How the Budget Committee Works

The budget committee comprises members of our community association, which enables residents to have a say in how their money is spent. How does the budget committee work and who serves on it? 

The Treasurer’s and Accountant’s Roles

It makes sense for the board treasurer to chair the budget committee. As chair, it’s the treasurer’s job to keep everyone on track as the budget is prepared. The treasurer also presents the budget for approval to the board and members. If the association works with an accountant, he or she may offer consulting, but the accountant really has no significant role in the process of devising the budget.

Who Should Be on the Committee?

The owners who serve on the budget committee should represent a cross-section of the community. Of course, if there are members willing to serve who have expertise in areas such as insurance, that’s even better. When it comes to size, a good general guideline is that the committee shouldn’t be so large that it becomes unwieldy.

What the Committee Does

The treasurer will make sure that all committee members understand the three basic components of the budget:

1. Funds needed for daily operation of the community, such as common electricity and water, grounds maintenance, management, insurance, and general maintenance. These expenses are either contractual or can be reasonably estimated based on experience. An important consideration when looking at items in the operating budget is the expectations of the community—for example, do members want a landscaper who is a “blow, mow, and go” type, or do they want a landscaper who provides a higher level of service? Obviously, the latter requires more of an investment.

2. Funds needed to maintain our reserves at sufficient levels. Reserve funds provide money for the repair and replacement of the community’s assets—such as the pool, roofs, pavement, etc.

3. Funds for additions or enhancements to the existing property. This is a function of what members of the community want and are willing to pay for. The community should provide input and approval for this component.

Armed with this knowledge, the committee will estimate total expenses for the coming year and compare that sum to the association’s potential revenue (assessments, interest on investments, concession income, and so on). If expenses are greater than revenue, the committee will look for ways to lower expenses without compromising service. If that doesn’t balance the budget, the committee may have to make a tough decision—whether to increase assessments or levy a one-time special assessment.

Its not always an easy job - but its absolutely essential to the health and longevity of your association. Homeowners always want to know where their money (or dues) are being spent. Serving on the budget committee can be a very eye opening experience!

Protecting Your Covenants

One Board member asks, “In your Board training class, you mentioned that a benefit of converting our community from a common law homeowners association (HOA) to a statute Property Owners Association (POA) permits us to rely on automatic statutory liens, rather than having to file paper liens on delinquent homeowners.  What if our Declaration of Covenants (CC&Rs) already says that we don’t have to file paper liens, even though we are not a POA?”

Great Question!  If your community is not submitted to the POA, then a paper lien is still required to protect the Association’s debt claims, regardless of what is written in your Declaration.  Your Declaration doesn’t overwrite the law regarding property lien notification.

There are certainly a lot of reasons to convert communities over to Georgia’s Property Owners Association Act (POAA), and we encourage all of our clients to take steps to gain such protection.  Here are some of its benefits:

• Creates certainty – HOA authority is constantly changing under court challenges, but more of your regulations are locked if you are operating under the POAA
• Explicitly states homeowner protection from being sued individually against claims others may make against the Association
• Provides 21 days notice - rather than the normal minimum 10 day notice - required for upcoming meetings
• Clearly allows you to hold renters liable for their actions
• Places prospective owners on constructive notice about assessments
• Shifts the burden of collection expenses onto the delinquent homeowner
• Automatic statutory liens established, so you no longer have to pay $200+ in legal fees filing paper liens
• Avoids lien invalidation due to accidental misspellings
• Buyer and seller jointly liable until all funds collected at closing
• Association may foreclose on HOA debt while leaving the home loan bank note in place
• Blocks a judge’s arbitrary waiver of late charges, fines and attorney fees
• Amendments to the governing documents can be applied equally to everyone, not just those that voted to approve an amendment
• Creates a one year time limit for challenges against amendments
• Establishes a range of 66% to 80% required approval for future amendments
• Any regulations that are a violation of federal/state law may be amended automatically without a community-wide vote (such as removing rules that are now considered Fair Housing Act violations)

If your community is currently operating under a common law HOA regime, get with your property manager and legal counsel to explore how you can enact the above protections!

