What to do with surplus in one expense category?

Started by PaulM • 5 replies • 1776 views

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PaulM (Pennsylvania)
Posts: 1,347

Posted:

I would appreciate feedback from anyone who has been on a Board where there was, at year-end, a significant surplus in one expense category (ex. snow maintenance). Our Declaration document calls for only 2-options in the case of a surplus:
1. reduce monthly maintenance fee to residents until surplus is used up
2. put surplus in capital expenditure fund

There have been postings on using overage in one area to pay another area, but I don't see our docs stating that. However, if we are underfunded in another area, why would we have to do a special assessment to make up the shortfall if we have an actual surplus?
I hope I've not confused anyone. It's not making sense to me.
The only reason I can see by not using the 'surplus' to pay off an underfunded area and use it in the above 2 ways only, is to ensure that each year's funds pay for each year's expenses. That every year must be self-funded and not to rely on anything left over from prior year/s.

Can anyone shed some experience on this?
PaulM

DavidS3 (Maryland)
Posts: 37

Posted:

PaulM

Our HOA has a $1M budget and it appears that we will have as much as $40,000 in excess income for 2006. I can't speak to your situation but we have no restrictions on what we spend in a given category other than good fiscal management. With >100 line items we kmow that some categories may overrun and some will underrun. We try to manage such that income and expenses will balance at the bottom line but even that isn't possible. If we save $20,000 because it didn't snow we certainly aren't going to spend it somewhere else just to break even.

I believe that the two rules you quoted stem from IRS guidelines on what HOA's can do with excess income to avoid taxes. Our accountant however, has indicated that there is more than one way to handle it. Consider for example, that our "surplus" was not cknown until the end of year financials received late in January, over two months after the 2007 budget was approved and the residents received their assessment notices. But, even now we won't know the exact number until our annual audit report is completed at the end of March. Does this mean that in April we have to divide the actual number by the number of residents and mail out checks? Our accountant says otherwise.

What we will do is factor the additional income into the 2008 budget bottom line calling it something like "assessment abatement due to 2006 excess income". If 2007 also ends up with excess income we will do the same thing in 2009. As long as the cumulative surplus is not excessive (e.g., >5% of expenses) our accountant says we will not have a problem. Maintaining a continuing operational reserve or contingency fund is only common sense when your costs are variably dependent on weather.

DavidS3

JM2 (Oregon)
Posts: 439

Posted:

Hi Paul:

You might want to change your documents (if needed) or pass a resolution, so that excess funds in this category would be held over as a separate fund. Then, you can budget for the "average" year, knowing that in years with less snow (= less expenditure) you will save the money so that it's already there when you have a year with more than normal snow. Kind of a "rainy day fund" except that it was too cold to rain...or put the excess into a reserve fund category for street maintenance that you could raid when it's too snowy. You might need to check with your manager, accountant or lawyer to figure out what works best with your documents in your state.

by the way, our Association spent $40,000 proving it couldn't clear the streets several years ago (an ice storm wtih 1" ice and steep hills in the community) so we just tell the folks to plan ahead to work from home or make other arrangements. If the amount of their daily salary isn't more than their car's deductible, stay home!!! We can't find any company to plow and spread de-icer in these situations and the city doesn't plow, other than the main streets. Luckily our docs don't require snow removal.

J. Patrick Moore, CMCA

GlenL (Ohio)
Posts: 5,491

Posted:

Posted By PaulM on 03/02/2007 10:48 AM

I would appreciate feedback from anyone who has been on a Board where there was, at year-end, a significant surplus in one expense category (ex. snow maintenance). Our Declaration document calls for only 2-options in the case of a surplus:
1. reduce monthly maintenance fee to residents until surplus is used up
2. put surplus in capital expenditure fund

There have been postings on using overage in one area to pay another area, but I don't see our docs stating that. However, if we are underfunded in another area, why would we have to do a special assessment to make up the shortfall if we have an actual surplus?
I hope I've not confused anyone. It's not making sense to me.
The only reason I can see by not using the 'surplus' to pay off an underfunded area and use it in the above 2 ways only, is to ensure that each year's funds pay for each year's expenses. That every year must be self-funded and not to rely on anything left over from prior year/s.

Can anyone shed some experience on this?
PaulM

The two items you refer to generally would mean a surplus of the total budget not a specific line item which may be spent elsewhere if needed. See: http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/14801/view/topic/Default.aspx

Before you just keep the money in general funds make sure it is allowed by your CC&R's and /or State laws. You might also check out this posting:
http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/14526/view/topic/Default.aspx

Studies show that 5 out of 4 people have problems with fractions

JoeW1 (New York)
Posts: 728

Posted:

PaulM - typically the community votes on the subject of excess income. they usually do this at the annual meeting.

RogerB (Colorado)
Posts: 5,067

Posted:

Glen, with the 2 requirement option you have I would place any excess operating funds into the capital expenditure fund under a line item call contingencies. Then when the operating budget is negative due to less income and/or greater expenses than anticipated you will have a buffer. And the next time there is an occasion to amend the Declaration I would try to change that ridgid requirement.

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