C.D. from Sarasota County, Florida writes:
Dear Mister Condo,
Florida condo. Budgeting – I understand there are 2 parts to the budget: a. the yearly operating budget
b. the reserve budget (spending plan). Our membership votes annually to approve the operating budget proposed by the board, and separately approves our reserves spending plan (we are “pooled reserves” although don’t think that is germane to my question) For years our board has voted (w/o membership approval) to roll over any operating surplus from the end of each year to our reserves. We have a clause in our bylaws stating – “…at corporate year end, any surplus remaining from the operating assessments shall be applied to the budget of the full year following the determination of such surplus, in such a manner as to effectuate a reduction in the projected assessment for that year. In the event of a deficiency, the same shall be immediately assessed against the various units by the board of directors”.
Some board argues that gives them permission to rollover to reserves instead of building into the next year’s operating budget? Further, understanding the hierarchy of laws I believe regardless of what is stated in our docs (although to me that is patently clear as to how we MUST handle both operating profits and losses), you then have to look at FS 718, and Florida Adm Code which I further believe state the same things
a. We must refund profits from an operating budget to ONLY the operating budget
b. and you can’t “commingle” funds between reserves and operating.
And I say that is exactly what past board were doing by taking operating funds and transferring them (particularly without membership approval) to reserves. The membership voted for a SPECIFIC operating budget, and a SPECIFIC reserve budget. If you take profit from one year’s operating budget and “slide it over” to reserves wherein I say ignoring the intent of the membership vote, you’re not only commingling funds against FS, you’re betraying the intent of your membership as now that operating profit (if any) would be coming back to them is pushed into reserves for “future” owners to enjoy.
Mister Condo replies:
C.D., I fully concur with your synopsis and the intent or the law. However, I am neither an attorney nor can I offer you any legal opinion in this column. The good news is that your association is operating at a profit and that the association is not spending more than it brings in through assessments. The bad news is that the Board may not be handling the surplus correctly by simply moving it into the Reserve Fund (although I applaud them for funding the Reserve Fund). The real problem here is that the Board could get sued by a homeowner who challenges the misapplication of the surplus, which would force the Board to return the money to the Operating Budget each year and, perhaps, cause lower dues payments as a result. That would also prevent them from simply finding the Reserve with the surplus each year. An astute member would want both the Operating Fund and the Reserve Fund correctly funded without paying more for either than is budgeted, expected, and ratified by the members of the association. Commingling funds is a definite “no-no” and should be avoided at all costs. Ideally, the Board will correct the behavior before a member challenges them. Their current method, while well-intentioned, is not in the best interest of the association if it violates the law or the spirit of the law. All the best!