Lending Restrictions

Worried about what trouble your future Board might create?  A great way to lock in good governing habits is with a bank loan.  Yes, a bank loan.  All those restrictions for an Association loan guarantee that no funny business will be happening under someone else’s watch.  Just make sure the loan includes the following:

The 'proxy put'   This provision allows the lender to immediately call the loan due if a majority of the Association's Board of Directors becomes filled with 'non-continuing Directors' that were not approved by the original Board members.  Take it a step further to a 'dead hand proxy put', which prevents current Directors from bestowing 'continuing director' status to any new directors seated via a contentious election.

Governing Amendment   The lender holds veto power over any changes to community regulations.  That smoking ban will just have to wait.

Annual Audits   No, the treasurer did not pay for that Porsche with community funds.  Conspiracies are a thing of the past, when you’re required to have a CPA touch the books every single year. 

Insurance coverage    No corner-cutting here.  Great way to ensure that D&O insurance, fidelity, and workers comp coverage - the three coverages that typically get neglected - are fully in place.

Self-Managed?  No way.  That lender is going to have the last say on any changes in professional management.  And self-managed always turns out to be more costly in the long run.

Minimum Annual Budget   Yep, put the kibosh on all those crazy candidate promises of ‘lowering assessments’.  A related requirement keeps wastrels from draining your reserve funds.

First priority asset status   This allows the bank to have first dibs over any money or property the Association holds or might hold in the future.  Since HOAs rarely actually own real estate, the next best thing is having rights to all future assessments paid by homeowners.

Collections  The days of “going easy” on deadbeats are over.  Your banker expects the community to hit delinquent behavior with both barrels.  Absolutely no write-offs of debt without prior approval!  Best of all, if the delinquency rates slip above 10%, the note is called due.

Cross Default   Not cross-dressing, but close.  If the Board stiffs the plumber, it’s an automatic bank loan default.  It is also a default for any other creditor to have the ability to elect a majority of the members of the Board.

The point is this:  Requirements like those above have ramifications most of us never guessed existed, so be careful navigating past potential problems.  When your community obtains a bank loan for a major renovation/repair project, be sure your attorney is heavily involved. 

Penny Pinchin'

One compelling reason to do annual increases to the community’s budget:  The courts' intolerance of delayed maintenance work.  In the last few years, judges have made it clear that they do not accept excuses for refusing to increase assessments.  One community opted to discontinue landscaping service, rather than raising dues.  Commercial units in the association sued since this was directly noticeable by their clients.  The judge was not happy.  A special assessment was ordered.  In another community, the Board felt it was too expensive to repair the exterior of the building, and black mold took hold.  A court order and a million dollars later, not only was the building repaired at greater expense, but penalties were tacked on for the Association shirking its duties.

Now another critical reason prompts us to thoroughly maintain common areas:  Cancelled insurance policies. 

Insurance inspectors are tightening up on property reviews, and we have had several instances in the last few months where the carrier dropped a homeowners association, or threatened to do so - if action wasn't taken within 90 days to address basic items such as new roofs and pool resurfacing.  And it doesn't stop there - insurers are also dropping property, liability and directors & officers coverages.

Unless your community's bank account is flush with millions of dollars, the above should be terrifying.  Without insurance to personally protect you, no intelligent person willingly serves on a Board of Directors. Next, all mortgage lending dries up, since a master insurance policy is a basic requirement.  Things snowball from there.

An insurance inspector will not be fooled by substandard work resulting from ‘going cheap’.  Boards of Directors can no longer push for cutthroat contract rates and refuse to increase assessments over two or three years. 

