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Subject: Dealing with budget surplus monies
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NancyD5
(Wisconsin)

Posts:47


04/05/2021 2:00 PM  
When WI State Statutes say "all common surpluses of the association shall be credited to the unit owners' assessments for common expenses or as otherwise in the declaration or shall be used for any other purpose a the association decides", can a Condo Board just take the surplus money and use it for a landscaping project they want done?
JohnC46
(South Carolina)

Posts:10944


04/05/2021 3:06 PM  
Nancy

Typically an improvement should be paid for from a Budgeted (funded) Line item often Called Capital Improvement. Capital Improvement usually require owner approval.

Based on another post of yours, I think your association needs to evaluate its Budget Line Item categories/title to clarify some things.

Returning any surplus money based on one or two years is a dangerous practice. As you are in WIN this means Snow Removal. It is possible (rare) to have no/light snow season where all the money allocated to Snow Removal is not used thus creating a surplus. Are you suggesting for that year the Surplus be retuned to owners? If yes. what happens next year when Snow Removal cost is twice what was budgeted? Hw would you like a Special Assessment?

I am beginning to think you might well be the type owner that fights the dues and can jeopardize your association in the long run. Hope I am not right.
TimB4
(Virginia)

Posts:17599


04/05/2021 3:29 PM  
Technically, yes.

However, I would rather see the funds deposited in the reserves (unless they are 100% funded).

Keep in mind that the Board (not the membership) makes the decisions for the Association.
MarkM19
(Texas)

Posts:790


04/05/2021 3:34 PM  
Tim,
I agree with you and will just add a little more detail. Our HOA is a Large one with a Large Reserve accounts. I have been working to setup several Reserve accounts. The first one holds cash or liquid funds for projects that are imminent in the Calendar year. I also have laddered blocks of funds into CDs that are set to mature several times a year just in case of emergencies. This helps keep all accounts under the $250K FDIC insurance levels.
BenA2
(Texas)

Posts:872


04/05/2021 4:48 PM  
I say, yes. "Any other purpose the association decides" makes it clear that the board has that discretion and it is well within the board's responsibility to decide the whether a landscaping project is an appropriate expenditure.
KerryL1
(California)

Posts:8014


04/05/2021 5:52 PM  
Agree with others. In this case, Nancy, "Association decides" means Board decisions, not membership (owner) decisions. Are you sure you cited the state statute correctly when you wrote, "...common surpluses...?

Do your own governing documents have anything to say about this topic?

I think JohnC's off a bit in that Nancy doesn't say the landscaping project is a "capital improvement ." In addition, boards often can make capital improvements without owner votes if the improvements don't exceed xxx % of the annual budget.
NpS
(Pennsylvania)

Posts:4170


04/05/2021 8:21 PM  
Posted By MarkM19 on 04/05/2021 3:34 PM
Tim,
I agree with you and will just add a little more detail. Our HOA is a Large one with a Large Reserve accounts. I have been working to setup several Reserve accounts. The first one holds cash or liquid funds for projects that are imminent in the Calendar year. I also have laddered blocks of funds into CDs that are set to mature several times a year just in case of emergencies. This helps keep all accounts under the $250K FDIC insurance levels.



Question - I've heard that you can get one bank that will handle the distribution of reserve funds to the other banks. Are you familiar with this Mark?

Sikubali jukumu. Read all posts at your own risk.
MarkM19
(Texas)

Posts:790


04/05/2021 8:55 PM  
NpS,
I have seen it a few different ways. In Ca. I was told that the financial institutions can pay for the insurance to cover assets over the FDIC limits. We used a Broker verses a bank so not sure the differences.

I had a board member on the last board in Texas that claims each Bank has added benefits. He moved and resigned before he answered all my questions. I am certainly not an expert on all financial matters. I have a good grasp the basics of economics and love the use of Reserve accounts. I think everyone should have a Reserve Account in their personal portfolio. Trust me when things come up and they always will every HOA and owner should be prepared.

Not sure I answered your question but it is late.
NpS
(Pennsylvania)

Posts:4170


04/05/2021 9:16 PM  
Thanks for sharing what you know Mark.

We haven't taken that route yet.

We've been of the opinion that CDs are lower risk than cash in an account. So we allow monies at one particular bank to exceed the $250k FDIC limit.

