Accounting for Surplus Funds

DavidG45 (Delaware)
Posts: 994

Posted:

Our HOA (and state law) calls for all surplus funds must be "paid annually to lot owners in proportion to their common expense liabilities or credit to them to reduce their future common expense assessments. So far this has never happened, and we now have accumulated about $350,000 (for 500 residents) in our checking account.

I believe this requirement is pretty common, but I'm not sure how it is commonly handled from an accounting perspective. I doubt many HOAs actually send checks every year. However, I would think it must go somewhere instead of straight into the checking account. My thought is that our "Income and Expense" report should include an Income line of "Surplus from Prior Year". This way, when making our budget and computing our annual fees, this income would be used "to reduce future common expense assessments" as required by law.

Thoughts?

Note: This is particularly important in my community, because we have a General Fund that all 500 residents pay for all common expenses, and also a Limited Common Element Fund that just our 150 residents in our 55+ section contribute to for our own clubhouse and pool. Last year we had an $8,000 surplus in our Limited Common Element; but it went into the general checking account. So our $8,000 from 2021 have basically "vanished", as it is not reflected on our books anywhere. I think we should include that $8,000 as income for our 2022 budget.

***
All sums collected by the Executive Board with respect to assessments
against the Lot Owners may be commingled into a single fund, but shall be held for each Lot
Owner in accordance with the percentage interest attributable to the Lot. Any surplus funds of
the Corporation remaining after payment of or provision of common expenses and any
prepayment of reserves must be paid annually to the Lot Owners in proportion to their common
expense liabilities or credited to them to reduce their future common expense assessments.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Since your HOA is comingling funds into one account, make sure your Reserve Funding is airtight and properly accounted.

One way to accomplish a distribution to homeowners is to forego monthly dues increases and allow monthly expenses to naturally rise, which is covered by "excess" cashflow. You have less than $1,000 per property in your checking account so you don't have as much as you think.

If your reserves are fully funded at 100% replacement levels, your monthly expenses are fully covered and you even have a modest operating reserve fund that helps with expensive repairs that don't rise to reserve fund levels of engagement, then your HOA is overcharging residents or it's not reinvesting reserve funds into the property, thus trapping your "liability" within the aging components of your community.

Sounds like you're not in bad shape, honestly.

SteveH35 (Washington)
Posts: 339

Posted:

Quote:

Posted By DavidG45 on 06/02/2022 7:33 AM
Our HOA (and state law) calls for all surplus funds must be "paid annually to lot owners in proportion to their common expense liabilities or credit to them to reduce their future common expense assessments. So far this has never happened, and we now have accumulated about $350,000 (for 500 residents) in our checking account.

I believe this requirement is pretty common, but I'm not sure how it is commonly handled from an accounting perspective. I doubt many HOAs actually send checks every year. However, I would think it must go somewhere instead of straight into the checking account. My thought is that our "Income and Expense" report should include an Income line of "Surplus from Prior Year". This way, when making our budget and computing our annual fees, this income would be used "to reduce future common expense assessments" as required by law.

Thoughts?

Note: This is particularly important in my community, because we have a General Fund that all 500 residents pay for all common expenses, and also a Limited Common Element Fund that just our 150 residents in our 55+ section contribute to for our own clubhouse and pool. Last year we had an $8,000 surplus in our Limited Common Element; but it went into the general checking account. So our $8,000 from 2021 have basically "vanished", as it is not reflected on our books anywhere. I think we should include that $8,000 as income for our 2022 budget.

***
All sums collected by the Executive Board with respect to assessments
against the Lot Owners may be commingled into a single fund, but shall be held for each Lot
Owner in accordance with the percentage interest attributable to the Lot. Any surplus funds of
the Corporation remaining after payment of or provision of common expenses and any
prepayment of reserves must be paid annually to the Lot Owners in proportion to their common
expense liabilities or credited to them to reduce their future common expense assessments.

