Most financially-savvy individuals, homeowners, property management firms, and association board members started feeling the effects of the economic downturn in 2006, when property values began falling from the record highs enjoyed in the early 2000s. The fall of housing prices cut deeply into home building and home purchases. The corresponding sharp rise in foreclosures resulted in the loss of hundreds of billions of dollars among the nation's leading banks and a tightening on credit options. Association boards and property managers faced the daunting task of keeping HOA budgets balanced in the face of drastic reserve losses and rising operating expenses.

Tough Times

It has been widely accepted that the housing market slump was both a cause, and a predictor of the recession’s broader economic troubles. Those troubles are still evident despite the belief by many that the worst is behind us. Former President Bill Clinton recently stated, “Whenever you have a financial collapse and a real estate collapse, [recovery] almost always, is out there at 10 years."

Using the former president’s formula, and the 2006 date as a starting point, places full economic recovery well in the future. So if it is too soon to relax association budget constraints, is it too soon to note a “surplus” in some HOA and COA budgets?

A surplus is defined as being in excess of what is needed or required, or excess receipts over expenditures, during a certain time period. While association budgeting is an ongoing effort requiring monthly reports and adjustments most HOAs work within an annual budget time period.

Daniel J. Haumann is president, and owner of Advocate Property Management, LLC in Naperville, and says that many associations are still experiencing higher than normal assessment delinquencies. Maintenance funds are often cut in order to balance the budget. A prolonged cutback on maintenance generally creates additional problems, and adds stress to an already compromised budget. “Only the healthiest associations are experiencing a budget surplus in today’s financial climate,” states Haumann. He has isolated a few reasons why a budget surplus might occur:

• Reduced maintenance fees may result from negotiating a better maintenance contract.

• A more proactive approach to maintenance may lower fees.

• Recent capital improvements may provide savings on routine maintenance cost.

• Better than anticipated collections may improve the bottom line and generate a surplus.

Haumann always recommends that a board be open and sharing with members on budget surpluses or deficits. It is the board’s option to disclose the surplus or deficit in regularly scheduled meetings with members but all boards are required to provide an annual budget to members in the fall. Typically, year-to-date, actual numbers are part of the annual budget. Haumann recommends that plans to utilize the surplus or cover the deficit should always be covered and discussed as well.

Surplus? Where? and Why?

“Once a surplus is identified, how it is handled is dependent upon the declarations and bylaws of the association,” Haumann explains. “Some associations require budget surpluses be refunded back to the members in the next calendar year.” When no such rule is in place, it is not required to place the surplus funds in the reserves. Reserve deposits are typically part of the association budget, and are typically a fixed monthly amount for the year. “In most cases, the money would be deposited in the operating account.”

It would then be the board’s fiduciary responsibility to determine the current financial health of the association, and the current maintenance health of the association, and decide whether the money should remain there to shore up the operating account or be invested to improve the overall condition of the association.

The board can also consider lowering future assessments to members if the operating account and property maintenance account are deemed satisfactory. The board may experience tremendous pressure from the members to lower assessments rather than investing in postponed maintenance activities. While this approach can create short-term satisfaction for members, it often creates long-term financial difficulties requiring larger assessment increases, and even special assessments in the future. Once all the options are examined, it remains the board’s responsibility to make the appropriate short-term and long-term decisions to ensure the association’s optimum financial health. Haumann and his staff readily provide suggestions and directions.

Educating the Homeowner

As Lakeside Community Development Corporation, Executive Director Brian C. White approaches surplus and deficits from an entirely different angle. Under White’s careful direction Lakeside has grown into a HUD-approved, comprehensive housing agency assisting over 700 residents per year. Assistance is offered on numerous housing issues and programs, including fair housing, zoning, land use, and municipal codes. White designed and implemented Lakeside's community association training program and has been involved in developing and expanding other programs for renters, homeowners, and homebuyers. Additionally, White is responsible for program development, guiding advocacy and research efforts, and fund raising to support agency operations and programs.

His goals are focused on educating homebuyers, generally first time homebuyers, before they find themselves in an association with no idea of the benefits and/or restrictions. Those attending his free HUD-approved classes will be better equipped to choose a community suited to their personal needs and preferences. The community of choice will also benefit by having an educated homeowner with an understanding of HOA and COA rules, regulations and benefits.

From his vantage point, he feels there are very few associations showing a surplus in their budget. The few that can project a surplus have collected fees above and beyond the required operating expenses. He would recommend rolling over any surplus funds into the general operating fund to be used for ongoing operating costs and not to grow the reserves. “These funds are not found money,” he states. “An association must determine the source, and roll the funds back over to cover allocated expenses. Financial statements should always reflect any surplus or deficit.”

Steve Silberman, CPA, is vice president and a business advisor with the accounting firm of Frost, Ruttenberg & Rothblatt, and he has seen enough Chicago winters to factor snow plow expenses and increased fuel usage into an association’s budget. A mild winter can easily result in surplus funds in the operating account. He has also seen a timing issue create an artificial surplus when work was accomplished in one fiscal year, but not billed and paid for in the same period.

“Do your homework,” he cautions.” Start checking budgets mid-year; be sure you aren’t comparing apples to oranges, and check to ensure your expenses match up with the correct account.” Silberman offers one example where a CPA’s expertise and knowledge makes a difference. “IRS regulations require painting expenses to be paid from operating expenses and not a reserve account.” There are specific forms and transfer of funds options that are familiar to Silberman and other experts at FR&R. Seeking expert advice can save time and money.

Silberman, for example, is not in favor of a surplus automatically going into the reserve fund, and he would not recommend surplus funds be refunded, but rather be placed in a contingency fund to allow coverage of possible bad debts and/or emergencies. “Do not be complacent,” he advises, “look to the future.”

Surplus Options

While having extra or surplus funds may be a nice problem to have, how those funds are saved, spent or distributed will require careful consideration in order to extract the most benefit for the property and the property owners. There is no blanket answer. It all depends on the needs of the community. However large or small, once a surplus is accrued the board and management team have a legal and moral obligation to show those funds in the annual statements and financial reports. The financial reports are corporate records and available for all owners for review.

While reporting a surplus is still uncommon in the present economy, most communities strive for some form of cash cushion. The Community Associations Institute (CAI) recommends an association maintain about three months worth of assessments in its operating account. Also, it’s important to remember that new HUD rules require condos to have at least 10 percent of its budget allocated for reserve funding.

Having a surplus can lower maintenance assessments and reflect positively on an association’s cash flow. But it’s up to the board to show how the surplus was achieved and how it will be used. n

Anne Childers is a freelance writer and a frequent contributor to The Chicagoland Cooperator.