By David A. Kline, Esq.
Civil Code sections 5300 and 5310 require common interest developments to distribute their annual budget reports and annual policy statements 30 to 90 days before the end of their fiscal year. For most community associations, that deadline is fast approaching.
So, let’s take this opportunity to consider some of the issues that community managers and boards of directors sometimes overlook when racing to complete their annual disclosures.
To begin, in an ideal world, we would not race to complete the annual disclosures. It’s a good idea for management to provide the board with a draft budget for its consideration well in advance of the deadline. It’s particularly important for directors to review that draft budget in advance of the open board meeting where the budget will be discussed. That way, they will be prepared to approve the budget or propose amendments to the draft budget at the meeting. The budget meeting should be scheduled sufficiently in advance of the deadline so that the board can adjourn the meeting if necessary to resolve any issues that may arise during the budget meeting or in case the meeting needs to be adjourned for lack of quorum.
Don’t Forget Balcony Inspections
Civil Code section 5551 requires condominium communities to complete their first visual inspection of exterior elevated elements by January 1, 2025. That means, if your condominium community has not already completed this task, it must budget for it in this next fiscal year. Also, the law requires the report prepared by the architect or structural engineer to be incorporated into the association’s reserve study, which should be completed before the budget meeting so that the board can properly budget for reserve contributions.
Make Sure Your Disclosures Are Well-Reasoned
It’s also important for community managers and boards of directors to carefully review the disclosures required by Civil Code sections 5300(b)(3) through (6). Generally, the law requires an association to share its reserve funding plan, and statements as to whether the board has determined to defer maintenance, whether it anticipates any special assessments, and a description of the mechanisms by which the board plans to fund reserves. Occasionally, we find annual budget reports that proudly report no increase in regular assessments, but disclose severely underfunded reserves, no intention to defer maintenance, no plan for future special assessments, and no realistic explanation as to how future maintenance needs will be addressed. Of course, boards of directors have an obligation to levy regular and special assessments sufficient for their association to perform its obligations under the governing documents and Davis-Stirling Act. (See Civil Code section 5600(a).) It’s important for the annual budget report to provide evidence to the members that the board has complied with that obligation and explain the board’s reasoning.
Insurance Premiums Are Skyrocketing
Finally, it’s generally a good idea to plan for small budget increases every year due to inflation and increases in the cost of living. This year though, as you may have heard, many associations are facing significant increases in their insurance premiums. In some cases, insurance premiums have skyrocketed to multiple times an association’s previous premiums. We recommend reaching out to your association’s insurance broker at budget time to discuss anticipated increases in premiums. It’s better to find out the bad news now, so you can plan ahead, rather than wait until the policy is set to renew later in the fiscal year.
If you need help preparing your annual disclosures, contact your association’s legal counsel for assistance. But, do so well in advance of your deadline so that the board has sufficient time to address any issues that may arise. As they say, the early bird catches the worm! Following these recommendations will help avoid a mad scramble at the end of the fiscal year, and help set up your association for a productive new year.