David,

Paid annually to lot owners in proportion to their common expense liabilities or credit to them to reduce their future common expense assessments is UCIOA phraseology. You have expressed that your association has $350,000 in Retained Earnings (RE). That's quite a lot of money.

Despite a barrage of homeowner opinions to the contrary, you should do exactly what the statue directs you to do. I've heard many homeowners and CAMs suggest that you should simply "roll the funds into your reserve" or let it sit in your operating account. The problem is that doing so does not directly "reduce future common expense assessments." CICs are nonprofit organizations. Keeping your homeowners funds hostage is inappropriate. If you need more funds in your reserve, budget for that. If you need more funds in your operating account, budget for that or create a special assessment.

REFERENCE the Surplus Funds page: https://www.(LINK-NOT-ALLOWED-PER-POSTING-RULES)/governance/surplus-funds. View APPENDIX A2: 70-604 ELECTION LETTER RECOMMENDED FORMAT in the Schwindt & Co. Treasurer's Accounting & Procedures Manual

Regards,
Steve

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By KellyM3 on 06/02/2022 7:51 AM
Since your HOA is comingling funds into one account, make sure your Reserve Funding is airtight and properly accounted.

One way to accomplish a distribution to homeowners is to forego monthly dues increases and allow monthly expenses to naturally rise, which is covered by "excess" cashflow. You have less than $1,000 per property in your checking account so you don't have as much as you think.

If your reserves are fully funded at 100% replacement levels, your monthly expenses are fully covered and you even have a modest operating reserve fund that helps with expensive repairs that don't rise to reserve fund levels of engagement, then your HOA is overcharging residents or it's not reinvesting reserve funds into the property, thus trapping your "liability" within the aging components of your community.

Sounds like you're not in bad shape, honestly.

I do feel as if we are in good shape. However, those of us in the 55+ side had $8,000 in surplus funds in 2021. Because this money is not on our books anywhere, it is now gone and is available to be used for purposes other than which it is intended. Effectively, this $8,000 was taken from the 55+ residents and given to the community as a whole.

My suggestion is to add that $8,000 as income on our 2022 Income and Expense statement. That would put the money back where it belongs and also, IMO, fulfill the obligation to credit our residents' for their surplus funds from the prior year. Would that work? Is that how it is usually handled?

SteveH35 (Washington)
Posts: 339

Posted:

Quote:

Posted By DavidG45 on 06/02/2022 8:17 AM

Posted By KellyM3 on 06/02/2022 7:51 AM
Since your HOA is comingling funds into one account, make sure your Reserve Funding is airtight and properly accounted.

One way to accomplish a distribution to homeowners is to forego monthly dues increases and allow monthly expenses to naturally rise, which is covered by "excess" cashflow. You have less than $1,000 per property in your checking account so you don't have as much as you think.

If your reserves are fully funded at 100% replacement levels, your monthly expenses are fully covered and you even have a modest operating reserve fund that helps with expensive repairs that don't rise to reserve fund levels of engagement, then your HOA is overcharging residents or it's not reinvesting reserve funds into the property, thus trapping your "liability" within the aging components of your community.

Sounds like you're not in bad shape, honestly.

I do feel as if we are in good shape. However, those of us in the 55+ side had $8,000 in surplus funds in 2021. Because this money is not on our books anywhere, it is now gone and is available to be used for purposes other than which it is intended. Effectively, this $8,000 was taken from the 55+ residents and given to the community as a whole.

My suggestion is to add that $8,000 as income on our 2022 Income and Expense statement. That would put the money back where it belongs and also, IMO, fulfill the obligation to credit our residents' for their surplus funds from the prior year. Would that work? Is that how it is usually handled?

David, you should be working with a CPA firm to audit your books. They can perform all the appropriate calculations and provide some guidance.

CathyA3 (Ohio)
Posts: 6,299

Posted:

I agree about the need for an audit.

Dumping the excess $8000 into the general checking account strikes me as dicey, given that state law requires you to return excess funds to the homeowners. Aside from fairness (why are the 55+ residents subsidizing the rest of the community?), if anything the excess should go into the 55+ reserve account. But this may depend on the legal structure of your community as a whole and how much of a separate entity that 55+ section is.

