HOA, management company should explain budget overruns

Q: What is the legal responsibility or requirement for an association and/or management company to keep spending within a budget that has been approved for a fiscal year? Our association, after being over budget for most of the months during the year, ended up nearly $28,000 in the hole at the end of 2007.

Apparently, the management company did not try to get the board to cut back on expenditures. The board continued to spend funds that obviously it was not authorized to spend.

To add insult to injury, the board at this past month's meeting voted to give holiday bonuses to the two employees as well as giving them each a 3 percent pay raise. One would think that since they had gone so far over budget, board members would be cutting back on expenses, not increasing them.

Also, we do not have a budget in place for 2008 and it looks as if it will be at least mid-March before we do. The board failed to realize (again, apparently without proper guidance from the management company) that they had to have a new budget prepared earlier than this.

Those of us who see what's going on are worrying that our association fee will drastically increase to cover all this overspending by the board.

A: There really is no statute that prohibits an association from overspending. There is an expectation that associations operate within their budgets, but budgets are not exact science.

The primary purpose of an operating budget is to project anticipated expenses for some period of time, in this case, a fiscal year. Because budgets are estimated, they can be inaccurate. The inaccuracy does not necessarily mean the budget was improperly prepared. For example, a number of years ago, insurance premiums skyrocketed beyond what any community manager anticipated. The same big increase (over double digits) occurred with water costs. (Associations can expect to see water expenses jump even more in coming years).

One of the more difficult expenditures to project pertains to maintenance and repairs. Vandalism and abuse of common areas, vehicular security gates and plumbing problems are examples of the types of expenses that can significantly increase beyond what was projected. For instance, an association may decide it needs security for the summer months that had not been projected but is now needed as a result of incidents in the community.

To determine whether overspending was due to carelessness or just plain disregard of the budget by a board with an appetite for spending, you would have to review the monthly financial statements. If the reader can support the position that the board did not uphold its fiduciary responsibility to the membership, the reader could file a complaint with the state ombudsman's office.

Financial impropriety allegations are more difficult for the ombudsman's office to substantiate. It's like being a Monday-morning quarterback. You already know the outcome, so you try to work backwards in the decision-making process to assess whether the board really did have other financial options which at the time perhaps it did not realize.

Ultimately, the power is in hands of the membership to remove directors who are not financially responsible to the association.

As to the pay increases, finding and keeping community managers and association staff is becoming a major problem because of the shortage of qualified and licensed people. A 3 percent increase is less than the more recent CPI increase of more than 4 percent. A 3 percent increase is not what one would call a merit increase, but just a standard-of-living increase. As to whether these people deserve a bonus and the increase, I cannot comment.

Regarding the 2008 operating budget, the association did have a legal responsibility to provide a budget not less than 30 days and not more than 60 days before the beginning of the fiscal year (NRS116.31151).

Because there is no new budget, the association would operate on the previous year's budget until a new one is produced and approved by the board and affirmed by the membership.

If the new budget requires a significant increase in assessments, the reader should call the association and management company to task, insisting that they show members precisely why an increase is needed and explain the $28,000 deficit. The deficit may be a result of an increase in delinquency and foreclosures and assessments that were written off as bad debt. The reader should request a meeting at the management company to review the association's finances. This is within her right as a homeowner.

Barbara Holland, certified property manager, broker and supervisory certified association manager, is president and owner of H&L Realty and Management Co. Questions may be sent to Association Q. & A., P.O. Box 7440, Las Vegas, NV 89125. Her fax number is 385-3759. Questions may be shortened and are subject to editing.