By Steven S. Weil, Esq.
Delinquencies are up, assessment payments are down, but the beat goes on. Insurance bills are due, lawns must be mowed, roofs need fixing, reserves should be funded, and owners demand enforcement of the CC&Rs. With its high rate of delinquencies and large receivables is this year a sign of things to come, or an anomaly, like a one-hundred year storm? Time will tell. Meanwhile, for most boards, the process of prioritizing what services will be cut and what will continue to be provided to Association members began with adoption of the 2009 budget. This articles discusses the "what next" and offers some basic operational principles to get you through the year.
Protect the Money
Members expect and the Association needs it--protecting reserves from financial losses must be the top priority of the board, the manager and the treasurer. Investment goals are, in order of importance: (1) protecting principal from risk by investment in FDIC-insured or Certificate of Deposit Account Registry Service ("CDARS") accounts, (2) layer investments to permit withdrawals with little or no penalty, and (3) higher yields are not as important as preserving principal.
Adopt an Investment Policy
One way to protect Association funds and to assure members the board has done so is by adoption of an investment policy. The policy should identify the Association's goals and objectives, require periodic (at least quarterly) review of investments, require consultation with professionals, limit investments to insured accounts (such as T-Bills, CDs and Money Markets) maintained in the Association's name, be based on safety, liquidity, reasonable investment costs and diversification, limit withdrawals to those authorized by the board with signatures by the President and Treasurer, and permit policy exceptions for good cause and emergencies following board approval.
Monitor the Money
The Treasurer is not just another association director or officer. Under most bylaws, the Treasurer (also known as the "Chief Financial Officer") has specific duties which can include being responsible for the receipt and deposit of funds, signing checks and promissory notes, keeping or causing to be kept proper books of account and assisting in presenting the budget and financial statement to the members. As a practical matter this means the Treasurer should regularly communicate with the manager and the Association's CPA and be prepared to make oral presentations at board and membership meetings.
The Manager's Role
Managers who are members of the California Association of Community Managers or the Community Association Institute bind themselves to comply with ethical and financial management obligations. Also, the manager's duties with respect to the receipt, accounting and handling of Association funds will (or should) be spelled out in the management contract. The manager should not be responsible for how those funds are spent, that duty rests with the board.
Indemnification and Limited Immunity
It would be hard to attract board volunteers if their decisions concerning prioritization and reduction of services could trigger lawsuits for breach of fiduciary duty or other claims. To encourage volunteerism, an Association can "indemnify" directors, officers and committee members from claims that their decisions caused financial harm. This means that either through insurance or Association assets, these volunteers will, assuming they act in good faith and within the scope of their power under the governing documents and the law, be protected. Also, both the Civil Code and Corporations Code provide limited immunity protections to directors sued for decisions made on behalf of the Association.
Prioritization of Expenses
Some expenses can be eliminated, some can be reduced. Some services can be cut altogether, others provided less frequently. Prioritization decisions should be based on a careful (and documented) analysis of many factors. They include safety, obligations imposed by contracts, the CC&Rs and conditions of approval, membership expectations, property values, short and long term financial consequences resulting from "cutting back" on services, maintenance or reserve funding. The advice of counsel should be obtained. Membership input should be considered and decisions made in open session. It is especially important that meeting minutes reflect the reason behind cost cutting measures adopted by the board.
Getting the Most for the Money
Prioritizing is sensible, being "penny wise and pound foolish" is not. Re-structuring payment arrangements, revising scopes of work, timing the delivery of services can all be effective ways of preserving relationships with key professionals and vendors. They can be essential partners in the board's effort to "ride out the storm" and candid discussions about how the board can partner with them could be one of the most important tasks a board can accomplish this year.
Transferring or "Diverting" Reserves
A board can authorize the "transfer" of reserve funds to pay for current expenses. The decision to transfer (what is generally referred to as "borrowing") must be made at an open meeting that is properly noticed and agendized; the Civil Code requires that resolutions authorizing the transfer and a "restoration plan" must also be adopted at the meeting. The transferred funds must, in theory, be restored within a year; a longer period is permitted provided the board finds that more time is necessary and prudent.
Does the board have the power to "divert" monies to an operation account before the funds are deposited into reserves as intended by the budget? If so, the diverted funds would never have made it to reserves and thus, it could be argued, the "borrowing" rules would not apply. In reality, there is hardly a difference between "borrowing" and "diverting" reserve funds. Both decisions will usually be made at open meetings; the posted agenda for the meeting must specify the intended action (to borrow or divert funds); and whether required by statute or not, the use of funds in or designated for reserves must be justified on the basis of legitimate short term cash flow needs.
Special assessments can be imposed by the board without membership approval vote in four situations: for safety emergencies or unforeseen expenses; in an amount up to 5% of the budget or if otherwise allowed by the CC&Rs; or by court order. All other special assessments require the approval of a simple majority of members. The educational "campaign" to gain membership support for a special assessment creates the opportunity to involve the members in understanding and contending with the financial challenges the current economy has wrought.
Bankruptcy and Receivership?
We get this question a lot: can the Association file for bankruptcy to avoid its debts. Almost always, the answer is "no". Likewise, the Association cannot change its name or reorganize as a different legal entity to avoid debts. The Association has ongoing obligations to the members and the ability – by special assessment authorized by the members or imposed by a Court – to satisfy its legal obligations.
Prudence and Documentation
Directors must act in good faith and make decisions that are reasonably intended to benefit the short and long term interests of the Association. Inevitably, many of these decisions will be difficult and cannot satisfy everyone. Thus, it is all the more important that boards act in open session and document with properly drafted minutes and resolutions, the basis for decisions relating to services, expenses and investments.
THE CONTRACTUAL COMMUNITY
Why Community Associations Are Not Governments And Why That Matters
By Tyler P. Berding, Esq.
Copyright ©2008 BERDING | WEIL
All Rights Reserved.