned. $160,000 in costs will be moved into FY2003-2004.
• The Board of Directors approved an allocation of $17,500 for RALO Organizing. On 26 June 2003 the Board of Directors will be discussing the formation of At- Large Groups. If the Board approves a structure that includes RALOs, this item of expense will be moved to the FY2003-2004 budget.
• On 25 April 2003, the Board of Directors authorized expenditures of $147,325 to support the 2003 Nominating Committee work. The 2003 Nominating Committee has completed the selection of the nominees for its nominees for Board members, GNSO council members & ALAC members but additional selections as set forth in the bylaws may be needed. To aid the ongoing Nominating Committee process, the remaining unspent allocated funds will be carried forward into FY2003-2004.

Summary of Changes from Preliminary to Proposed Budget

While there is no change to the revenue or expense bottom lines from the Preliminary Budget, there has been a reallocation of the expenses between accounts in the Proposed Budget. This reallocation represents less than 5% of the total proposed expenditures and is due to the following:

• Proposed increase in Personnel expenditures from $3,820,000 to $4,011,000 to accomplish a restructuring of the staff along a more business-like model, which has been proposed by the new CEO. This reorganization will entail retooling the current staff structure and adding two positions over the FTE number in the Preliminary Budget. Additional funds ($74,000) have also been shown in Professional & Technical Services to accomplish this restructuring.
• Additional $15,000 in Professional & Technical Services and $15,000 in Administrative & Systems in response to the request by the chair of the Nominating Committee for the administrative support of the 2004 committee.
• $90,000 increase in Board & Public Meeting to fund travel to ICANN Board meetings for the three members of the GNSO Council and the five members of the ALAC selected by the Nominating Committee, as requested by the chair of the Nominating Committee.
• A reduction of proposed expenses for Travel and Other Meetings ($100,000) and Administrative & Systems ($110,000), following a thorough review of budgeted items in these categories.
• Shifting of the June 2004 ICANN Board meeting to July 2004. With this shift, most of the expenses for this meeting will fall into the next fiscal year (FY05). This will result in a reduction of Board & Public Meeting expenses in FY04 by $175,000.

Budget Issues for FY04

This is a year of significant change for ICANN. There will be a new Board of Directors and a new CEO to lead ICANN through its next stages of service to the Internet community. The Proposed Budget builds substantially on the budget requirements imposed as a result of the reforms adopted and incorporated into revised bylaws by the ICANN Board in October 2002 and December 2002. There is still much work to be done in implementing these reforms, but important progress has already occurred.

Subject to certain cautions noted in this document, ICANN's financial performance continues to improve. Furthermore, the budget changes that occurred between FY02 and FY03 have led to increased staffing and funding levels. ICANN now has seven more staff on board than at this time a year ago; this has helped to relieve some of the backlog and to allow ICANN to respond more effectively to service and other demands.

All financial figures in this document are in US$. ICANN's fiscal year runs from July though June, that is, the fiscal year FY04 runs from 1 July 2003 through 30 June 2004.

This Preliminary FY04 Budget builds on the Adopted FY03 Budget primarily by providing for the expansion of ICANN staff and other resources required to meet the obligations required by the approved ICANN reforms as embodied in the bylaws and in board resolutions. It also reflects changes that Paul D. Twomey, as the new President and CEO, will make to the organization over the next fiscal year. The Adopted FY03 Budget represented a meaningful expansion over the Adopted FY02 Budget and provided resources to support pre-reform – that is, ICANN 1.0 – obligations. This Preliminary FY04 Budget now provides for:

• Adjustments to the Adopted FY03 Budget to allow for reorganization of current staff positions into a business-like organizational structure. This will include the retooling of certain current positions, as well as the addition of two new positions.
• An increase in both staffing and expenditures to accommodate the additional programmatic requirements imposed by the new reforms and the new bylaws, that is, the transition from ICANN 1.0 to ICANN 2.0.
• The addition of a Deputy General Counsel to ease the considerable burden that falls on the General Counsel. This in-house position will also mitigate to some extent expenditures for outside counsel.
• The personnel changes described above will increase ICANN's FTE to 40.

In addition, one new program is proposed, that is, a modest outreach effort to facilitate communications with developing countries in certain regions. This is proposed as a "pilot" program and is more fully described in Appendix 2.

