operating surplus

Helene, I'm not an accountant either but what do your CC&R's state on the matter? Our CC&R's for instance mandate an emergency operating reserve equal to three months assessments and before Ohio changed the law required surpluses to be repaid to the homeowners in the form of lowered assessments. Ohio changed the Condo law and gave the COA's the option of returning the surpluses or placing them in reserves.

Helen

I am not nor do I play a lawyer nor accountant.

One of the main problems with many associations is they never have enough money to properly do things. People are always screaming about special assessments. I say bravo to a BOD that had a surplus and allocated it to reserves or whatever. As long as I see where the money is, all is well.

I personally do not know of any Covenants/Bylaws that "dictate" where a surplus goes. I also do not consider a surplus to be a taxable profit. Of course I could be wrong on both accounts.

I say the worst they could do is refund/credit it.

PS

How much is $10K in relationship to your total budget?

Thanks

I think there is some confusion in this discussion between a Replacement Reserve fund and an Operating Contingency. A replacement reserve fund is normally funded via transfers from the operating account. These transfers are typically planned in the operating budget based on a reserve study. Once transferred these funds can only be used for the intended purpose of replacing common elements that have reached the end of their useful life.

An operating contingency, in contrast, is typically shown on the balance sheet as something like "unappropriated members equity". These funds can be explicitly budget for by holding budgeted operating expenses (except for the contribution to the operating contingency) to less than the budgeted income (in total the budget must be "balanced"). Or, as in the case of the OP, a surplus may exist in the operating account at year-end. This may be a result of actual income exceeding budgeted income and/or actual expenses less than budget expenses. In that case, if no explicit action is taken to transfer the surplus, it will appear on the balance sheet as mentioned earlier.

A number of years ago our auditor recommended that we "develop through the budget process an operating contingency of between 10% to 20% of annual assessments". For our association a 20% operating contingency amounts to $422,000. Over several years we budgeted in such a way that we had year end surpluses in the operating account. We were very glad to have this operating contingency in 2009/2010 when our area was hit with two +20" snowfalls in one winter. Our snow removal costs exceeded our budget by 50%. We covered these unbudgeted expenses with a portion of the operating contingency. In subsequent years we explicitly budgeted to create a surplus in the operating account to replenish the operating contingency.

Fortunately we have had flexibility to reduce operating expenses while holding monthly dues steady to free up funds to create and maintain the operating contingency. We have not had an increase in dues since 2008. We have also continued to fully fund our Replacement Reserves during this period.

Clearly our association has had very favorable financial circumstances that don't exist in most HOAs. Our experience is that any operating contingency that can be created when an operating surplus exists is a wonderful safety net to have.

I am surprised the attorney said they could do it because Section 47-256 of Connecticut's CIOA states:

"Sec. 47-256. Surplus funds. Unless otherwise provided in the declaration, any surplus funds of the association remaining after payment of or provision for common expenses and any prepayment of reserves shall be paid annually to the unit owners in proportion to their common expense liabilities or credited to them to reduce their future common expense assessments."

They must be getting away with it by claiming that the surplus is being used for prepayment of reserves or there is something in your declaration that allows them to do this.

As far as tax ramifications go, there probably are none as long as the association id filing Form 1120-H. When filing on Form 1120-H all income derived from assessments is considered exempt function income which means it is not taxable, even if you don't spend it all. It's a different story if the association files the standard corporate Form 1120.

Thanks for all your comments. Always interesting to hear about what other Assoc. are doing and some insight into other state laws. I have seen many positive changes to Ct. CIOA laws over the years. Unfortunately no agency to enforce them and volunteers that don't want to be bothered with them. And a majority of unit owners who don't understand their rights.

DavidW has a clear picture of the situation regarding Operating Reserves and a year end surplus in the general Operating Acct. Sounds like he is part of a well run Assoc.

As Bruce pointed out COIA gives boards the option of returning a year end surplus to the unit owners in the form of lowered monthly assessments or transferring the funds to a Reserve Acct. Bruce, I did follow up on the filing of tax returns. We use 1120-H so I'm satisfied there will be no tax ramifications.

I don't know why the attorney said the board could close out the Operating Reserve and don't know if he really did. The pat answer to everything these days is "our lawyer said we could". Certainly the account can be physically closed but I am concerned how that $10.447 surplus, which was part of the balance, will be accounted for. My gut feeling is that it won't be. It's buried!