Consequences of a Rejected Condo Budget

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W.C. from Hartford County writes:

Dear Mister Condo,

What are the consequences of a rejected Annual Condo Budget?

Mister Condo replies:

W.C., I have seen condo associations prepare budgets on their own, in conjunction with their property manager, or by simply letting the property manager submit a proposed budget that the Board adopts before presentation to the unit owners at the Annual Meeting. If the budget has been well thought out and isn’t too controversial, most unit owners will vote to approve and the budget is ratified. When unit owners disapprove, the association is basically forced to use the previous year’s budget until a new budget is presented and ratified by the unit owners. The effects of this can range from a simple inconvenience to downright financial chaos depending on what items are included in the budget and what changes to the common fee structure were proposed or needed for operation of the association. And, unlike our federal government, there is no shut down or sequester. Bills need to be paid and common fees still need to be collected during the interim.

While it is not unusual for an Annual Budget to be rejected, the underlying circumstances often require further analysis. The folks responsible for the budget’s presentation are the Board of Directors, a group of volunteer members from within the association who have been democratically elected by the unit owners to serve the best interest of the community. Theoretically, these are the unit owners closest to the action and have the best information at their disposal to know what financial needs and challenges the community is likely to face in the coming year. Preparing an annual budget is part mathematics and part guess work as there is no way to know exactly what things will cost in the coming year. Add to that the challenge of predicting snowfall removal costs and other unpredictable weather-related expenses and you can see where a portion of the budget is derived from a best guess methodology. However, if the Board is moving the community towards higher common fees in order to prepare for a major capital improvement, such as repaving of roads or purchasing adjoining land to increase the common property it is not unusual for unit owners to protest these actions by voting down the annual budget. This may sound reminiscent of certain members of the U.S. Congress who recently voted against funding the government to protest a section of it they wished to prevent. While it is not the same process the ideology is quite similar.

The bottom line is that a condo association is no different than any other municipality when it comes to preparing and living with their budget. Funds need to be collected and funds need to be spent. Instead of taxes, they collect common fees. However, unlike the government who prepares the budget regardless of whether the public likes it or not, Board of Directors face annual scrutiny from unit owners over their budget preparation. If the unit owners agree with the wisdom of their elected representatives, the budget passes. If they don’t agree, they have the power to reject the budget. The previous year’s budget remains in effect until a new budget is ratified. All the best!

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