The chair of the Nominating Committee has made two requests for funding under the FY04 budget. The request is for $30,000 for use by the 2004 Nominating Committee, which would start work after the end of the 2003 ICANN Annual meeting. These funds would provide operating expenses to allow the Committee to complete its charter in a timely and efficient fashion. These funds have been included in Column H of the Proposed Budget Schedule.

The chair of the Nominating Committee has also requested that ICANN fund travel to the ICANN meetings for the three members of the GNSO Council and the five members of the ALAC selected by the Nominating Committee. The chair of the Nominating Committee believes that this has a strong bearing on ICANN's continuing ability to attract strong candidates. $90,000 has been included to fund this travel. These funds have been included in Column H of the Proposed Budget Schedule.

To provide the funds for these additional requests, it is proposed to move the ICANN Board meeting currently scheduled for June 2004 to July 2004. The majority of the expenses for this meeting would be budgeted in the FY05. This proposal is contingent upon agreement by our local hosts in Kuala Lumpur.

Resources are also provided to increase ICANN's levels of reserves closer to board-approved levels (see Building the Reserves).

The Adopted FY03 Budget was designed to bring ICANN's level of expenditures more in line with requirements imposed by its mission, as understood at that time. However, as stated in that budget document, that budget did not provide for the effects of reforms designed to improve ICANN's effectiveness, including the financial implications of the revised ICANN Mission and Core Values. The rationale for these reforms have been discussed and commented on extensively in posted documents, and are not repeated here. The reforms have been adopted by the Board and incorporated into the staff organization proposed by the new CEO.

The Proposed Budget includes 2 FTE to support the ccNSO, a policy development position and the ccNSO Secretariat. These are place markers only because the precise requirement cannot be determined at this time. The FY04 Proposed Budget also provides for modest travel and administrative support for the ALAC during its formative stage; and continuing administrative support for teleconferences and travel for the ALAC Liaison to the Board.

One of the challenges in formulating a budget for FY04 at this time is that ICANN is still in discussion with the address registries regarding their mutual relationship. For purposes of this Proposed Budget, the assumption is made that the future will continue along the lines of past practice.

One critical factor driving this Proposed Budget is the continuing need to build ICANN's financial reserves to acceptable levels. Although it appears that a key step forward will have been taken in FY03, there will still be a gap between the actual level of reserves and what is prudent. Furthermore, achieving the projected level of reserves in FY03 is still dependent on ccTLD and RIR contributions, neither of which can – as noted above – be predicted with certainty at this time.

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 short of budgeted revenues, and as a consequence, budgeted contributions to the reserves do not materialize. As with the Adopted FY03 Budget, this Proposed FY04 Budget attempts to make allowances for this discrepancy by providing for a modest Contribution to Reserves even in the face of a shortfall in the ccTLD contributions. However, realization of this Contribution to Reserves still depends on a modest contribution from the ccTLDs and a contribution from the RIR Address Registries in keeping with past understandings and practices.

Background

Fiscal Year 2003-2004 (FY04) is the fifth full budget year for the corporation, and is based on significant operating experience obtained over the previous three years. It is also based on the transition from ICANN 1.0 to "ICANN 2.0" reflected in the adoption by the ICANN Board of reforms that occurred in October and December 2002.

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 budget cycle for FY04. 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 2002-2003 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 2002, ICANN's President appointed the original members of what is now termed the Budget Advisory Group. The BAG was formed in accordance with the recommendations of the TFF Report. Its membership changes each year 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.

For FY04, the composition of the Budget Advisory Committee (BAG) is different from the previous two years. Previously, the BAG was composed of three representatives from each of the four groups that provide the lion's share of the funding to ICANN: the gTLD registrars constituency, the gTLD registries constituency, the ccTLD constituency, and the RIR address registries. However, there are two changes for the FY04 process:

• Previously, there were three RIR address registries, each of which named one member of the BAG. With the addition of LACNIC, however, there are now four address registries. In FY03, these four registries will name one as an official member of the BAG (over succeeding years, this position will be selected in rotation across the four registries – and any new registries that might be formed), but the other registries will provide observers.
• With the ccNSO still under formative discussion, the exact status of the ccTLD constituency remains uncertain. It is no longer a member of the former DNSO, nor of the new GNSO. The Administrative Committee of the former ccTLD constituency has advised that, under the circumstances, there will be no "official" members of the BAG nominated by the ccTLD constituency; three individual ccTLD managers (members of the ccTLD constituency) have, however, indicated their willingness to advise and assist in their individual capacity. This offer has been accepted since members of the BAG in any event serve as individuals, not as representatives.

