When discussing the association’s budget process, questions are often raised about other issues such as financial reporting, access to records, and year-end audits. This article will be limited to the budget process. As always, homeowner association laws vary from state to state and must be considered in conjunction with the association’s governing documents. Governing documents also vary and may include other provisions such as caps on budget increases, reserve funding, movement of surplus funds at the end of the budget year, limits on expenses that exceed the budget by a certain percentage, etc. Here are the main points of the budget process.
The responsibility for preparation of the association budget usually rests with the board of directors. These powers are usually stated in the association governing documents, and state laws. Most state laws governing non-profit corporations also address the issue of the board’s powers to approve the budget. Large associations may delegate the responsibility to a budget committee to develop and recommend a proposed budget. The board may invite homeowner input though the budget committee or at the homeowner forum which is typically at the beginning of board meetings. In the end, it is the board that has the power to develop and adopt the budget.
But the members who support the association through their assessments should have a right to review and even reject the budget. Again the governing documents and/or state laws often require that members be provided a summary of the budget and notice of a meeting to ratify the budget. The meeting notice is typically mailed to each lot owner with a minimum advance notice of say 10 days or more. Given that member participation in annual meetings is often small, experience shows that member participation in budget ratification meetings is usually even less and in many cases there is not even a single homeowner present. This is why the budget ratification meeting in most cases does not require a quorum of the membership. And since few homeowners attend, the meeting is usually held during business hours. If the association contracts with a management company, the meeting is usually held at the offices of the management company. The time and location is for convenience as there may be additional expenses associated with holding a night meeting.
On the other hand, if the proposed budget is seriously flawed in the opinion of many members, the governing documents and/or state laws often provide that a majority of the lot owners may vote to reject ratification of the budget. This is usually a majority of the entire membership, not just members in attendance. In the event the budget is not ratified, the most recent approved budget remains in effect until a new budget is proposed and ratified.
With regard to changes in the budget during the year, governing documents and state laws may also provide that proper notice be given of any special called meetings along with an agenda. If the membership has concerns about the budget or financial statements during the year, they may request a special meeting. Generally, the board must call a special meeting when requested by a certain percentage of the membership. The percentage may be just 10% and is usually defined in the governing documents and/or state laws.A membership that is dissatisfied with the board’s performance may also seek to gain support to change the make-up of the board in the next election.
- The board adopts the budget.
- A budget summary and notice of a ratification meeting is sent to the membership.
- The budget ratification meeting is held. There is no requirement for a quorum.
- The budget is ratified unless a majority of the entire membership votes to reject the budget.
- If the budget is rejected, the most recent approved budget remains in effect.
Finally, if a single member or group of members believes that the board failed its fiduciary responsibility to adequately adopt and/or ratify the budget, they may file a complaint with a state agency and/or ombudsman if available. Failing all else they may file a lawsuit. This is usually expensive and time consuming but in blatant situations may be sufficient to cause the board to re-evaluate its actions. Unfortunately, the legal fees incurred by the association to defend the board, if not covered by directors and officers insurance are usually passed along to the members in the form of increased assessments. In a strange catch-22, the board may need to amend the budget if the legal fees exceed the budget and are incurred in the middle of the budget adoption cycle.