Even if there is no legal division between the two, the 55+ assessments are earmarked for specific expenses for that section only and should be accounted for separately. They should not be paying for general expenses associated with the entire community since the 55+ owners are also paying a general assessment, same as everyone else. The older folks are basically paying twice.

LoriM15 (Florida)
Posts: 1,009

Posted:

I'm not trying to argue here, but I think David, who has discussed this issue before, is trying to use that part of his CC&Rs to convince the board to give back the $8000 to the over 55 section. He's trying to use accounting to get back the money they are owed. But we are missing so much context here. And I still don't understand why the over 55 section doesn't try and make a change and become their own sub-association so they can keep track of their own budget.

If you looked at my community's finances from a top level it would look like we were dumping all of our excess funds into our checking account because we aren't required to keep a physically separate reserve account. David is saying they had an excess $350k that got dumped into their checking account but he doesn't give any context to their budget. How much of that $350,000 is what is in excess of actual operating expenses but earmarked for reserve or some other purpose? Like a contingency fund? We just don't know.

We never give back excess funds. We roll over those funds and use that money to prevent increases for the monthly assessments the next year and to increase the funding of our reserve account, which is never fully funded. All perfectly legal since we vote on the rollover every year at our annual meeting.

So there are actually two issues here 1) giving back excess funds to the whole community and 2) trying to get the $8000 that was rolled into the general funds back

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By LoriM15 on 06/02/2022 11:11 AM
I'm not trying to argue here, but I think David, who has discussed this issue before, is trying to use that part of his CC&Rs to convince the board to give back the $8000 to the over 55 section. He's trying to use accounting to get back the money they are owed. But we are missing so much context here. And I still don't understand why the over 55 section doesn't try and make a change and become their own sub-association so they can keep track of their own budget.

If you looked at my community's finances from a top level it would look like we were dumping all of our excess funds into our checking account because we aren't required to keep a physically separate reserve account. David is saying they had an excess $350k that got dumped into their checking account but he doesn't give any context to their budget. How much of that $350,000 is what is in excess of actual operating expenses but earmarked for reserve or some other purpose? Like a contingency fund? We just don't know.

We never give back excess funds. We roll over those funds and use that money to prevent increases for the monthly assessments the next year and to increase the funding of our reserve account, which is never fully funded. All perfectly legal since we vote on the rollover every year at our annual meeting.

So there are actually two issues here 1) giving back excess funds to the whole community and 2) trying to get the $8000 that was rolled into the general funds back

Trust me, the 55+ folks would love to separate. But it would require the entire community to go along with it, including the Developer who still has over 100 votes. And that's not to mention the legal fees and everything else that would go into it; it's not like we can just say "I divorce thee" three times and we're separate. But that is an entirely different subject.

As for the $350k, undoubtedly once we have a reserve study done a big chunk of that will be put into reserves. We do have two reserves funds (one for the entire community and one for the 55+) with their own bank accounts. I suspect they are inadequate, and will be "seeded" with our exiting cash.

I am looking both towards the future, but also for the here and now. Let's say we get our Reserves Funds at the level they need to be. Let's then say we have a year in which we have $25,000 in surplus funds at the end of the year. That is, our income exceeds expenses by $25,000. By law we have to either refund that money or credit it back. It's easy to see that if we send refund checks we have complied with the law. But, from an accounting perspective, what else can be done that would comply with the law?

My initial thought would be to carry that $25,000 forward to the next year, as "Surplus from Prior Year" on the "Income and Expense" statement. That is really the whole of my question, here. Would that count? Is that what people do? Are there other options? Because certainly not doing anything - just leaving the money lie in our checking account, can't possibly be considered in compliance with the law.

SteveH35 (Washington)
Posts: 339

Posted:

Quote:

Posted By DavidG45 on 06/02/2022 11:25 AM

As for the $350k, undoubtedly once we have a reserve study done a big chunk of that will be put into reserves. We do have two reserves funds (one for the entire community and one for the 55+) with their own bank accounts. I suspect they are inadequate, and will be "seeded" with our exiting cash.