With this background, the FY03 members of the Budget Advisory Group and their affiliations are:

• Elana Broitman [register.com – Accredited Registrars]
• Paul Stahura [eNom – Accredited Registrars]
• Rick Wesson [Alice's Registry – Accredited Registrars]
• Chuck Gomes [VeriSign – gTLD Registries]
• Steve Juarez [MusDoma – gTLD Registries]
• Steven Pack [Afilias – gTLD Registries]
• Axel Pawlik [RIPE – RIRs]
• Hartmut Glaser [.br ccTLD]
• Chris Disspain [.au ccTLD]
• Bart Boswinkel [.nl ccTLD]

Budget Process for FY04

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 by May 17. For FY04, the Board expects to act on the proposed budget at its meeting on 26 June 2003 in Montreal, Canada.

The ICANN annual budget-development cycle follows three general phases:

• The first phase 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, a date that experience has shown to be unrealistic given the time it takes to close the second quarter of the fiscal year and delays in completing the annual audit of the previous year.

  The audit for FY02 proved to be no exception. Posting of official six-month figures, however, was delayed this year because of the need to reconcile with the final audited figures for FY02 and for the requirement to close the second quarter. The FY02 final audit has been posted at http://www.icann.org/financials/financial-report-fye-30jun02.htm. The financial report for the first six months of FY03 has been posted at http://www.icann.org/financials/financial-report-fpe-31dec02.htm. These are unaudited figures prepared by ICANN's external accountant. The projections contained in the Proposed Budget Schedule and Accompanying Notes are based on staff estimates.

  It should be emphasized that the six-month figures are unaudited. Furthermore, they are in "accounting" format consistent with audit principles used by our external auditors for the annual audit. This format differs substantially with the format used for budgeting and forecasting that is for "management" purposes, although the two formats can readily be reconciled.

  For example, official "accounting" reports defer revenues associated with services that are rendered across the fiscal year and across fiscal year boundaries. Annual Registrar Accreditation Fees, as one example, 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 President and the Chair of the Finance Committee solicited input to the Proposed Budget from ICANN's Supporting Organizations and constituent units in the Open Forum at the meeting in Shanghai in October 2002, and in a widely distributed written solicitation in December 2002. A request was received from Interim ALAC for budget support, mostly for FY03 but with some effect on the Proposed FY04 Budget. This has been included.

• 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 was posted on 15 March 2003 in advance of the first meeting of the calendar year, which was held in Rio de Janeiro. A summary of the Preliminary FY04 Budget was presented at the Public Forum to be held in Rio de Janeiro on 26 March 2003, and formed the basis for open discussion.
  
  
• 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 FY04, this posting will occur on 17 May 2003.

  The Proposed Budget, modified as appropriate from analysis of comments received, is presented to the Board for adoption at its second meeting of the calendar year, resulting in the Adopted Budget. This year, that will occur on 26 June 2003 in Montreal, Canada.

The calendar of currently scheduled budget related meetings and teleconferences for the FY04 budget is as follows. The Finance Committee also meets as needed during the budget process in addition to the meetings listed below.

Budget Priorities for FY04

This Proposed Budget assumes an ICANN restructured according to the reforms approved by the Board in October and December 2002, that is, assumes the transition to ICANN 2.0.

This Proposed Budget 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 continues to be premature to make any assumptions at this time.

The basic philosophy driving this Proposed Budget was discussed earlier in this document (see Budget Issues for FY04). From a workload perspective, this Proposed Budget builds on the ongoing and highlights priorities as follows:

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 providing support for the implementation of new policy-development procedures, and providing secretariat support as appropriate.
• 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.
• Implement agreements with constituent bodies to formalize the delegation of ICANN responsibilities and to create an institutionalized framework of mutual accountability.
• Conduct an active global 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 all ICANN meetings.
• 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 full internationalization of ICANN.
• Monitor and ensure compliance with all agreements entered into by ICANN.
• Execute the general management and administrative responsibilities of the corporation in an efficient and effective manner.