The best course of action is educating your homeowners on the above.  Share with them the basic conclusions of your engineering study, analyzing the life expectancy and replacement cost for big ticket items.  Items such as road resurfacing, detention pond maintenance, clubhouse renovation, sewer line repairs and tree replacement can’t be neglected.

Bottom line - Uninsured is unacceptable.

Perspective Shift

Everyone has a custom currency.  An effective teacher taps into this to connect with what a student values most:  A child fascinated with Transformers toys more easily learns the alphabet if provided 'transformer' letters that twist into characters.  As we mature, these currencies become an overlooked language, but still shape our interactions.  In many ways, they are our native language.

When we talk about running a transparent organization, we are really attempting to overcome the confusion and conspiracy that crops up as these 'languages' muddy the translation.  It is not always easy bridging the gap into a universal language.

So, now on to how this relates to community management...

In the two months leading up to the annual meeting for a particular homeowners association, some owners along with the Board treasurer, were accusing other Board members of mismanagement.  The revolt crystallized due to renewed enforcement of leasing restrictions and regulating community access. 

The discontented shared a common currency of individualism and special distrust of authority.   When it came to determining terms of service for the election, this group challenged the validity of all meeting Minutes stretching several years.  At a special town hall meeting, the Board, management and legal counsel attempted to clarify using English.  The 'language' of the crowd overshadowed all reasoning.

One failed translation:  The term of service is not linked to the office title (president, secretary, treasurer) held by the person.  Over the past year, some Board members had been appointed into empty spots.  Afterward, the Board reassigned officer positions, but the original length of term for each Director remained unchanged.  To the homeowner group, this was a shell game.

If the leadership had addressed the crowd in the currency of individualism, not legalism, it might have looked like this:  No Board member joyfully inflicts misery on him or herself by coming up with rules that make mad neighbors.  Board members have to live under the same rules as their neighbors.  We all value the freedom enjoyed within the 'castle' of our home and don't want someone needlessly sticking his or her nose in our business. 

Communicating this, followed by the reasons for why the regulations were critically important, would have been more effective:  This particular community is in dire need of a million dollar bank loan to address safety issues - but banks will refuse to lend unless the leasing situation is reigned in.  In a way, it's the lending system that is infringing on our individualism.  They have the money and get to call the shots.  We homeowners may decide that giving up this freedom for a bank loan is not worth it.  But we then must be prepared for a huge special assessment.

Sharing the above information, not once, but seven times in several different ways to offset a misinformation campaign, was able to bring the crowd in for a soft landing at the annual meeting.  They were actually able to conduct all their crucial business within sixty minutes and get everyone out at a decent hour.

Leading up to the meeting, the rogue Board member had tried to worsen the situation by leaking inaccurate information about the finances.  But by the time of the annual meeting, every homeowner had a copy of the financials and could see that everything was in order.  It later came out that this Treasurer had never reviewed or understood any of the financials, despite coaching for her duties when she was first appointed.  

Although the election placed the 'crazy' homeowners on to the Board, they had learned enough in the final days to move cautiously with a broadened perspective.  It is now up to them to tap into their shared currency with those that elected them. 

Amend This

This is the fourth in a series of postings providing a detailed look at the governing documents for homeowners associations (HOAs). 

In our last posting, we discussed assessments.  Board members often request ideas on changes that can be made to the Declaration and Bylaws to strengthen their communities.  Here are some items related to assessments that we are seeing included in brand new communities.  As always, consult with your Association’s attorney before incorporating these ideas.

Construction Deposits.  Because of the potential damage that could occur to the common area, the Association should have authority to establish a construction deposit when an owner is making modifications, alterations or additions to his home.  Costs for repair of such damage may be deducted from the construction deposit and any additional expenses would be specifically assessed against the home.

Special Assessments.  Special assessments historically are capped at $200 before a community-wide vote is triggered.  Due to inflation, this cap may, at some future date, be raised to a higher level by the Georgia legislature, but communities will only be able to take advantage of this if their documents indicate they can do so.