I am looking both towards the future, but also for the here and now. Let's say we get our Reserves Funds at the level they need to be. Let's then say we have a year in which we have $25,000 in surplus funds at the end of the year. That is, our income exceeds expenses by $25,000. By law we have to either refund that money or credit it back. It's easy to see that if we send refund checks we have complied with the law. But, from an accounting perspective, what else can be done that would comply with the law?

My initial thought would be to carry that $25,000 forward to the next year, as "Surplus from Prior Year" on the "Income and Expense" statement. That is really the whole of my question, here. Would that count? Is that what people do? Are there other options? Because certainly not doing anything - just leaving the money lie in our checking account, can't possibly be considered in compliance with the law.

David, unless the statutes defer to your governing documents and your governing documents say otherwise, you are *REQUIRED* to follow the statue about reconciliation. Funneling retained earnings into your reserve or any other place is illegal. Full stop.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By SteveH35 on 06/02/2022 12:20 PM

Posted By DavidG45 on 06/02/2022 11:25 AM

As for the $350k, undoubtedly once we have a reserve study done a big chunk of that will be put into reserves. We do have two reserves funds (one for the entire community and one for the 55+) with their own bank accounts. I suspect they are inadequate, and will be "seeded" with our exiting cash.

I am looking both towards the future, but also for the here and now. Let's say we get our Reserves Funds at the level they need to be. Let's then say we have a year in which we have $25,000 in surplus funds at the end of the year. That is, our income exceeds expenses by $25,000. By law we have to either refund that money or credit it back. It's easy to see that if we send refund checks we have complied with the law. But, from an accounting perspective, what else can be done that would comply with the law?

My initial thought would be to carry that $25,000 forward to the next year, as "Surplus from Prior Year" on the "Income and Expense" statement. That is really the whole of my question, here. Would that count? Is that what people do? Are there other options? Because certainly not doing anything - just leaving the money lie in our checking account, can't possibly be considered in compliance with the law.

David, unless the statutes defer to your governing documents and your governing documents say otherwise, you are *REQUIRED* to follow the statue about reconciliation. Funneling retained earnings into your reserve or any other place is illegal. Full stop.

I get that. What I am trying to figure out is exactly what constitutes compliance with the law.

If we took our surplus funds, and entered it on next year's Income and Expense report as income, would that work?

I would think this is not an uncommon situation, so I am looking for best practices here.

KellyM3 (North Carolina)
Posts: 2,239

Posted:

David,

Money paid by the 55+ community needs to be focused and fully accounted. It can't be swept away. As others stated, a CPA would be worth engaging to straighten things out before community members assigned allegations, etc on why money was shifted.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By SteveH35 on 06/02/2022 12:20 PM
...snip ...

David, unless the statutes defer to your governing documents and your governing documents say otherwise, you are *REQUIRED* to follow the statue about reconciliation. Funneling retained earnings into your reserve or any other place is illegal. Full stop.

Maybe yes, maybe no. State laws differ on this.

Of course if the HOA as a whole is dumping the money into the general checking account without tracking it in any way, and the 55+ section is not a separate legal entity, you could argue that there are no excess funds. Problem solved, eh?

So...

Read the CC&Rs for the entire community and for the 55+ section (if there are separate ones) in their entirety. Sometimes relevant language is buried in surprising places.

Read the relevant state law. Does it defer to the CC&Rs or not? Does it give the board any discretion or not? (Personal opinion: I think it's counterproductive to not give the board any discretion in this since it essentially locks in budgeting or other financial errors. It's worse when accompanied by requirements for homeowner approval of assessment increases.)

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By KellyM3 on 06/02/2022 12:32 PM
David,

Money paid by the 55+ community needs to be focused and fully accounted. It can't be swept away. As others stated, a CPA would be worth engaging to straighten things out before community members assigned allegations, etc on why money was shifted.

