Reader Questions - Spending Cap, Reserve Fund Cap

Dear Kelly,

I live in a large retirement park, age 55 and up. There is no limit on the amount of money the board can spend. They are increasing our dues, to the point many people cannot afford to live here any longer. Question, can a portion of the residents sign a form to the board requesting a cap on the amount the HOA can spend without the approval of the people?

Thank you very much,

H.R., Murrieta

Dear H.R.,

Common interest development (CID, aka “HOA”) boards must annually create a budget which covers the anticipated association expenses in the coming year. Civil Code 5600(a), requires the association (acting through its board) to “levy regular and special assessments sufficient to perform its obligations” under the governing documents and the law. Part (b) of the same statute covers the other side of the equation, prohibiting assessments or fees which are not linked to anticipated costs. If the association expenses increase, the board must increase the assessments to make sure the property is properly maintained and preserved. Whether your home is part of an association or not, it is a fact of life that certain expenses are part of home ownership and must be handled. In a CID, those expenses are handled by the board.

Civil 5605 allows board to increase assessments by up to 20% per year, regardless of the CID governing documents. Associations which “cap” spending often usually do so by deferring proper maintenance and by shorting their reserve fund deposits – that is short-sighted. However, if you pursue a petition to cap spending, you need to also make sure to cap the association’s expenses. If you can figure out how to limit your bills, please call me, I want to learn that trick also!

Thanks for your question,
Kelly

Mr. Richardson,

What standard percentage of the total Reserve Fund do most HOA’s have funded? Our fund is at 140% of the total reserve amount. To me this seems unnecessarily high.

Each year the board seems to misunderstand the intent and purpose of the fund. In my view it is merely an estimate of term of life and estimated replacement cost. Thus, having such a high percentage of the fund in reserve is a huge burden on the residents, correct?

Thank you,

D.M., Ripon

Dear D.M.,

If your association reserve account is overfunded, the association may be technically violating the aforementioned Civil Code 5600(b), requiring assessments to be linked to anticipated expenses. If your association reserve fund larger than the reserve study requires, the board should consult with its reserve study preparer to recalibrate its contributions. Civil Code 5550 requires associations to create or obtain a reserve study each three years and review it annually. If your association used a professional reserve study preparer, first consult with that expert. Is the study realistically and accurately assessing the need for capital item replacement or refurbishment? Perhaps the board needs to recalibrate the association budget. Remember, the reserve account is your best protection against special assessments or even bank loans (and assessments to cover those payments) if your HOA is not adequately funded.

Since most association reserve accounts are woefully underfunded, if I were to pick which problem to have, I would quickly choose yours!

Thanks,
Kelly

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.