Highlight Priorities:

Specific priorities for FY04 that fit within the above framework include:

• Reorganization of ICANN into a more business-like structure, including retooling of current positions and addition of several key staff positions.
• Engage in global outreach and consultation with all parts of the stakeholder community.
• Complete the transition from ICANN 1.0 to ICANN 2.0, including:
  • Recruitment of any remaining unfilled positions.
  • Implementation of processes to support the new policy development procedures, including restructuring ICANN's methodologies for receiving public comment.
  • Improvement the effectiveness and timeliness of ICANN's mechanisms for openness and transparency, including reorganization of the ICANN website, revision of mechanisms for public input and comment, and other communications.
  • Completion of implementation of the ICANN Ombudsman Program.
  • Implementation of the Independent Review Program.
  • Support to the work of the At Large Advisory Committee in implementing the Regional At Large Organizations.
• Continue to improve IANA operations and technical services to speed turnaround where there are no intervening policy issues that need to be resolved.
• Provide support to the ICANN Security and IDN Committees (including the IDN Registry Implementation Committee), and implement recommendations arising from the work of those Committees as approved by the Board.
• Continue work under the Cooperative Research and Development Agreement on study of the performance and security needs for the root name server system and development and implementation of an enhanced architecture for that system, including preparation of plans and reports
• Improve the security and robustness of ICANN's technical operations.
• Complete any remaining work on the evaluation of the November 2000 round of new gTLDs; complete any remaining work on approving and launching a limited round of new sponsored gTLDs; and develop a framework for considering any possible further expansion in the top-level gTLD namespace.
• Improve ICANN's capability for monitoring agreements and ensuring compliance.
• Negotiate and enter into agreements with those ccTLDs that show interest in doing so.
• Enter into agreements with root name server operators to the extent feasible.
• Strengthen ICANN as an operating organization, including continued normalization of financial support, staffing, and administrative operations.

The proposed new Outreach Program is described in Appendix 2.

What Is Excluded from this Proposed Budget

Although this budget represents an expansion from previous years, there are many exclusions. For example, it does not provide for:

• Funding for any unforeseen litigation costs above routine levels.
• Any unanticipated costs that may be incurred with reform and restructuring. These, however, at the discretion of the Board could be funded from the "Unforeseen Projects" category (see Note (9) following the Proposed Budget Schedule and Accompanying Notes)
• The costs of launching any new gTLDs that may be approved by the Board beyond what may be recovered through application fees.
• Any other new programs or expansion of existing programs that cannot be funded from the Unforeseen Projects category (see Note (9)).

Building the Reserves

Four 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 by the Board of the 1999-2000 budget implied that the Board accepted this statement about the appropriate level of reserves.

Prior to FY03, we made no essentially no progress towards this goal. The primary reason is that full budgeted contributions to reserves never materialized, largely because ccTLD revenues always fell considerably short of budgeted levels. Since there are relatively few agreements with ccTLDs, most ccTLDs are under no legal obligation to support ICANN financially. Many generously make voluntary contributions even in the absence of agreements. In aggregate, however, these contributions in the past totaled 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 became an institutionalized reality. Action to address the problem was taken in a new budgeting approach that was adopted in FY03 by raising the planned "contribution to reserves" to a sufficient level 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. That is, the budget was set at a level that anticipated a shortfall in ccTLD contributions yet nevertheless anticipated a reasonable level in the contribution to the reserves (about $840,000).

One important effect of planning for a larger budgeted contribution to reserves and a "shortfall" in ccTLD contributions (it is not a true shortfall since most of these contributions are voluntary) is that the amount that must be allocated between the gTLD and ccTLD registries is correspondingly larger, resulting in a greater burden falling on the shoulders of the gTLD registrars and those ccTLDs under agreement.

Cost Allocations to ccTLDs

Costs allocated to name registries under agreement are now allocated among individual registries according to the number of domain names in those registries (see Appendix 1). The question is often raised, particularly by many ccTLDs, as to whether this is the most fair or the most effective way to allocate costs. Over the past years, this has been a particularly divisive issue that has not been resolved to anyone's satisfaction. Yet no fairer way has been proposed that is generally acceptable. With the potential advent of the ccNSO, it is quite possible that a fresh approach can be initiated, and other ways to address cost allocation, or to adjust current models, can be explored. This is something to which the community can look forward. In the meantime, because of contractual obligations, we must work within the current model.

