Each year, community associations attempt to predict their expenses through a detailed annual budget and then use that information, in addition to other estimates and projections, to divide the cost appropriately and set their annual assessments. Some years they are probably able to project revenue and expenses pretty accurately, but other years they may be off by quite a bit. Inflation and supply issues have wreaked havoc on association budgets over the past few years.
During the budget process, most associations allocate an amount to fund the association reserves (usually at least 10% but often more), some to any needed special projects, and most to the routine annual costs such as insurance, taxes, utilities, management fees, attorney fees and upkeep of the shared community or condo building. In years that an unexpected cost didn’t crop up, the association will have collected more than it needed and end up with a budget surplus.
In this case, your association may find yourself with a surplus of funds at the end of the year. When your associations find themselves in this situation (which is always better than the alternative!), it's important to proceed in compliance with the law and in the best interest of your community.
How Surplus Occurs in an Association Fund
Surpluses occur when expenses are lower than predicted in a given year or revenue is higher. It is important to act thoughtfully with the surplus that results. Residents will want to see that the board is being thoughtful with their funds, and a surplus may create an expectation of lower assessments in the future. Transparent and thorough communication on this will be vital.
Check Your State Laws for Guidance
First, check your state laws. There may be guidance or requirements included there. Additionally, the governing documents of the community may give specific steps to be followed. If in doubt, always consult the association’s attorney to determine if there is a required course of action or prohibited actions with surplus funds.
Credit the Surplus to Next Year's Expenses
Although not common and potentially an accounting issue, some associations choose to credit the surplus to your calculation of next year's expenses and member fees. Usually, this is done by adding an additional income line to the next year’s budget. This effectively becomes an equal credit to all members on next year's fees.
Refunding a Surplus
In some cases, the association may choose to refund the surplus directly to the members by check or credit. The amount is divided equally based on the assessment allocations. However, this method is not common because it is inefficient. Checks cost money, and most members would rather have a lower assessment next year (or avoid an increase) instead of an extra check.
Transfer the Surplus to Reserve Funds
A common choice is to transfer any surplus to the association’s reserve funds. Some community associations may already have a policy in place that directs surplus to the reserve fund.
Transparency and Legal Compliance is a Must
As in all things related to the association finances, including an association budget surplus, transparency, and legal compliance are vital. RealManage’s proprietary software, CiraNet, can help make transparent communication with residents seamless and effortless.
To learn more about community association management and important decisions in association governance, contact us today.