Board approving illegal budget

Our board of directors (I'm the Secretary), is preparing to accept the recommendation of the finance committee for the FY 2016 budget. The part of the budget that concerns the reserves is not in accordance with Florida law, which says under-funding the reserves is permissible only with a member vote. FS 720.303(6)(f)

This has been how the budget has operated for the past several years. A couple of board members have vaguely alluded to the fact that the budget may not be completely in accordance with the law, but no substantial discussion about it has taken place.

I plan to vote against this budget when the time comes, but what are my options after that if it passes anyway? I think moving the HOA in the right direction would be far easier to do that while on the board than sitting on the outside looking in. On the other hand, are there legal reprecussions or liability in play here? Should I resign to protect myself after the "illegal" budget passes? My preference is to not resign, but I don't know...

Despite the fact that there are no HOA Police to enforce these things, what about a homeowner a few years from now who decides to go after the boards who approved these illegal budgets? Even though we have D&O insurance, would that cover the actions of board members wilfully violating state law in the budgeting process?

Well, Geno, I tried to wade through the verbiage of 720.303 and see no usage of the word "underfunding." Underfunding means that the reserves are less that 100% funded. That's the case in the majority of HOAs.

Do you happen to know what % funded your HOA is?

What it does SEEM to say is that if the Board majority wants to waive the reserves altogether or lower the contribution to reserves from the previous year, Owners voting is required. I may have read too fast though.

So, does the Board want to lower the annual contribution to reserves in '16 from what it is in 2015?

Your "no" vote needs to recorded in the meeting minutes with your reason stated. That should protect you.

Do you think you could have your reserves specialist come to a meeting and explain why your HOA should contribute more not less to reserves?

The arrangement of the subparagraphs in FS 720.303(6) is a little awkward. Nevertheless, (6)(e) says the "amount to be reserved in any account established shall be computed by means of a formula that is based upon estimated remaining useful life and estimated replacement cost" for each reserve item.

We do not use a pooled method to calculate our reserve requirements, rather we use separate reserve accounts for each item so (6)(g)1 supplies the formula to be used. It's a simple calculation; for each resrve item the amount required minus the balance on hand divided by the number of years of remaining useful life gives the amount to be included in the budget for that reserve item for the year.

(6)(f) says,

"... the membership of the association, upon a majority vote at a meeting at which a quorum is present, may provide for no reserves or less reserves than required by this section. If a meeting of the unit owners has been called to determine whether to waive or reduce the funding of reserves and such result is not achieved or a quorum is not present, the reserves as included in the budget go into effect."

It is that "reduce the funding of reserves" that I termed "under-funding". I interpret these sections to mean that the members must vote in favor of reducing the funding of reserves below what the formula dictates.

Additionally, (6)(f) says, "Any vote taken pursuant to this subsection to waive or reduce reserves is applicable only to one budget year."

This has been going on here for years without approval by the membership. I know because I've read the minutes of all the members meetings for the last 15 years.

Richard, reserve accounts were set up by the developer. I have also read the minutes of the last board meeting before turnover, and the first post-turnover meeting, both from 1994.

Can kicking is exactly what I am concerned about. The buildings were last painted in 2013. With an 8-year useful life, as specified in our end-of-year financial reports, the next painting will happen ca. 2021. I understand estimates of useful life can change. The painting in 2013 cost right around $300,000. Going into 2016 we find ourselves with 5 years left to amass another 300k for the next go-round. That's assuming no inflation (which also bothers me but that's another discussion).

At the end of this year we will have $26,000 in the painting reserve fund. The formula given by FS 720.303(6)(g)1 comes up with (300,000 - 26,000)/5 as the required reserve contribution for next year. That's almost $55,000. The spreadsheet I just saw from the finance committee has $40,000 earmarked for the painting reserves in next year's budget. It is continuing to kick the can down the road.

In fact, when the $300k paint project was done in 2013 there was only $265k available in the reserve fund (this was before I got here). So the painting reserve fund was negative $35k at the end of 2013. That's why there's only $26k in there this year, we had to play catch-up from the last under-funding fiasco.

And that's just the painting reserve fund.... there are more like that. Not quite so bad, but all will have a balance below Fully Funded at the end of this year.

That's how I read it too, NpS. One possible approach would be to adopt a "pooled" method of calculating reserve funding requirements. It still costs the same in the end, but it provides more leeway to smooth things out over time. I brought that up last year with the finance committee and they wouldn't even consider it. Maybe this year will be different.

Last year we got socked with a surprise $15,000 pool repair. Guess what? No pool reserve. So this year we are paying for something last year that should have been reserved for, but wasn't.

The HOA has never had a reserve study done. Florida does not require them. The finance committee and the board feel "we can do it ourselves".

You're right up to a point. FL does not require an INDEPENDENT reserve study. But does require an analysis that is comparable. And (g) provides the formulas that must be used.