Thanks. To clarify, this was caused by a property manager with no guidance from the board while under developer control. The good news is that we now have our own, residents only, board. They are reasonable people who understood the issue when I explained it to them. I am confident they will do the right thing. I'm just trying to gather information so I can suggest to them what exactly "the right thing is."

The Board might well discuss with the CPA who performs our annual audit. I'd just like to be informed about conventional wisdom and best practices in advance.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By CathyA3 on 06/02/2022 12:46 PM

Posted By SteveH35 on 06/02/2022 12:20 PM
...snip ...

David, unless the statutes defer to your governing documents and your governing documents say otherwise, you are *REQUIRED* to follow the statue about reconciliation. Funneling retained earnings into your reserve or any other place is illegal. Full stop.

Maybe yes, maybe no. State laws differ on this.

Of course if the HOA as a whole is dumping the money into the general checking account without tracking it in any way, and the 55+ section is not a separate legal entity, you could argue that there are no excess funds. Problem solved, eh?

So...

Read the CC&Rs for the entire community and for the 55+ section (if there are separate ones) in their entirety. Sometimes relevant language is buried in surprising places.

Read the relevant state law. Does it defer to the CC&Rs or not? Does it give the board any discretion or not? (Personal opinion: I think it's counterproductive to not give the board any discretion in this since it essentially locks in budgeting or other financial errors. It's worse when accompanied by requirements for homeowner approval of assessment increases.)

I'm afraid this is sounding to folks as if my question is much more complicated than it is. I quoted state law in the OP. I've read our CC&R's thoroughly. The problem isn't understanding the meaning of the law. The problem is identifying exactly what, from an accounting perspective, will satisfy that law.

Again, my suggestion is to take the surplus funds from one year, and apply it as income to the next year. I just want to know if this sounds correct and, if not, what would be correct.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Actually I think it may be more complicated than you're making it. I can't tell from what you've said whether you've got an accounting problem or a legal problem or both.

As I'd said earlier, if your section is not a separate entity and there is no requirement to segregate funds, it's questionable whether there is a surplus at all *and who the money needs to be returned to* per your CC&Rs. If you're not separate, you may have a hard time arguing that the money should be returned to the folks who actually created the "surplus". That would be unfair, and I have a hard time believing that your community is designed to create such issues. But apparently your community is organized differently from ones I'm familiar with that have sub-associations with separate CC&Rs, separate assessments for specific spending items inside the sub, and their own sets of books. This sounds like a legal question bleeding into an accounting one.

If the 55+ section is a separate entity with a requirement to segregate funds (probably a legal opinion), then the problem becomes getting the money back. You can't do anything with it unless you actually have the dollars in your hot little hands. You have to have an agreement that the issue even exists. This looks like an accounting problem that could morph into a legal one. Separate assessments argue for a separate entity, but it sounds like you believe that's not the case.

A CPA's and a lawyer's opinions may add some clarity. In your shoes I'd start with the lawyer - you can't establish ground rules on shifting sands.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

David

Rarely is giving money back a smart thing to do. Look long and hard at your Reserve Study as costs might well have changed. I say put the money in the +55 Section Reserve Fund.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By CathyA3 on 06/02/2022 1:59 PM
Actually I think it may be more complicated than you're making it. I can't tell from what you've said whether you've got an accounting problem or a legal problem or both.

As I'd said earlier, if your section is not a separate entity and there is no requirement to segregate funds, it's questionable whether there is a surplus at all *and who the money needs to be returned to* per your CC&Rs. If you're not separate, you may have a hard time arguing that the money should be returned to the folks who actually created the "surplus". That would be unfair, and I have a hard time believing that your community is designed to create such issues. But apparently your community is organized differently from ones I'm familiar with that have sub-associations with separate CC&Rs, separate assessments for specific spending items inside the sub, and their own sets of books. This sounds like a legal question bleeding into an accounting one.