Even within the current framework, one key question that arises as the effective amount allocated per domain name increases is whether the burden is falling fairly on gTLDs and ccTLDs according to efforts expended in relative support of these registries. In this context, it should be noted that the overall budgetary philosophy that underscores financial support for ICANN is not currently based on any kind of dedicated financial support for dedicated services. Financial support is intended to support the overall mission of ICANN whether specifically directed to the needs of a given funding organization or not. Nevertheless, some reasonable form of proportionality is worthy at least of consideration.

The problem, however, is that relatively few ccTLDs are under agreement (although that number is steadily growing), whereas all gTLD registries and registrars are under agreement. The amounts required to fund ICANN are falling most heavily on the shoulders of gTLD registries/registrars and those ccTLDs under agreement. The more ccTLDs that are under agreement, the further that burden can be shared and the amount per domain name contributed by any given registry under agreement would be reduced. However, there are contractual constraints that may require the assent of existing registries under agreement for any changes to the allocation to go into effect. As such, this Proposed Budget does not reflect any reduction. This will be an issue for the new ccNSO organization to consider.

Comments on FY03 Projections

Column D of the Budget Schedule displayed in the following section summarizes the projected financial performance for the current year, FY03, displayed in the format adopted for these budgeting purposes. This projects an operating surplus (contribution to reserves) of $754,000 compared with a budgeted figure of $843,000, even after allowing for originally unbudgeted expenditures towards the transition to ICANN 2.0 of $446,000. This projected contribution to reserves, however, assumes ccTLD contributions totaling $600,000 and commitments from RIR address registries totaling $535,000, both of which must remain uncertain at this time given that the ccNSO is a work in progress and that relations with the RIRs have not been fully defined, although there are very constructive discussions underway.

Furthermore, there is a difference between contributions to reserves in a budget forecast document, and actual cash reserves. This is because not all commitments are realized in cash, at least in the near-term, but remain on the books as accounts receivable. The level of cash reserves is what counts. However, ICANN's cash reserves are projected to suffice through the beginning of the next fiscal year to meet planned operating obligations, although they would not suffice to meet any unplanned emergencies or to address unusual levels of litigation.

Proposed Budget Schedule and Accompanying Notes
(See appended notes for explanations; all items are in US$)

Explanation of Columns:

• Column A is the Adopted FY03 Budget.
• Column B is the FY03 Year-End Projection as of 30 April 2003, but excluding any of the costs incurred in FY03 in arising from the transition to ICANN 2.0, that is, on account of the reforms.
• Column C is the FY03 Year-End Projection as of 30 April 2003 of costs incurred in FY03 arising from the transition to ICANN 2.0.
• Column D is the sum of Columns B and C, resulting in the aggregate FY03 Year-End Projection.
• Column E is the difference between Columns D 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 F is the base budget for FY04. It includes all previously authorized expenses and revenues, projected to cover inflation and other known factors. As such, it includes no provision for the extra costs incurred by the transition to ICANN 2.0, that is, the effect of the reforms.
• Column G is the projected additional costs incurred by the transition to ICANN 2.0.
• Column H is the additional costs proposed to support the expansion of ICANN's outreach activities (see text) and the funding requested by the chair of the Nominating Committee.
• Column I is the sum of Columns F, G, and H representing the FY04 Proposed Budget.
• Column J is the budget-to-budget difference, namely the difference between Columns I and A. The same conventions apply as used in Column E (see above).

Notes:

The following notes detail the assumptions underlying the Proposed Budget:

(1) ICANN was authorized a fiscal year-end headcount of 27 FTE in the Approved FY03 Budget. The justification for these positions can be found in the Adopted FY03 Budget. The Proposed Budget projects that an additional 13 staff will be required to effect the organizational structure proposed by the new CEO and to fulfill the requirements of ICANN 2.0, that is, to comply with requirements imposed by the new bylaws.