Borrowing. To handle some emergency repairs, rather than relying on a special assessment, the community may want to authorize the Association to borrow up to a certain threshold, such as $10,000, without the need for a vote.

Audit Review. There are different levels of auditing available, and it makes sense that at least bi-annually the community has a CPA provide an independent review. 

Operating Budget.  If the Board fails to establish a budget, or the community votes down a budget, the default is to go with the previous year’s budget.  To avoid deteriorating services, the prior budget should be automatically increased by a minimum inflation rate determined by something such as the Consumer Price Index (CPI). 

Capital Budget.  To ensure that accurate numbers are being used in long range planning, communities are starting to require reserve studies prepared by an independent qualified engineer.  Such study shall be updated at least every 4 years. 

Working Capital Fund.  Often an initiation fee or capital fund is listed as a fixed amount in the documents.  Tying the amount to a percentage of the annual assessment makes more sense in keeping up with inflationary costs. 

Foreclosure Administration Fee.  Foreclosures create substantial administrative and other burdens on the Association, such monitoring the status of mortgages and legal periodicals to determine when foreclosures occur, searching the land records for names of the purchasers, contacting the foreclosure purchaser/owners regarding responsibilities and assessment obligations and updating Association records multiple times.  The Association should be able to assess a fixed rate amount, such as $1,000, at the time of foreclosure to offset these costs.

More amendment ideas headed your way in upcoming posts!

Money, Money Everywhere

This is the third in a series of postings providing a detailed look at the governing documents for the homeowners associations (HOAs). 

So let’s talk assessments.

In the Declaration, the origin of an expense determines how it will be paid.  Some items clearly benefit the entire community, and so are paid through the regular annual operating budget.  Other expenses are linked directly to a subset of homeowners, and are billed exclusively to them.  Some expenses will occur in future years, requiring the collection of capital funds or initiation fees.  And some unplanned expenses require the imposition of emergency funding via a special assessment.

Community-wide assessments may be evenly divided among all homes, or split based on percentage of ownership tables, with larger homes paying a greater share.  They may also be calculated based on utility meter readings.  If the Association is handing the master billing for a particular utility, it has the right to turn off said utility whenever a homeowner becomes delinquent.  For condominiums, this power may only be invoked after obtaining a $750+ judgment against the home.

There are also indirect assessments, which arise if the Association orders owners to conduct repairs or safety-related measures (such as the purchase of fire extinguishers), or to obtain homeowners insurance.  Regardless of the type of assessment, courts have made it clear that nothing mitigates the requirement to pay.  Full payment is required even if a homeowner does not use the community pool, or has incurred personal expenses due to poorly maintained roads.  Any dispute the homeowner has with the Association must be taken up separately.

Individuals who enter in to contracts with a homeowner may also be held liable for unpaid assessments.  If outstanding debt wasn’t collected from the seller of the home at the sale, the buyer may be pursued for the full amount.  The Declaration may also stipulate that tenants in an HOA be required to pay full monthly rents to the Association until an owner’s outstanding balance is cleared.  Facing this, the tenant may decide to break the lease rather than get caught in the crossfire.  To avoid losing tenants, the landlord often settles accounts with the Association.

While many communities offer homeowners the ability to spread out the payment of an assessment over a period of time, technically the full amount is due on the first day of the fiscal year.  When a homeowner becomes delinquent, the Association has the option to call the full annual amount due.  This is known as acceleration, and is normally invoked toward the start of the year, providing a higher dollar amount to be pursued via lawsuits.

During the collections process, the homeowner may enter into an agreement to pay back outstanding assessments over a span of months.  However, remember that payments of fines, late charges, interest, and legal fees often come before the principal balance is addressed.  If the payment agreement doesn’t suspend future late charges, or the homeowner is slow in paying debt, many more months may be required before payments actually start being applied to principal.

Stay tuned for future blogs on specific sections of the governing documents that Boards need to heed!