If the 55+ section is a separate entity with a requirement to segregate funds (probably a legal opinion), then the problem becomes getting the money back. You can't do anything with it unless you actually have the dollars in your hot little hands. You have to have an agreement that the issue even exists. This looks like an accounting problem that could morph into a legal one. Separate assessments argue for a separate entity, but it sounds like you believe that's not the case.

A CPA's and a lawyer's opinions may add some clarity. In your shoes I'd start with the lawyer - you can't establish ground rules on shifting sands.

Thanks. Yes, the structure is troublesome. We are a single entity, but with a specific set of lots identified as 55+. The owners of those lots have a clubhouse and pool that our docs specifically say are for the folks living in those specific lots. The docs further say the clubhouse and pool are paid for through a separate assessment that only applies to the owners of those specific lots.

Everyone on the board accepts this. If anyone were to try to make a case otherwise then it would create a completely different issue.

But until and unless that happens, my only question is the accounting aspect, which will also apply to our general fund. How do we account for the surplus in a way that satisfies the law?

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By JohnC46 on 06/02/2022 2:08 PM
David

Rarely is giving money back a smart thing to do. Look long and hard at your Reserve Study as costs might well have changed. I say put the money in the +55 Section Reserve Fund.

We have no intention of sending refund checks. We do intend to follow the law. I’m curious how we can satisfy the law without sending refunds.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By JohnC46 on 06/02/2022 2:08 PM
David

Rarely is giving money back a smart thing to do. Look long and hard at your Reserve Study as costs might well have changed. I say put the money in the +55 Section Reserve Fund.

We have no intention of sending refund checks. We do intend to follow the law. I’m curious how we can satisfy the law without sending refunds.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By DavidG45 on 06/02/2022 2:17 PM

Posted By JohnC46 on 06/02/2022 2:08 PM
David

Rarely is giving money back a smart thing to do. Look long and hard at your Reserve Study as costs might well have changed. I say put the money in the +55 Section Reserve Fund.

We have no intention of sending refund checks. We do intend to follow the law. I’m curious how we can satisfy the law without sending refunds.

If the law says that surplus funds must be returned to homeowners and the board has no discretion, then it sounds like refund checks to me. Anything short of that means the surplus is still in the HOA's hands.

IANAL, but I was a systems analyst/software designer, and I could not design software to handle this particular issue with what you've told me. I think that there is an unresolved contradiction with how the 55+ section is set up: it behaves as a separate entity for some things but not for others. That's why I said that from one perspective there is no surplus, and from the other there is. It can't be both simultaneously. You may or may not have an accounting issue, but you can't follow the law without knowing what you're applying the law to.

I call this Schrödinger's Surplus.

DavidG45 (Delaware)
Posts: 994

Posted:

Quote:

Posted By CathyA3 on 06/02/2022 2:51 PM

Posted By DavidG45 on 06/02/2022 2:17 PM

Posted By JohnC46 on 06/02/2022 2:08 PM
David

Rarely is giving money back a smart thing to do. Look long and hard at your Reserve Study as costs might well have changed. I say put the money in the +55 Section Reserve Fund.

We have no intention of sending refund checks. We do intend to follow the law. I’m curious how we can satisfy the law without sending refunds.

If the law says that surplus funds must be returned to homeowners and the board has no discretion, then it sounds like refund checks to me. Anything short of that means the surplus is still in the HOA's hands.

IANAL, but I was a systems analyst/software designer, and I could not design software to handle this particular issue with what you've told me. I think that there is an unresolved contradiction with how the 55+ section is set up: it behaves as a separate entity for some things but not for others. That's why I said that from one perspective there is no surplus, and from the other there is. It can't be both simultaneously. You may or may not have an accounting issue, but you can't follow the law without knowing what you're applying the law to.

I call this Schrödinger's Surplus.

Let’s ignore the 55+ side for the sake of this conversation. HOA has a surplus at the end of the year. The law and our docs state (in the OP) the surplus must be returned to the owners or credited to them. From an accounting perspective, what happens to the surplus? Would adding it has income for next year work?

I can’t imagine we are the only HOA with a surplus.