(2) This line item represents the costs associated with the FTE changes detailed in Note (1). It is assumed for purposes of this Proposed Budget that all positions will be filled for the full 12 months. Note that positions are considered fulltime (except where noted) staff positions even though they may, according to management judgment, be filled by contract personnel.

(3) Professional and Technical Service costs are projected to decline in FY04 because some technical support functions previously handled by outside contract services have now been accommodated by hiring internal technical staff. Furthermore, some external costs historically carried under this category (particularly external computer and systems contracts) have now been shifted within the chart of accounts to be included under Administrative Costs (see Note (6)). The FY04 budgeted figure makes no allowance for any increase in litigation. It does, however, provide for some of the personnel costs in the proposed outreach program.

(4) This number has been reduced since the posting of the Preliminary Budget to reflect the move of the June 2004 ICANN meeting to July 2004 (i.e. from FY04 to FY05). Additionally, costs of meetings have continued to increase over the past two years, and sponsorship (see Note (7)) per meeting has declined when the meetings are not in the United States. As such, all sponsorship is now directed to the local host committee to help offset local expenses, and ICANN bears the entire brunt of its own other meeting costs. The total cost per meeting now averages $200,000. Also included in the proposed budget is $50,000 in funding to contract out for meetings coordination function now carried out by staff. There is also provision for one Board retreat separate from a major ICANN meeting in FY04 Proposed Budget. Any other retreats are assumed to be held alongside a major ICANN meeting. Staff travel to ICANN meetings is also included in this line item, and this will increase because of new staff hired in conjunction with ICANN 2.0, some of whom will need to travel to meetings.

(5) Other Travel & Meeting costs are projected to increase to support the travel costs (other than to ICANN meetings) of additional staff members resulting from the annualization of the increased staff hired during FY03, and the effect of the new staff hired for reforms, that is the implementation of ICANN 2.0. Some of these have or will have duties that will require them to travel.

(6) Administrative & Systems costs are projected to increase to allow for three factors: (a) inflation; (b) costs of supporting an increased staff associated with ICANN 2.0, including increased space; and (c) costs of additional "hardening" of the L-root server through contracting with an external professional facilities provider and providing for increased bandwidth. Furthermore, the latter and many of the other systems costs that were externally contracted in whole or in part were previously carried within the category of Professional and Technical Services (see Note (3)).

(7) This is the portion of meeting expenses that, in the past, was used to indicate the portion of meeting costs supported by external sponsorship (see Note (21) regarding the offsetting sponsorship income). However, for reasons given in Note (3), all such sponsorship income is now directed to offset expenses of the local host committee, and ICANN bears the entire cost of its own direct expenditures. This line item, therefore, is now carried for historical alignment, and will not be present next year.

(8) The proposed budgeted amount is to support the formation of Regional At Large Organizations and other ALAC expenses to help jumpstart the process. This amount will decrease with the growth of the RALOs and the ALAC as RALOs are able to shoulder their own expenses. The financial support for attending ICANN meetings declines substantially from FY03 (actually, the last 4 months of FY03) to FY04, as the ALAC starts to rely on teleconferences and e-mail to replace the face-to-face meetings required during its initial start-up period. ICANN staff support for the ALAC is carried under Personnel Expenses for ICANN 2.0 (see Note (1)).

(9) The IDN Committee is an ad hoc committee of the Board. Contrary to earlier expectations, its work still continues as the need for examination of the policy implications of IDNA become more apparent. However, in FY04, the focus will shift to the work of the IDN Registry Implementation Committee. It is nevertheless anticipated that some funds will be needed to support the work of the IDN Committee in FY04, primarily for teleconferences, but there may also be a need for limited travel support.

(10) Every year projects arise in mid-year that are not anticipated when the budget is approved. For example, in FY02, the IDN and Security Committees were formed; in FY03, there were recruiting and related expenses associated with the new President and with providing interim support for the GAC. 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 FY04.

