One HOA Increased Assessments: The Other Refuses

By Kelly G. Richardson, Esq. CCAL 

Dear Mr. Richardson: Management sent a budget notification to members with an agenda, date, time, and location. The board meeting was attended by the directors and several homeowners. The board met with the treasurer to go over the proposed budget and voted to accept one of several dues increase options. In the past, there was one meeting to approve a draft which was then presented at the next open regularly scheduled board meeting where it is ratified. It was not listed on the later board meeting agenda. When I asked why, I was told it was voted upon at the (previous) open meeting. L.B., Martinez

Dear L.B.:
Establishing a budget is one of the most important annual board decisions. Boards have the power and responsibility to determine what assessment increase is necessary to make sure the association can meet its anticipated expenses and set aside enough money to meet its reserve study recommended savings needs. Some associations with older governing documents have strict limits on how much the board can increase assessments each year, but Civil Code Section 5605(b) does not allow a cap on annual increases lower than 20%.

Increasing assessments by a figure of up to 20% can have a major impact on the homeowners (remember, the board pays that increase also), so even though the board has the power to pass a large increase, it is a good idea to take time to explain to the entire membership why the increase is necessary. For example, many of my clients are suffering from major budget increases due to huge escalations in property insurance costs, and they are explaining this to their neighbors, so everyone understands.

Best regards, Kelly

Dear Kelly: As treasurer of an association, which is over one million dollars short in its reserve account, is there a process to enforce Section 5600(a) (the statute requiring associations to impose sufficient assessments to pay its obligations)? I submitted plans to raise the regular monthly assessments, but all of the other board members voted for no increase. Will the court issue an order to increase funding by 20% per year until all obligations of the association are funded? J.B., Oceanside

Dear J.B.: Unfortunately, many boards pursue “target-based” budgeting instead of anticipating the coming year’s reasonably anticipated expenses. In that method, boards set a predetermined expense goal and expect the manager to create a budget meeting that target. I wish I could handle my household expenses that way, but utilities, maintenance, repairs, and insurance cost what they cost, and I can’t force them to accept less simply because I want to pay less. Some boards create ”zero-increase” budgets despite cost increases by reducing or eliminating the accumulation of capital reserve fund savings. However, the HOA quietly falls into deficit by not setting aside money corresponding to the deterioration of common area assets calculated by the reserve study. That deficit isn’t felt until major refurbishment of common area elements is needed – then, the HOA suddenly feels the crunch it should have seen coming long beforehand.

Suing the HOA would be expensive and divisive, and your duty of loyalty as a director prevents you from doing so. There is a more cost-effective approach – encouraging neighbors to elect a more financially prudent board!

Sincerely, Kelly