Sikubali jukumu. Read all posts at your own risk.
NancyD5
(Wisconsin)

Posts:47


04/05/2021 10:59 PM  
Thank you for responding. Yes the docs say exacting what I typed here. The Statute itself is titled: "Common expenses and common surpluses (1) DISPOSITION OF COMMON SURPLUSES" then goes on to say what I typed previously. No where in our Declaration or Bylaws does it mention surplus monies. This is so difficult to understand.
NancyD5
(Wisconsin)

Posts:47


04/05/2021 11:00 PM  
Thank you for your response and no I do not fight dues. We are a fairly new and very inexperienced single family 20 unit condo development. What concerns me here is not following the State Statutes and getting ourselves into trouble. Since I am not a lawyer all I can tell you is what the Statute says and when it says "all common surpluses of the association shall be credited to the unit owners' assessments" makes me think there's no choice here but doing that or doing the later, "shall be used for any other purpose the association decides". Then when I read in the Statutes section on definitions what it says the word "association" means it says "all the condominium's unit owners acting as a group" so that's why I thought this is a voting matter for the membership. Staying out of legal trouble is my goal and so not following a Statute worries me.
CathyA3
(Ohio)

Posts:1881


04/06/2021 5:02 AM  
Posted By NpS on 04/05/2021 8:21 PM
Posted By MarkM19 on 04/05/2021 3:34 PM
Tim,
I agree with you and will just add a little more detail. Our HOA is a Large one with a Large Reserve accounts. I have been working to setup several Reserve accounts. The first one holds cash or liquid funds for projects that are imminent in the Calendar year. I also have laddered blocks of funds into CDs that are set to mature several times a year just in case of emergencies. This helps keep all accounts under the $250K FDIC insurance levels.



Question - I've heard that you can get one bank that will handle the distribution of reserve funds to the other banks. Are you familiar with this Mark?




I think you're talking about CDARS, which is a method of extending FDIC protection for accounts over $250,000. It appears to the customer that all of the money is in a single bank, but instead it is spread out so that individual banks remain under the FDIC limit.

Not all banks offer this, so you'll have to shop around. When we were looking for a second bank for our reserves, this was one factor in our choice.

https://www.cdars.com/home/faqs
CathyA3
(Ohio)

Posts:1881


04/06/2021 5:16 AM  
Posted By NancyD5 on 04/05/2021 10:59 PM
Thank you for responding. Yes the docs say exacting what I typed here. The Statute itself is titled: "Common expenses and common surpluses (1) DISPOSITION OF COMMON SURPLUSES" then goes on to say what I typed previously. No where in our Declaration or Bylaws does it mention surplus monies. This is so difficult to understand.




Shortfalls and surpluses are common in any business no matter how careful and skilled people are at budgeting. Budgets are typically prepared in fall for the coming calendar year, and there is always a certain amount of guesswork involved.

For instance, we budget for snow removal based on an "average year". If we have money left over at the end of winter, it goes into a "snow reserve" account. We do this so that less disciplined board members don't go "oh hey, money!" and spend it on petunias or something. That surplus is already earmarked and will very likely be needed in a year or two.

Returning money to homeowners may be called for if a board typically over-estimates expenses (yeah, right) or if something major changes to make the budgets inaccurate. If anything, though, HOA and COA boards chronically under-estimate estimate expenses in order to get assessments down to some magic number that they want to stay at. This leads to short-term thinking and a tendency to neglect things to avoid spending - and it doesn't work well.
CathyA3
(Ohio)

Posts:1881


04/06/2021 5:51 AM  
Posted By NancyD5 on 04/05/2021 11:00 PM
Thank you for your response and no I do not fight dues. We are a fairly new and very inexperienced single family 20 unit condo development. What concerns me here is not following the State Statutes and getting ourselves into trouble. Since I am not a lawyer all I can tell you is what the Statute says and when it says "all common surpluses of the association shall be credited to the unit owners' assessments" makes me think there's no choice here but doing that or doing the later, "shall be used for any other purpose the association decides". Then when I read in the Statutes section on definitions what it says the word "association" means it says "all the condominium's unit owners acting as a group" so that's why I thought this is a voting matter for the membership. Staying out of legal trouble is my goal and so not following a Statute worries me.




Being concerned about following the law is a good thing. And learning to understand legalese can be a challenge. One thing to remember is that you have to read all relevant parts of the law (ie, don't take a single sentence as the whole story) and you can't read anything into the law that isn't there. It's not unusual to find a statement that seems very straightforward, but which also contains some kind of limiting clause such as "except as otherwise specified elsewhere".

The statement you quoted in your OP says surplus money shall be returned to the owners OR shall be used as specified in the Declaration OR shall be used for any other purpose as decided by the association. This gives your board pretty broad leeway. It would be a misreading of that statement to assume that surplus must be returned to homeowners.

