QUESTION: Is it legal for a board to amend the budget if they discover six months into the year that they cannot operate within the approved budget?
ANSWER: There is disagreement in the legal community over this issue. Here are the board's options for funding unexpected mid-year expenses:
1. 5% Assessment. The board 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. The board can approve a special assessment greater than 5% if it qualifies as an emergency.
3. Membership-Approved Increase. The board 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. The board can borrow from the reserves to cover unexpected expenses and then repay the borrowed amount the following year.
5. Budget Reductions. The board can look for items in the budget to reduce or eliminate so as to offset the unexpected expense.
6. Mid-Year Budget Increase. The benefit to amending the budget is the board can increase assessments by up to 20%. Some law firms are in favor of this approach and others are opposed. Those opposed to a mid-year 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).)
Those in favor argue there is no express prohibition in Civil Code §5300 precluding a board from revising the budgetary information required by sub-section. Presuming 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 to increase (or further 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 mid-year, then Section 5615 has no meaning. The 30-60 day timing is different than the 30-90 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 61-90 days before the beginning of the fiscal year (in order to be in compliance with Section 5300) can’t actually raise assessments because they just violated Section 5615. Therefore, Section 5615 can only apply in the context of mid-year increases in regular assessments.
Recommendation: Boards should consult legal counsel on how best to proceed when confronted with unexpected expenses.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.