I do understand that there's a lot more wiggle room and less visibility when it's DIY.

Can you explain your HOA's process for approving your INTERNAL reserve analysis? What formulas are they using to come up with their numbers? Wet finger to the wind?

Geno

Without a specific item Reserve Study (versus a personal guesstimate) I fail to see how something could be considered underfunded.

I am an advocate of strong Reserve Funding versus kick the can down the road but I need better then guesstimates. My HOA has been carrying a 3 year old number forward (roof shingling). Even a simple cost of living increase would be better then a 3 year old number.

This approach, although it has it's touchy feely aspects seems a lot more rational than the statute.

Per the statute, if you've never had reserves, you don't have to. All you need is to print a big warning in capital letters that no one probably reads anyway. But if you do have reserves, there's no wiggle room - You must do things according to formula. I recognize that this new legislation was in reaction to the market crash, but I think it's requirements are a bit overkill as much legislation was after the crash.

Common sense solution would be to hold an information meeting with the HOs. Bring someone in to explain the new laws. Talk about the current practice of the HOA and your best efforts to work within the framework of the statute. But also explain the harshness of it all. Then vote. All you need is a majority of those who show up at the meeting to go along with what you are doing.


Changing components is a really bad practice as you already know. But at least your CPA is bringing shortfalls forward. Which is probably more than a lot of other DIY reservists are doing. By statute, you need to recover the shortfall in 1 year. And this I think is the centerpiece of where your discussion needs to be. The demands of the statute are unreasonable - unless you hold a meeting/vote - in which case there are no demands. Crazy to me.


I wouldn't be that concerned about a misc category. Amounts are being carried forward - Far more important.


Other than misc and pool, anything else disappearing?


1st quote is IMO ho-hum. 2nd quote is unadulterated BS. Could discuss, but not worth added length.


Doesn't have to be a 5 minute discussion. Question your board needs to answer for itself: "How do we comply with the statute without creating the impression that we've been doing a lousy job?"

Remember - the statute is onerous - but it does give you a free pass if you want to take it. The trick is in making the statutory "100% recovery in current year" the centerpiece of the discussion. No one with any common sense would force that requirement on an HOA. Agree to vote that onerous requirement away.

You cover the most important points in your original post:

"moving the HOA in the right direction would be far easier to do..."

"There are no HOA Police to enforce these things."

I was so blown away at my HOA when I realized that so little is in accordance with HOA law and that the attorney general of the US really is not about to move in and sue all the board members. Especially horrifying when you realize 99.9 percent of your neighbors could care less.

If you feel strongly that the budget is poor, try to do something about it and forget every single thing you learned from television about the terrifying ramifications of liability, legal action by hypothetical future HOA members, poor citizens standing in front of the US supreme court with their meager belongings, Erin Brokovich, or anyone else.

Glad to see someone at least tried to wade through this.

Jeez, sorry about the triple post--got distracted...

NpS makes a lot of sense, Geno & his & my posts obviously crossed.

Do you happen to know what % you actually are funded??

All of you who responded have my sincere thanks.

Yes, JohnC46, I do want to try to help right the ship. There's some work to do but it's not hopeless.

It's a 25+ year old HOA and some common elements are maturing and need more attention than they did 10 or 15 years ago.

KerryL1, I made 2 spreadsheets of my own. The first "basic" one, including only the components that are on this year's list, indicates we're 86% fully funded. The other "enhanced" version to which I've added several assets not on the current list (e.g. entrance gate, clubhouse HVAC and exercise equipment, pool resurfacing and deck furniture, lake irrigation pumps, resurfacing and fencing for the tennis courts, street lights) says we're 79% fully funded. All numbers are as of the end of this year.

At the end of last year we were 90% fully funded. The trend is downward by several percent per year due to inflation and the fact that we were significantly over-funded for the better part of a decade due to a large cash infusion in 2006 as a result of a large insurance settlement after hurricanes Frances and Jean in 2005. This has helped assessments for reserve funding to stay very low over the years. The reserves were used like an ATM machine and the prevailing sentiment of most owners is still "there's plenty of money in the reserves". The situation is now changing, however, with all the spare cash having been spent on what should have been operating budget repairs and maintenance.

At least it's all accounted for. Nobody to my knowledge has ever tried to help themselves to the money for their own personal gain. No mysterious checks or contracts to relatives of board members or anything like that. We are self-managed and there is no PM involved. The finance committee is pretty powerful because the chairman, who is also a board member, is a retired CPA who has years of experience in the corporate finance department of a Fortune 500 company on his resume. He speaks and people listen. I listen too (I'm an engineer, not an accountant). He's a bright and friendly guy who, in the year before I got on the board, never once denied me access to any information I asked about. He's always willing to talk to the owners about our finances. I believe he knows the score, but he's a snowbird who is not here between June and December so other than board and FC meetings which he attends via speakerphone or video conference he's not around to sit down with and go over spreadsheets and numbers. That kind of review is very hard to do over the phone or by email. I'm kind of hoping he will be on my side in this but he won't be back in Florida until December while the budget will be proposed in September and up for board approval in October.

