Q&A: What to Do with a Surplus?

Q My building took on a major project, and residents were assessed a significant  amount, about $20,000. After two years, the project was completed and came in  under budget. The board is now grappling with what to do with the surplus funds. Can they  retain it for future expenses? Could they refund current residents who paid the assessment (several units  changed ownership since)? Or should they refund everyone, even if they have since moved? What are the responsibilities of the board on this, and are there any laws that  speak to how this should be resolved?  

 —Flush with Cash  

A “Illinois law permits your board to either retain the surplus and allocate it to  the association’s reserve or general funds or it can be credited towards the budget for the  following year, allowing for lower regular assessments,” says attorney James Erwin, principal of the Chicago-based law firm of Erwin & Associates LLC. We generally recommend the former course of action. In any  event, refunds to the owners, past or present, are not permissible. After a special assessment is levied and paid, those funds are property of the  association and cannot be paid out to owners in any fashion.  

 “In reaching its decision on what to do with excess assessment funds, the board  must exercise its best business judgment. In order to do so, it should: (a)  first verify that the project truly is fully paid for and that there definitely  is a surplus; (b) next, look to its governing documents as these sometimes  provide express directives on how to allocate excess funds; (c) review the  condition of the association’s reserves and most recent reserve study to see how likely it is that the  association will need to address another project in the near future; and (d)  lastly, look at whether there is a greater benefit in applying it towards the  next annual budget, thereby reducing (albeit temporarily) the regular  assessments of the ownership.  

 “Generally speaking, we feel the most prudent course of action is the most  fiscally conservative approach—i.e., allocating the surplus to the reserve fund. Having a comfortable cushion  in reserves means that the association will be able to most efficiently pay for  any upcoming capital projects. A strong reserve fund is a critical measure of the financial health of an  association and is reviewed by potential buyers, lenders, appraisers and  insurers. Therefore, boosting the reserves will provide a benefit to the property and to  all owners alike. While owners might like the idea of seeing reduced regular assessments, that  positive feeling might quickly fade when they go up dramatically the next year  or, worse, another special assessment is levied because reserve funds are  short.”