QUESTION: Is it legal for a board to produce an amended budget if they find 6 months into their year that they are not able to operate within the approved budget? 

ANSWER: There are three options for funding a mid-year unbudgeted expense. They are as follows:

1. A special assessment (i) imposed by the board of 5% or less or (ii) approved by the membership if more than 5%.

2. An emergency special assessment larger than 5%.

3. Borrowing from the reserves, provided proper notice is given and a repayment plan adopted.

4. A mid-year increase in membership dues. Since the most common surprise mid-year expense is a large increase in insurance premiums, this particular expense is one that would carry into future budgets, thereby justifying a mid-year increase in the regular dues.

Mid-Year Increase. Mid-year increases are not addressed in the Davis-Stirling Act. However, the Act does require that associations levy regular assessments sufficient to perform their obligations under the governing documents. Civil Code 1366(a). Accordingly, I believe boards can revise the budget, provided (i) the original budget was properly implemented, (ii) boards stay within their 20% increase limitation, and (iii) they give a minimum 30-days notice of the change.

20% Limitation. To stay within the 20% limitation, boards must take into account any increase that occurred at the beginning of the fiscal year. For example, if there was a 5% increase at the beginning of the fiscal year, the board's mid-year increase is limited to 15%.

I have not polled other law firms to see where they stand on mid-year increases, so there may be some disagreement on this issue.