In December 2008, the National Bureau of Economic Research announced that the United States was in a recession that had started back in December 2007. The official announcement was old news for most Americans.

Most financially savvy individuals, homeowners, property management firms, and association board members started feeling the effects of the economic downturn in 2006, when property values began falling from the record highs enjoyed in the early 2000s. The fall of housing prices cut deeply into home building and home purchases. The corresponding sharp rise in foreclosures resulted in the loss of hundreds of billions of dollars among the nation's leading banks and a tightening on credit options. Association boards and property managers faced the daunting task of keeping HOA budgets balanced in the face of drastic reserve losses and rising operating expenses.

Moving Forward

The current recession remains the longest downturn since the Great Depression of the 1930's. It has been widely accepted that the housing market slump was both a cause, and a predictor of the recession’s broader economic troubles. Those troubles are still evident despite the belief by many that the worst is behind us. Former President Bill Clinton recently stated, “Whenever you have a financial collapse and a real estate collapse, [recovery] is almost always out there at 10 years."

Using the former president’s formula, and the 2006 date as a starting point, we can place full economic recovery well in the future. So if it is too soon to relax association budget constraints, is it too soon to note a “surplus” in some HOA and COA budgets? Maybe not!

A surplus is defined as being in excess of what is needed or required, or excess receipts over expenditures, during a certain time period. While association budgeting is an ongoing effort requiring monthly reports and adjustments most HOAs work with in an annual budget time period.

Steven J. Weil, PhD, EA, CAM, is president of Royale Management Services Inc. in Fort Lauderdale. He has a dozen years’ experience with community and homeowners associations in Broward County. Many of the properties his firm manages are still working through budget challenges resulting from non-payment of fees, foreclosed properties, and rising expenses. “It is rare but not unheard of for a property to show a surplus,” he states. ”Identifying why there are surplus funds is essential, those funds belong to the owners, not the association boards or the managers.”

Royale Management Services began providing accounting services to businesses and individuals in 1984. The expansion into HOA, COA, and Community Association Management was a natural development, says Weil. “A number of our accounting clients began asking for help with the accounting and budgeting needs for their associations. Budgets are built from the bottom up,” he explains, “starting with where we have to spend assessed funds—insurance, utilities, water, landscaping, maintenance and so forth.”

Once the reoccurring, annual essentials are totaled, the major repairs, replacements, and deferred projects come into play. Does the pool need resurfacing? Does the sprinkler system need updating? Is it time to paint or re-roof? And the most dreaded of all budgeting questions, “Will a special assessment be required to fund a necessary project?” Weil knows if maintenance is deferred, it usually just pushes the cost up as well as pushing completion of the project further into the future. Of course bad debts and emergencies must be factored in as well.

Weil says it's vital to educate the owners and to ask the hard questions. What do you want to give up? If maintenance is deferred will it result in higher cost down the road? Can some of the residents work together to reduce some of the routine maintenance expenses? That being said, managers must remain sensitive to the fact that raising fees for homeowners may add financial strain on some unit owners and increase the chance of additional defaults. “Raising fees is not always the best solution,” says Weil. “It's a fine line between making and breaking a budget.”

Surplus? Where? and Why?

Jeffery Ulm, CMCA, AMS, PCAM, is president and CEO of Association Services of Florida, AAMC, based in Miramar. His company has made note of a few reoccurring reasons a property’s bottom line might reflect a surplus:

• Operating expenses for the year were under budget.

• Income for the year was greater than anticipated.

• Special projects might have come in under budget.

• The board may have deliberately budgeted to build a surplus.

While reporting a surplus is still uncommon in the present economy, most communities strive for some form of cash cushion. “The Community Associations Institute (CAI) recommend an association maintain about three months’ worth of assessments in its operating account,” states Ulm.

Roxana Dorigo is the director of association finance with KW Property Management in Miami. Like other finance directors, Dorigo is not finding surplus issues to be common. “We are seeing a trend that collections are getting better; however, most associations are still dealing with delinquency issues, affecting the bottom line,” she states. In addition to the usual reasons an association might experience a surplus, Dorigo cites an unanticipated event such as an insurance premium refund. If a board is able to renegotiate a loan, and lower the interest, those reclaimed funds could also show up as a surplus.