(11) These are the budgeted fees owed by the Tier 3 TLD Name Registries under agreement to ICANN and by the Tier 3 ccTLDs under agreement (currently .jp,.au and .tw). The fees are allocated between the registries by an amount proportional to the actual total number of domain names in each category as of July 1, 2003 (see Appendix 1). This is in accordance with the recommendations of the Task Force on Funding and approved by the Board. For the TLD Name Registries, if the registrars, by vote of those who account in the aggregate for two-thirds of the registrar fees, approve the budget, the budgeted fees will be charged directly to the registrars by ICANN. The individual registrar's portion of the fees will be calculated quarterly. If the registrars do not approve the budget, these fees will be charged directly to the registrars by the registries. The budgeted amount in FY04 approximately equates to 18.9 cents per domain name, compared with 12.8 cents in FY03. This significant increase was anticipated in the various ICANN documents posted by the Evolution and Reform Committee leading up to the Board-approved reforms. See Appendix 1 for greater detail.

(12) An agreement yet to be approved, but that nevertheless guides budget considerations, provides for the IP address registries to pay ICANN an amount not to exceed 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 this constraint, there is no increase in the amount allocated to address registries since the FY03 level already equals 125% of the FY01 allocation.

(13) These are budgeted fixed fees for Tier 1 gTLDs (.museum, and .aero), Tier 2 gTLDs (.coop) and Tier 1 & Tier 2 ccTLDs under agreement. There are currently seven Tier 1 ccTLDs under agreement. There are no Tier 2 ccTLDs under agreement. This Proposed Budget does not provide for any increase in this number, since the actual number cannot be forecast with accuracy, although there surely will be an increase.

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

Operator	Registry	Amount
VeriSign	.com	$115,000
VeriSign	.net	$115,000
Afilias	.info	$115,000
PIR	.org	$115,000
NeuLevel	.biz	$92,000
GNR	.name	$92,000
RegistryPro	.pro	$92,000
Total		$736,000

As allowed for in the gTLD registry agreements with ICANN, these figures are 15% over those budgeted for FY03. It is assumed for budgetary purposes that there will be no new TLDs authorized in FY04, since no firm projection can be made at this time.

(15) There are no gTLD Initial Fixed Fees in FY04.

(16) These are projected fixed fees to be realized from new applications by potential gTLD registrars. Unless new gTLDs are introduced during the year, it is assumed there will be a decline in new applications.

(17) These are the annual fees paid by registrars to renew accreditation by ICANN. The budgeted figure for FY04 is higher than that budgeted for FY03 to account for new registrars that were accredited in FY03, but has also been tempered to provide for the effect of some registrars that do not renew their accreditations (see also Note (18)).

(18) This provides for registrars who do not pay their annual accreditation or quarterly variable fees (see Notes (11) and (17)). After a grace period and fair warnings, the accreditation for such registrars is withdrawn. This is part of the "tempering" effect referenced in Note (17).

(19) This is the overall allocation to ccTLDs according to the distribution proportional to the number of domain names (see Note (11)). However, as described in the text (see Budget Issues for FY04), except in the limited number of cases where ccTLDs have agreements with ICANN, contributions by ccTLDs to ICANN are entirely voluntary. As such, this overall allocation is never realized in practice. See Note (20).

(20) This is the portion of the allocation detailed in Note (19) that, in practice, is not expected to be contributed by the ccTLDs. The following line represents the anticipated net amount actually contributed by ccTLDs.

(21) This line item in the past represented actual sponsorship income for ICANN meetings. It is no longer applicable (see Notes (4) and (7)), but is carried because it was included in the FY03 budget. The line item will not appear in the FY05 budget process.

(22) This line item in FY03 provided for individual voluntary contributions to further the At Large process. It is not applicable to FY04, and will not be carried forward into FY05.

(23) This category includes interest income and other miscellaneous income.

(24) The Contribution to the Operating Reserve has been set towards building a necessary ICANN reserve equal to about one year's operating costs. This follows a directive of the Board and is consistent with prudent financial management. The level of the Operating Reserve is also set to anticipate a shortfall in ccTLD funding contributions compared with budgeted levels. See Notes (10), (18), and the earlier section on Building the Reserves for a fuller explanation.

(25) This projection for FY03 assumes that all the $372,000 carried forward from FY02 for the evaluation of the new gTLDs (authorized in November 2000 and subsequently launched) will be spent in FY03. Should this not to be the case, the evaluation will carry forward into FY04. The funds not spent during FY03 will be allocated to the FY04 Budget. The Adopted Budget will be adjusted to include any funds remaining at the end of FY03.

