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

3. 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 dues increases are not directly 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) In addition, Civil Code §1366(d) requires that associations give notice of "any increase in the regular . . . assessments of the association, not less than 30 nor more than 60 days prior to the increased assessment becoming due." This is clearly separate from the annual budget notifications given at the beginning of a fiscal year.

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 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.