Time May Be Short for YOUR HOA’s Budget Report

By Kelly G. Richardson, Esq. CCAL

This time of year is often budget season for HOAs and their managers and can be hectic. Most HOAs follow fiscal years that are also their calendar years, and HOAs with a fiscal year beginning January 1 must issue their Annual Budget Reports by December 1 (thirty days before fiscal year end). Therefore, only a few weeks remain for them to get out their Reports.

For many years, only the budget had to be issued on time to preserve the board’s ability to increase assessments in the coming year. However, starting in 2014, this requirement was greatly expanded when Civil Code Section 5300 added eleven other items to the budget, calling the collection the “Annual Budget Report.”

The consequence of late issuance applies to these 7 of the 12 Annual Budget Report items:

• Budget:
• Summary of the association’s reserves;
• Disclosure of any board decision to defer, not repair, or not replace any major common area component, including reasons;
• Disclosure if the board anticipates a special assessment to replace major components or to fund the reserves account;
• Statement as to how the board will fund reserves;
• Description of how reserves are calculated and established; and
• Disclosure of any current HOA loans of over one year in length.

Per Civil Code Section 5605(a), these seven items must be issued in summary or complete form to all members by the deadline or any assessment increase or special assessment in the coming year can only be by vote of all the members.

Hopefully, your HOA is already on top of this – if your HOA has a January 1 fiscal year, boards should move swiftly before it’s too late. Here are three tips:

1. Get something out. If the HOA is close to the deadline and not ready, instead of failing to timely issue these seven items, consider putting a fresh date on last year’s disclosures and send that to members. That will allow the board to modify the assessments during that fiscal year if necessary once a more accurate budget is prepared. It’s embarrassing but at least it preserves HOA flexibility. 

2. Avoid “target-based” budgeting. Many boards tell their managers at the beginning of the budgeting process to assume a given assessment increase. This puts the cart before the horse. The law requires HOA boards to budget for the HOA’s actual obligations (Civil Code Section 5600). Presupposing a budget target before the projected expenses are tallied will often force the budget preparer to make unrealistic assumptions to hit the board’s target. 

3. Don’t “hold the line.” Some boards refuse to allow assessment increases, priding themselves on keeping assessments flat for multiple years. At the same time, food, wages, gas, building materials, insurance, and other expenses rise with inflation. HOAs avoiding assessment increases usually make things worse by deferring maintenance and reducing reserve fund deposits – which means the HOA slips into an increasing deficit.

Management company contracts should recite that the manager helps with not only the budget, but also the complete Annual Budget Report (and Annual Policy Statement) packet. The management contracts I see usually do not include this important responsibility, and refer only to the budget, not the entire Report packet. 

To read these or any laws in full, the official state website is www.leginfo.legislature.ca.gov.