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February 5, 2007
May a Board Reduce Assessments Mid Year?
It is not that common, but sometimes an Association ends up having overbudgeted - an example would be an association that budgeted to keep up the earthquake insurance coverage and then, after an unanticipated renewal hike, and a member vote, decided not to renew (because of high cost, lowered coverage, etc., you may have faced the scenario of difficult choices). So now, there is a budget item that is no longer applicable.
In most cases, in California, a budget may be revised any time the board realizes that the estimations were short or long, or some item does not any longer apply. It is important to document the reasons for revisitng the budget and explain the basis for the change when any change is made and a new budget or notes on the modifications are sent out to the members. It is important to make sure that the governing documents don't specifically prohibit mid year budget revisions. It would not make sense to me that there would be such a prohibition, however, there may be some clause that raises a question about mid year changes. There would be limitations on the amount an assessment could be increased if a budget item was missed and added later, or a cost increased such that the current assessment needed to be increased more than the Board could increase it without a membership vote. But lowering the budget and the assessment is much less likely to violate a covenant.
However, before lowering the assessments, make sure there are not other expenses that have been underestimated, and also look at whether alternate use of the income makes sense. An example would be if the earthquake insurance was dropped, but there were other things that might benefit the association - such as considering retrofits, self insuring to any degree etc. I am not recommending these things necessarily but I am suggesting that many things need to be considered before decreasing the budget and lowering the assessments. It would be unfortunate to be like the State of California and send out refunds for taxes to all Californians because of a change in the budget or needs of the State and to follow that with announcements that the budget would be insufficient for the coming year and taxes would have to be raised.
Posted by Beth Grimm at February 5, 2007 8:32 PM