HOW TO HANDLE OPERATING SURPLUS

I am of the mindset of once you open Pandora's box, keep it open. There may be a dead cat in there... If the HOA gives back the money to the members, that will cause future issues of collecting money when you all need it. People will say "We got money back X years ago, why is are budget so bad now?". It will be a struggle to convince people to ever believe the board can handle the money given to them even if doing a great job.

My recommendation? Spend the money on a much needed project. Example: Buy flowers for the common area. Hire pressure washers to clean. Apply it to an annoying project that would benefit from some funds.

Couldn't the surplus, rolled forward to the following fiscal year's budget, actually be helping the HOA Board avoid having to raise the assessment for the following fiscal year?

I agree with Melissa and Terri. Returning the money will also mean you'll need to file the appropriate forms with the IRS and the homeowners will have to list that on their tax returns. It can also mess up your budgets in the future because people will get used to that returned money in a hurry and yell (loudly) when they don't get it back.

We didn't always have budget surpluses, but when we did, we transferred the money to our reserves fund - that may be the best option for you. If you don't have one (you should if you have lots of common areas to address), use the money to get a reserve study and then set up the fun. he study will give you recommendations on how to fund it. Don't know what I'm talking about? There are lots of old conversations on this website about the subject so do some searches and have fun.

Are all your obligations being paid out? If you have a large surplus of operating cash, what do your reserves look like? Deposit some cash into your reserves, get that account to near
100% funded. Do the above before you reduce assessments.

State laws often spell out how surplus operating funds are to be handled, which is why ElleN asked if this community is subject to FS 718 or FS 720 or something else.

When we know the answer to this, we will know which state laws apply to this community and what these laws say about surpluses, if anything.

And why was there a surplus? Careless budgeting? A maintenance project that had to be put off for some reason? The answer to this will suggest the answer to the question (consistent with state law). A maintenance project won't just go away on its own unless the board really doesn't know what they're doing. Returning the funds to the membership or putting the money into reserves doesn't make sense if the money is needed in the short term.

As JohnC46 mentioned, associations in my part of the country have to deal with snow removal, which is nearly impossible to budget for accurately. There's almost always a surplus or a shortfall at the end of the winter, so any surplus is held in what we call "snow reserves". It's not kept with the regular reserve accounts since these can't be tapped for operating expenses unless the money is repaid at the end of the fiscal year, which makes no sense for a variable operating expense. Our snow reserves are more of a "budget stabilization fund", which actually has a precedent in my state since Ohio is required by law to have a balanced budget.

(Quote: "The BSF is a reserve balance that is set aside during good economic times to protect the state budget from cyclical changes in revenues and expenses that may occur during poor economic times.")

Personal opinion: laws that prevent community associations from doing something like budget stabilization across multiple years are taking away a needed tool, since operating needs don't necessarily follow the calendar. In the name of promoting good governance and "consumer rights", the states' community association laws actually tie boards' hands and make financial game playing more likely.

OK, dumb question time since I'm not up on all the tax laws.

Why would homeowners have to report the return of funds on their tax returns? I don't think that assessments are deductible - my tax prep software doesn't ask about it, so I assume they're not. And refunded assessments aren't new money/income - they probably come out of current earnings which is already being reported. If people truly have to report this as new money, then I really wouldn't want the money back since it would mess up my tax planning.

I can see why this would affect the association's income and what's reported on that return, but for the homeowners...?

And I agree about it messing with people's heads, since extra money seems to get spent more often than not.

(Note: if this country taxed on spending rather than on income, my answer would change.)

Any surplus condo fee income gets rolled over to the following year.
IRS Resolution 70-604. (Requires YES Majority vote by unit owners).
If the majority is NO then refunds are issued.
Most of the time the amount isn't large enough to split 144 ways.

In all the years I have been living in my association the vote has been YES. (to Roll over)