Also, as someone else noted, the phrase "as the association decides" means "as the board decides" except for a few possible instances where homeowner approval is necessary. For example, in some states and in some communities, homeowners must approve annual budgets or assessment increases over a certain percentage. I don't think this is common - and I refer to such things as a license to commit financial suicide, since few owners understand association budgeting and expenses are what they are no matter how much we'd like them to be otherwise.

One thing I noticed is that your community is small (only 20 homes). Small associations have all of the complexity and legal requirements of larger ones, except for maybe no amenities. Small does not mean "simple". In fact, small associations have less wiggle room if things don't go according to plan. For instance, a single delinquent owner is 5% of your income - whereas in a large community it would be a tiny fraction of their income and easily compensated for. And a professional property manager makes no financial sense for very small associations, which means that the board needs additional knowledge, skills and free time to handle the property management side of things. So a small association will have unique challenges just because of its size.
NpS
(Pennsylvania)

Posts:4170


04/06/2021 6:10 AM  
Thanks Cathy. CDARS is exactly what I was looking for.

Sikubali jukumu. Read all posts at your own risk.
NancyD5
(Wisconsin)

Posts:47


04/06/2021 10:38 AM  
Thank you Cathy. We just happen to be one of those condo associations where the Board must submit to the membership a proposed budget each year for the members to review it and makes any changes and then it is brought up to a vote in order for it to be passed. Sometimes we can be voting on a couple different proposed budgets to see what one the majority prefers. So the Board can bring options to us but we as the membership have the final say as to what gets passed. Same with any dues increase.

I still am confused as to the Statutes wording of the phrase, "or shall be used for any other purpose the association decides". I took it as saying, as the "membership decides" since the Statutes definition of the word "association" is "all the condominium unit owners" but it seems a number of you here are saying I'm wrong on that, right? The reason I ask is because other members would rather see the surplus money used for a different project and some want it deposited into our Savings Acct. and I just want to see this handled correctly. Thank you



CathyA3
(Ohio)

Posts:1881


04/06/2021 11:22 AM  
Posted By NancyD5 on 04/06/2021 10:38 AM
... snip...

I still am confused as to the Statutes wording of the phrase, "or shall be used for any other purpose the association decides". I took it as saying, as the "membership decides" since the Statutes definition of the word "association" is "all the condominium unit owners" but it seems a number of you here are saying I'm wrong on that, right? The reason I ask is because other members would rather see the surplus money used for a different project and some want it deposited into our Savings Acct. and I just want to see this handled correctly. Thank you






"As the association decides" means the board deciding things that they have the authority to decide and the homeowners deciding things that they have the authority to decide. It sounds confusing, but it's very clear cut. Budgets need approval by homeowners. But once the budget is approved, then the board should have discretion on dealing with the unexpected unless the law and/or your governing documents say otherwise.

Many boards will survey homeowners to find out what they think about things, but it's not a requirement unless it's in writing somewhere.

You can see why most communities don't do things this way and instead allow their boards to crate and approve budgets. Putting this stuff in the hands of homeowners - the majority of whom can't handle personal finance well, let alone finance for a non-profit organization - puts the decision in the hands of people who don't know what they're doing. This is a recipe for financial trouble or worse, and I say shame on the lawmakers who did this.

Disclaimer: I'm not a lawyer, and laws governing community associations differ from state to state. If this looks like it's becoming an issue, it may be a good idea to buy a couple hours of a well-informed lawyer's time and get answers. It's usually cheaper to get advice up front than dealing with lawsuits if people choose to fight about it. (Of course, the cheapest solution is to budget in such a way that there never is a surplus, avoiding the issue altogether. I view that as unethical, not to mention irresponsible and a breach of the board's fiduciary duty. But laws that create unnecessary difficulties can encourage "creative" solutions from the politically savvy.)
MarkM19
(Texas)

Posts:790


04/06/2021 11:28 AM  
Nancy,
You answers really help. I get why you do not have a reserve account. Your HOA expenses should be few and far between. I get why they are calling it a Savings account. I would still prefer it called a contingency fund so that the ankle biters won't call the board out for saving money.
JohnC46
(South Carolina)

Posts:10944


04/06/2021 11:42 AM  
Nancy

Allowing owners to change a budget is really letting the inmates running the asylum. A budget is the responsibility of the BOD to prepare and present. Allowing questions to be asked is all well and fine but it is the BOD's responsibility to prepare it.
KellyM3
(North Carolina)

Posts:1695


04/06/2021 5:57 PM  
Yes. The board can move unspent operations monies (I wouldn't call it a surplus, per se) into landscaping.

A smart board would likely assess things before doing such but it's not out of the norm.
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