(26) In FY03, ICANN issued a Request for Proposals and undertook a detailed evaluation leading to a decision to transfer responsibility for the operation of the .org registry from VeriSign to a new organization, the Public Interest Registry (PIR). Each of the 11 bidders were charged $29,000 for their bid submission to cover ICANN's costs associated with the RFP and Evaluation processes, and to provide for any contingency for future costs that might arise (for example, any future legal costs). As of the date of this Proposed Budget, expenditures on this project total $241,000 against revenues of $319,000. No decision has been made by the Board at this point regarding the disposition of any remaining funds on this project once all disbursements have been made.

Appendix 1: TLD Assumptions

The following tables detail the assumptions made regarding domain name counts for purposes of the Proposed Budget. These assumptions are important since they form the basis for allocating budgeted revenues among gTLDs and ccTLDs (see Note (10)). The calculations actually used for computation of contributions during FY04 will be based on counts (actual or, where necessary, reasonably estimated) as of 1 July 2003, once those become available.
The domain name counts for ccTLDs have jumped 22% over the numbers used last year. The count for gTLDs, however, has declined 5%, largely due to a drop-off in .com whose statistics dominate the overall gTLD count because of its comparative size.

The Tier 3 ccTLDs counts used for purposes of the Proposed Budget are:

The Tier 3 counts as of 1 February 2003 are provided below. They will need to be updated to provide 1 July 2003 estimates or actual. The other gTLDs are Tier 1 or Tier 2.

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 ccTLD registries assumed to be in this category are listed in the table at the end of this Appendix. In addition, .coop is also now a Tier 2 registry.

The remaining 192 registries (including .museum, and .aero) are assumed to be Tier 1 for purposes of this Proposed Budget.

Appendix 2: Proposed ICANN Outreach Program

The purpose of this program is to provide an improved vehicle for ICANN to explain its policies and procedures, and its other activities, to Internet communities in developing countries, including governments. We now do visit many of these countries and give talks at regional meetings, but there is need for a continuing presence "on the ground" to ensure follow-through and continuing coordination. In spite of current visits, communication problems are made more difficult by the frequency with which governments and other players change so there may be little continuity of knowledge.

The proposed Outreach Program would be a pilot program of outreach, education, and communication in which ICANN would hire two part-time Internet activists in two key developing regions who would be resident in each region, that is, "locally" accessible. These outreach "evangelists" would be responsible for fielding queries from governments, institutions, businesses, and individuals in their respective regions, preparing outreach materials suitable for local distribution (online, in print, via CD-ROM, etc.), making presentations at relevant meetings and conferences, and communicating with the media.

Initially, this program would be piloted in two regions of the world. The reason for piloting before committing to an established program is to learn more about what is most effective and what difference such a program makes. This would be a more considered approach before asking the ICANN Board to commit to a more permanent and fully defined program.

To support this one year pilot, as stated above two articulate, knowledgeable communicators would be hired – probably as consultants – who are actually located in and are from developing countries in the selected regions, charged with making the ICANN process, its policies and activities, and the DNS more fully transparent, less mysterious, more responsive, and more welcoming to Internet communities in developing countries. They could also help to catalyze "at large" activities in the region in support of the ALAC's activities. Subject to Board approval, of course, the first two hires in this prototype effort should be in (a) Africa and (b) either the Pacific Islands or Latin America.

The kinds or problems, for example, that these consultants would address are processes to be followed in effecting a redelegation (the most common problem as more countries wish to "repatriate" their ccTLDs); where to find basic information on ccTLD operations (there is room here for a cooperative educational effort with ISOC, for example); how to address situations where the administrative or technical contact is not doing their job; understanding ICANN and its role in the global community.

The pilot program would have modest costs in its first year of operation, about $220,000, of which $120,000 would be for salaries and benefits, $40,000 for travel (mostly within the region, but with some for training at Marina del Rey), $40,000 for the costs of production of appropriate materials and for mini-workshops (mostly attached to other regional workshops), and $20,000 for administrative costs. These individuals can likely either work out of their homes or collocate for free with some established entity.

This important effort that will support our activities to enter into agreements with ccTLDs in developing countries. ICANN would also collaborate with UNICT and with the ITU-D as appropriate to see to what extent their activities can be beneficial in amplifying the benefits obtained from this effort.

Page updated 14-Aug-2003
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