James Donnelly, CEO and president of Castle Group in Plantation agrees with Weil, Ulm, and Dorigo, “Budget surpluses in the last five years have been rare due to the economy.” However, he notes it is normal to have a small surplus because associations strive to avoid having a deficit. The budget may include a contingency line that is not utilized and that could create a surplus.

However large or small, once a surplus is accrued the board and management team have a legal and moral obligation to show those funds in the annual statements and financial reports. Ulm points out that the financial reports are corporate records and are available for all owners to review. “A well-run, well-maintained association increases property values, and I think that is something every property owner would want,” he explains. Annual reports and monthly statements are one way to provide a clear picture of property values.

Dorigo recommends the board disclose the financial condition of the association—deficit or surplus—in the monthly treasurer’s report.” This becomes increasingly more important as the board contemplates and formulates the upcoming year’s budget,” she says.

“Associations must operate with complete transparency,” adds Donnelly. “Whether state statutes require this is irrelevant, it is the right thing to do.”

Weil stresses an owner’s responsibility to stay involved and educated in the budgeting process. “Owners cannot expect board members or management staff to go one-on-one for budget explanations. Financial statements are available to all owners.” Additionally there is information on the web-portals, and the opportunity to attend regular meetings. “Show up and ask the questions, and look at the budgeted amount compared to the actual expenses,” urges Weil. He makes this point when he cautions, “Don’t assume a surplus will happen again; ask why.” How a surplus will be handled is a completely separate issue and will depend on the reason for the surplus.

Playing Your Cards Right

While having extra or surplus funds may be a nice problem to have, how those funds are saved, spent or distributed will require careful consideration in order to extract the most benefit for the property and the property owners. “There is no blanket answer,” says Ulm. “It all depends on the needs of the community.” If a community has an acceptable amount of money in the operating account, transferring the surplus to the reserve account may be an excellent idea. Some communities may have loans they want to pay down, or projects that have been deferred.

Donnelly often sees surplus funds factored into the subsequent year’s budget to help keep maintenance assessments down. He has also noticed some associations have established reserve funding for the potentially high cost of insurance deductibles in Florida.

Dorigo says she has seen the benefit of improved common areas as a result of surplus funds. Improving common areas almost always results in greater satisfaction for property owners, as well as creating an attractive environment to attract potential property owners.

When dealing with surplus funds in the budget, there will almost always be discussion on returning the funds to the owners. After all, it is their money, and no one disagrees on that point, though property management experts do agree returning the funds directly to the property owners is seldom the best long term option. Refunding a surplus to the property owners can send a mixed message; perhaps they were overcharged or fees were misapplied. Refunding also sets expectations for additional refunds and builds in future expectations.

Positive, creative use of surplus funds can go a long way towards protecting and enhancing the property, while keeping the fees level. Weil often recommends rolling the surplus funds over to reduce the upcoming year’s expenses, and to keep from raising fees. Using surplus as working capital also makes sound financial sense. If the surplus resulted from deferred maintenance, revisit the project, and the cost. Maybe a contract can be renegotiated, and the surplus funds can be reassigned to the original budgeted item.

For his part, Ulm does not favor using the surplus to reduce upcoming assessments. “It can lead to misunderstandings when the assessments have to be increased after the excess is exhausted.” He also recommends putting the surplus to work in a money market account. “Even the currently low interest is better than nothing.” By projecting good financial health, an association can attract new residents more readily, and increase the opportunity for better future stability.”

Dorigo recommends using surplus funds to reduce upcoming budget cost, or to increase the reserve account for emergencies. She also prefers an association maintain two months’ worth of expenses in the operating account. The Community Associations Institute (CAI) recommends an association maintain about three months worth of assessments in its operating account. Also, it’s important to remember that new HUD rules require condos to have at least 10 percent of its budget allocated for reserve funding.

A Positive Reflection

Donnelly feels a surplus can reflect positively on an association. A surplus can earn interest while in the bank, can keep maintenance assessments down, and show better than expected performance. Donnelly stresses the importance of transparency. “Always explain how a surplus was derived, and how that surplus will be used, but don’t continue to run surpluses every year. Owners want and deserve prudent handling of their maintenance assessments. If the funds are spent responsibly and the community is being maintained to the expected standard then the owners tend to be happy. They don’t want to see deferred maintenance and they don’t want to see continual surplus funds maintained by an association.”

Anne Childers is a freelance writer and a frequent contributor to The South Florida Cooperator.