As for my desire for the owners to have a say and a vote on reduced funding for the reserves, well, that would have to happen before the budget is approved for next year and there would be no support from the board to call a special meeting of the members for that purpose before then.

NpS, thanks for your comments as well. It's not easy juggling all the divs and quotes and line breaks like that, but I appreciate that you took the time to do it.

I am in complete agreement that a meeting where homeowners could be made aware of some of the issues would be beneficial. This board, however, bends over backwards to not call special meetings. For example, we approved a contract in July and the contractor stopped work 2 weeks into the job because a question came up about expanding the scope of the work for a thousand dollars now that could save us 5 thousand down the road. There are enough directors here for a quorum and a special meeting could be held with 48 hours notice to deal with that specific question. It would be a 10 minute meeting we could have on the sidewalk in front of the president's house. Nope! Gotta wait until the next regular meeting in late September for that. Meanwhile the work is on hold. Frustrating.

The shortfalls are well documented and are carried over when they occur. It tends to put us in a hole, however, when the shortfall is recognized in one year, made up for in the next, and meanwhile the reserves are shortchanged $76,000 for those 2 years because a negative balance is a no-no. Making up the shortfall has first priority (as it should), but the regular contributions should be made on top of that. They're not and the can gets kicked down the road.

Other reserve components that come and go: entrance gate (on its last legs), propane heater for the pool (also on its last legs), utility (golf) carts for the maintenance staff, repair and upkeep of our gravel walking path around the property and "pressure cleaning". The last 2 should really be funded from the operating budget but they come and go on the reserves list every few years.

I'll have to check on whether it's possible for us to get out from under the "100% recovery in the current year" requirement. That would definitely help. Thanks again!

Whether you're 79% or 86% funded, Geno, your HOA is healthier than the majority. Only 30% of HOAs (CA? USA? Can't remember) are 70% or better fully funded. Another 30% are 20% or less funded!

Re: the change order your contractor wanted: Can't any two directors call a special meeting of the board? It sounds like you're the only director who sees things clearly. Is that true? Do you have ANY other support from the other directors?

Pressure washing should never be listed as a reserve component. Only components that have a somewhat predictable lifespan should be included. So your gravel paths might qualify.

Owners can call special meetings in FL without too much trouble. Can you convince a few to get this process started? The purpose would be for them and your board too to hear a presentation from a reserves special it.

I highly doubt it, but maybe. If I can get our FC guy to buy into the FS 720.303(6)(g)2 "pooled analysis" method of figuring reserves then it's possible. We could do it over the winter with the goal of getting owners to approve a comprehensive list of reserve items that would only rarely change. It's much easier to comply with (6)(g)2 than (6)(g)1.


Right now everything outside of roofs, painting and roads accounts for 6% of the total replacement costs. With my suggested additions that would increase slightly to 8% of the total.


We have a very hard time getting people to volunteer for committees, but the FC is doing OK at the moment with 5 people on it. I'll have to email my spreadsheets to the CPA FC chairman and ask him to evaluate them.


Pretty much. I replied to the president's email announcing the work stoppage and floated the idea of a quick special meeting. Sent it to all the other board members. Silence. It's not the first time I emailed something to all the other board members and did not get a response. I've pretty much stopped sending anything. The treasurer worries about violating the open meeting law, but he takes it to the extreme and even ignores FYI type background information.


FS 720 says 10% of the owners can call for a special meeting unless the governing documents say otherwise. Our bylaws say 1/3 of the voting interests. We barely get a 30% quorum (100 homes) at the annual meetings. It wouldn't be impossible, but probably very difficult. The only way to rouse enough people would be to announce "some on the board want to increase your assessments 42% next year". They'd show up but carrying pitchforks.


The HOA bought its own power washer a few years ago to save money. It broke down after a year and wasn't worth fixing, so they decided to go with an outside contractor. The contract calls for once a year visits but it really needs to be done twice a year. We had a resident fall on a slippery sidewalk last week under a tree where sap and other tree gunk are treacherous when wet. Luckily she wasn't badly injured. No. 3 in your list is under control. It's the first two that worry me.

I'm coming up with a list of how reserving for all the assets will benefit everyone. That puts it in a positive light. Maybe that will be more appealing to people than prognosticating doom and gloom and special assessments on the downside. "We can get the new pool heater, we can get a new entrance gate, the surprise expenses of the last few years will mostly be eliminated, we can get the new clubhouse furniture, we can do the necessary upkeep and get on a solid financial footing for the future. But we have to commit to doing it and then stick to the plan."

It will still be a tough sell.