It is not often that homeowners associations encounter excess operating funds in their budget. But, in the event that you do, you must know the proper way to deal with them. Here is everything you need to know about HOA surplus funds.
What to Do With HOA Surplus Funds
A lot of factors can influence your HOA’s financial condition. The state of the economy, for one thing, can have a huge effect on your association’s finances. Natural disasters and emergencies are another. In this day and age, though, having an HOA budget surplus is a problem a lot of associations would like to have.
At the start of every fiscal year, board members and budget committees work together to create an HOA budget. They list down the coming year’s anticipated expenses, such as utility costs, landscaping expenses, and the like. These anticipated expenses are added together, and the total is divided by the number of homeowners in the community to arrive at the assessment fee. But, when the actual expenses are lower than the anticipated expenses, it results in a surplus.
It is not very common to have excess funds in your operating account. But, if you do encounter such a situation, you must know how to proceed. You can’t just spend it on the first thing that pops up into your mind. There are rules about HOA surplus funds that you must take into account.
Check Your State Laws
The first thing you must do when you encounter a budget surplus is to check the law. The law on HOA surplus funding varies from state to state, and some states do not even have them.
Still, it is good practice and, frankly, common sense, to verify what the law says prior to taking any action whatsoever. This is so that your HOA does not run into any legal troubles. After all, one of the last things you want is to have your association on the wrong side of the law.
In Colorado, for instance, the law is very specific on what HOAs can do with surplus funding. Unless the HOA’s governing documents say otherwise, Colorado law dictates that any budget surplus must be given back to members of the association. Another option is to offset future recurring assessments with the surplus.
On the other end of the spectrum is Florida. No such stipulations exist in the Florida Condominium Act. Therefore, it is not required by law for associations to return the surplus funds to homeowners.
What Happens to the HOA’s Non-Profit Status?
In the eyes of the law, homeowners associations are classified as non-profits. But, they are required to file taxes as a corporation. There are, of course, certain tax privileges that HOAs can take advantage of. Still, if your HOA has excess funds, you need not worry. It will not affect your status as a non-profit. However, your HOA may need to pay a higher tax rate on taxable interest income.
Reporting HOA Operating Surplus Funds
Transparency is of paramount importance in any organization, especially when money is involved. Homeowners have a right to know what the association is using their money for. Beyond that, maintaining transparency helps combat HOA fraud.
The same goes for HOA surplus funds. If your association comes across excess money in the budget, you must make this information known. It does not matter how much the surplus is. Large or small, if a surplus exists, then the board must include it in the financial reports and annual statements. When the board or the HOA manager fails to do so, they could face legal liability.
Possible Recourses With HOA Excess Funds
If your state or local laws remain silent on the matter, then you must refer to your HOA’s governing documents.
Some declarations state exactly what board members must do in case of a budgetary surplus. Others, though, have no such provisions.
In the case of the latter, you must consider amending your governing documents to include possible courses of action. This way, you can set a precedent, and future board members will know what to do as well.
When amending your declarations, it is imperative to seek legal counsel. An attorney can assist you with the language and make sure your provisions do not come into conflict with the law or existing declarations.
1. Carry Over to Next Year’s Budget
The first and most common option is to carry over the surplus funds to the following year’s budget. This way, homeowners have less to pay for. After arriving at the total anticipated expenses for the next year, the surplus is deducted and the difference is then divided among all homeowners.
2. Transfer to Reserve Funds
Associations also have the option to transfer the surplus to the association’s reserve funds. Reserve funds are there to cover the cost of future replacements and larger repairs. This can include roof replacements, lighting projects, exterior painting, and other significant activities. Generally speaking, homeowners associations should conduct reserve studies at least once every five years.
3. Member Refunds
In some cases, the HOA board may opt to refund the excess funds to the members of the association. This can come in the form of a check or credit to every member’s specific account. Member refunds are a route least taken, simply because the first two options are more beneficial to the association.
A Duty to Look Out for the Community
Although it is uncommon for HOAs to have a budget surplus, it remains nonetheless important to know what to do in case the situation arises. Though some boards would like to, it is questionable to simply spend the excess funds on things that do not matter.
HOA board members have a moral and legal responsibility to make decisions in the community’s best interest. And that means handling HOA surplus funds accordingly.
If your association requires help with financial matters or other issues, consider an HOA management company like Clark Simson Miller. Give us a call at 865.315.7505 or email us today at help@csmhoa.com for more information.
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