It wasn’t so long ago that delinquencies were up, assessment payments were down and the bad economy strained the many aspects of homeowner association operations. The only thing that didn’t stop were the bills directors received and were requested to pay: insurance bills became due, lawns had to be mowed, roofs needed fixing, reserves were planned to be funded, owners’ demanded enforcement of the CC&Rs and the list went on and on. Many boards were forced to prioritize what services might have to be cut and which were too essential. This process began for many in late 2008 in anticipation of a bleak 2009.
Things are better now; the economy appears to be improving and the degree of optimism has notably increased. Even so, we are not yet “out of the woods” and some associations still face significant financial problems. We revisited an earlier article intended to assist directors facing the budget crunch; the principles and considerations seem as fresh and necessary today as they did a few years ago. What follows are some ideas on how to maximize income and reduce expenses.
Protect the Money
Members expect and the association needs it; protecting reserves from financial losses must be the top priority of the board, the manager and the treasurer at any time but especially coming through the meltdown tunnel and when facing under-funded reserves and repair needs deferred during the crisis. Investment goals are, in order of importance:
- Protect principal from risk by investment in FDIC-insured or Certificate of Deposit Account Registry Service (“CDARS”) accounts.
- Layer investments to permit withdrawals with little or no penalty.
- Higher yields are not as important as preserving principal.
Adopt an Investment Policy
One way to protect association funds and to assure members the board has done so is by adoption of an investment policy. The policy should identify the association’s goals and objectives, require periodic (at least quarterly) review of investments, require consultation with professionals, limit investments to insured accounts (such as T-Bills, CDs and Money Markets) maintained in the association’s name, be based on safety, liquidity, reasonable investment costs and diversification, limit withdrawals to those authorized by the board with signatures by the president and treasurer, and permit policy exceptions for good cause and emergencies following board approval.
Monitor the Money
The treasurer is not just another association director or officer. Under most bylaws, the treasurer (also known as the “Chief Financial Officer”) has specific duties which can include being responsible for the receipt and deposit of funds, signing checks and promissory notes, keeping or causing to be kept proper books of account and assisting in presenting the budget and financial statement to the members. As a practical matter this means the treasurer should regularly communicate with the manager and the association’s CPA and be prepared to make oral presentations at board and membership meetings.
The Manager’s Role
Managers who are members of the California Association of Community Managers or the Community Association Institute bind themselves to comply with ethical and financial management obligations. Also, the manager’s duties with respect to the receipt, accounting and handling of association funds will (or should) be spelled out in the management contract. The manager should not be responsible for how those funds are spent, that duty rests with the board.
Indemnification and Limited Immunity
It would be hard to attract board volunteers if their decisions concerning prioritization and reduction of services could trigger lawsuits for breach of fiduciary duty or other claims. To encourage volunteerism, an association can “indemnify” directors, officers and committee members from claims that their decisions caused financial harm. This means that either through insurance or association assets, these volunteers will, assuming they act in good faith and within the scope of their power under the governing documents and the law, be protected. Also, both the Civil Code and Corporations Code provide limited immunity protections to directors sued for decisions made on behalf of the association. Since “good faith” is one of the predicates for statutory immunity, it is essential that decisions are intended to made for the good of the community. Doing this requires that director “investigate” and obtain information. If directors are not trained in financial issues, they may need to get investment or other advice from those who are.
Getting the Most Out of Your Money
Some expenses can be eliminated; some can be reduced. Some services can be cut altogether, others provided less frequently. Prioritization decisions should be based on a careful (and documented) analysis of many factors. They include safety, obligations imposed by contracts, the CC&Rs and conditions of approval, membership expectations, property values, short- and long-term financial consequences resulting from “cutting back” on services, maintenance or reserve funding. The advice of counsel should be obtained. Membership input should be considered and decisions made in open session. It is especially important that meeting minutes reflect the reason behind cost cutting measures adopted by the board.
Prioritizing is sensible; being “penny wise and pound foolish” is not. Restructuring payment arrangements, revising scopes of work, timing the delivery of services can all be effective ways of preserving relationships with key professionals and vendors. They can be essential partners in the board’s effort to “ride out the storm” and candid discussions about how the board can partner with them could be one of the most important tasks a board can accomplish this year.
Other Options for Relieving Debt
Transferring or “Diverting” Reserves
A board can authorize the “transfer” of reserve funds to pay for current expenses. The decision to transfer (what is generally referred to as “borrowing”) must be made at an open meeting that is properly noticed and agendized; the Civil Code requires that resolutions authorizing the transfer and a “restoration plan” must also be adopted at the meeting. The transferred funds must, in theory, be restored within a year; a longer period is permitted provided the board finds that more time is necessary and prudent.
Does the board have the power to “divert” monies to an operation account before the funds are deposited into reserves as intended by the budget? If so, the diverted funds would never have made it to reserves and thus, it could be argued, the “borrowing” rules would not apply. In reality, there is hardly a difference between “borrowing” and “diverting” reserve funds. Both decisions will usually be made at open meetings; the posted agenda for the meeting must specify the intended action (to borrow or divert funds); and whether required by statute or not, the use of funds in or designated for reserves must be justified on the basis of legitimate short term cash flow needs.
Special assessments can be imposed by the board without membership approval vote in four situations: for safety emergencies or unforeseen expenses; in an amount up to 5 percent of the budget or if otherwise allowed by the CC&Rs; or by court order. All other special assessments require the approval of a simple majority of members. The educational “campaign” to gain membership support for a special assessment creates the opportunity to involve the members in understanding and contending with the financial challenges the current economy has wrought.
Bankruptcy and Receivership?
We get this question a lot: can an association file for bankruptcy to avoid its debts. Almost always, the answer is “No” in part because the association is an ongoing entity with the power – at least theoretically – to “tax” its members to finance its obligations. Likewise, the association cannot change its name or reorganize as a different legal entity to avoid debts. The association has ongoing obligations to the members and the ability—by special assessment authorized by the members or imposed by a Court—to satisfy its legal obligations.
Prudence and Documentation
Directors must act in good faith and make decisions that are reasonably intended to benefit the short- and long-term interests of the association. Inevitably, many of these decisions will be difficult and cannot satisfy everyone. Thus, it is all the more important that boards act in open session and document, with properly drafted minutes and resolutions, the basis for decisions relating to services, expenses and investments.
The Newest Wrinkle
Many associations are emerging from the fiscal crisis by applying the principles and techniques above. The strategy of deferring repairs though is only a temporary fix; buildings do not get “better” on their own; building decay doesn’t “go away”; leaks don’t stop. Sooner or later reality may set in: repairs and replacement of waterproofing and other common area components will be required to protect residents and property values. Prudent planning, as the economy improves, will entail less “conservation” and more “proper” and appropriately targeted spending. Future Echo articles will contain legal and practical tips on how to help.
Steven Weil is a founding partner at the law firm of Berding & Weil in Walnut Creek. He is a member of the ECHO board of directors. His practice focuses on legal issues affecting community associations. An earlier version of this article appeared in Berding & Weil’s Community Association Alert.