Sometimes a board discovers partway into a fiscal year that unexpected significant increases in utility rates or insurance premiums push operating expenses into negative territory and create a significant operating deficit. When this happens, boards have the following options for funding unexpected midyear expenses:
1. 5% Assessment. Boards can approve a special assessment of 5% or less. If the amount is insufficient, the board must explore other options as described below.
2. Emergency Assessment. Boards can approve a special assessment greater than 5% if it qualifies as an emergency.
3. Membership-Approved Increase. Boards can present a special assessment or amended budget to the membership for approval. If the membership disapproves, the board must look for alternatives to address the expense.
4. Reserve Borrowing. Boards can borrow from reserves to cover unexpected expenses and then repay the borrowed amount the following year.
5. Budget Reductions. Boards can look for items in the budget to reduce or eliminate so as to offset unexpected expenses.
6. Midyear Budget Increase. The benefit to amending the budget is the board can increase assessments by up to 20%. Some law firms favor this approach, while others are opposed.
Arguments Against. Those opposed to a midyear budget increase cite the budgeting process, which requires that annual increases in regular assessments comply with paragraphs (1), (2), (4), (5), (6), (7), and (8) of Civil Code § 5300(b). They believe that once the window closes for complying with section 5300, no increase can be levied without membership approval. (Civ. Code § 5605(a).)
Arguments in Favor. Those who believe boards can adjust the association's budget and impose a midyear increase argue there is no express prohibition in Civil Code § 5300 precluding a board from revising the budgetary information required by subsection (b). Assuming the original budget was prepared in good faith and timely distributed, the board will have met its one-time statutory obligations under Civil Code § 5605(a) and should be entitled to both revise the budget and increase regular assessments up to 20% as needed after the fiscal year has begun. In addition, Civil Code § 5615 refers to “any increase in the regular assessments.” If boards do not have the power to increase regular assessments midyear, then Section 5615 has no meaning. The 30 to 60-day timing differs from the 30 to 90-day timing in Section 5300 applicable to beginning-of-year increases. If section 5615 is intended to apply to beginning-of-year increases only, then any association that distributes the budgets 61 to 90 days before the beginning of the fiscal year (to comply with section 5300) can’t raise assessments because they just violated Section 5615. Therefore, section 5615 can only apply in the context of midyear increases in regular assessments.
Recommendation: Boards should consult legal counsel on how best to proceed when confronted with unexpected expenses that negatively impact the association's operations.
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