SteveH35 (Washington)
Posts: 339

Posted:

Quote:

Posted By DavidG45 on 06/02/2022 3:02 PM

Posted By CathyA3 on 06/02/2022 2:51 PM

Posted By DavidG45 on 06/02/2022 2:17 PM

Posted By JohnC46 on 06/02/2022 2:08 PM
David

Rarely is giving money back a smart thing to do. Look long and hard at your Reserve Study as costs might well have changed. I say put the money in the +55 Section Reserve Fund.

We have no intention of sending refund checks. We do intend to follow the law. I’m curious how we can satisfy the law without sending refunds.

If the law says that surplus funds must be returned to homeowners and the board has no discretion, then it sounds like refund checks to me. Anything short of that means the surplus is still in the HOA's hands.

IANAL, but I was a systems analyst/software designer, and I could not design software to handle this particular issue with what you've told me. I think that there is an unresolved contradiction with how the 55+ section is set up: it behaves as a separate entity for some things but not for others. That's why I said that from one perspective there is no surplus, and from the other there is. It can't be both simultaneously. You may or may not have an accounting issue, but you can't follow the law without knowing what you're applying the law to.

I call this Schrödinger's Surplus.

Let’s ignore the 55+ side for the sake of this conversation. HOA has a surplus at the end of the year. The law and our docs state (in the OP) the surplus must be returned to the owners or credited to them. From an accounting perspective, what happens to the surplus? Would adding it has income for next year work?

I can’t imagine we are the only HOA with a surplus.

David, you are required to credit the surplus in proportion to the amounts assessed to every owner. For current owners that were also owners last year, that's a credit on their individual unit ledger. For owners who sold, it's a physical check cut and mailed to them. The statute in Delaware is almost exactly the same as in WA because it's based on UCIOA.

Here's how our WUCIOA statute looks:

WUCIOA statute RCW 64.90.475 - Accounts and Records - Reconciliation

(1) The association must establish and maintain its accounts and records in a manner that will enable it to credit assessments for common expenses and specially allocated expenses, including allocations to reserves, and other income to the association, and to charge expenditures, to the account of the appropriate units in accordance with the provisions of the declaration.

(2) To assure that the unit owners are correctly assessed for the actual expenses of the association, the accounts of the association must be reconciled at least annually unless the board determines that a reconciliation would not result in a material savings to any unit owner. Unless provided otherwise in the declaration, any surplus funds of the association remaining after the payment of or provision for common expenses and any prepayment of reserves must 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.

Regards,
Steve

ThadC2 (Florida)
Posts: 820

Posted:

$350,000/ 500 homes is $700 refund due to every single person. It's unbelieveable to me that an HOA can get away with over charging people for so long.

Yes you are right, many HOA's have surplus funds. I'm guessing most HOA boards would rather just keep themoney for pet projects then return it to the rightfull owners.

SteveH35 (Washington)
Posts: 339

Posted:

Quote:

Posted By ThadC2 on 06/04/2022 6:24 AM
$350,000/ 500 homes is $700 refund due to every single person. It's unbelievable to me that an HOA can get away with over charging people for so long.

Yes you are right, many HOA's have surplus funds. I'm guessing most HOA boards would rather just keep themoney for pet projects then return it to the rightfully owners.

Thad, this unbelievable situation occurs for the same reason so many others in the CIC space occur and recur:

1) homeowners are generally unaware of the statutes
2) CAMs and management companies are either unaware of the statutes or refuse to push the issue with the Boards and CICs to whom they owe a significant duty of appropriate oversight
3) when the statutes require something that homeowners / volunteer leaders don't like, they simply don't follow the statutes.

In this case, crediting and/or refunding excess assessments is viewed as undesirable, yet that's what's required by the statute. The statute makes complete sense when one understands the nature of nonprofit member-based organizations. CICs are called to establish appropriate budgets to pay for annual operations and build up reserves over time. They are not intended to hoard surplus member assessments. The nature of nonprofits is to account for every dime that's collected but putting it to use in the near term.

Regards,
Steve