Community associations are usually incorporated as not-for-profit corporate entities; therefore, an association’s goal is to avoid making a profit or loss at the end of the year. Though it isn’t common, community associations can sometimes end the year with a budget surplus. Board members must be careful when handling the situation because a misstep could result in a dissatisfied, untrusting membership. If there is a budget surplus, board members have a few options, one of which is to refund the money to the members. Refunds are usually not a good idea (we’ll tell you why) but may be required depending on the HOA’s governing documents or state laws. Another option is rolling the funds into next year’s budget, saving them for a rainy day. A third option is using the extra money to improve common areas. Why is a budget surplus and how boards handle it such a big deal? We’ll tell you in this article.
What factors contribute to a budget surplus?
One reason a community association may end the year with a surplus is that operational expenses were less than anticipated. In addition, there might be a surplus if the association’s income was higher than was expected when drafting the budget. Finally, though rare, in some instances, the board may have purposely over-projected the association’s financial needs to create a surplus. While there can be other contributing factors, these are some of the most common ways an association can end up with a surplus at the end of the year.
How should boards handle a budget surplus?
Note: Always consult your association’s CPA to ensure that tax implications are clearly understood BEFORE deciding what to do with surplus funds. You should also reach out to the association’s attorney if there is any doubt regarding the path the board would like to pursue.
- Save it. If your community association ends up with a budget surplus, there are a few options as to what to do with it. One option is to roll the surplus funds into the next year’s budget. This can help offset any future expenses that might arise.
- Refund the members. Another option for the surplus is refunding the association members. However, refunding can create future problems. For example, if the association uses the excess to reimburse members, it might set a precedent for members expecting annual refunds. They also may think they’ve been overcharged or hesitate to pass higher budgets when needed in the future.
- Spend it on improvement projects. Spending the surplus before the end of the year is another, and often most recommended, option for board members. For example, the surplus can be spent on improvements to the common areas and amenities of the community. This can make the community more attractive and welcoming, which can help to attract new residents and boost property values.
Ultimately, deciding what to do with a budget surplus is a difficult decision that depends on the specific needs and goals of the community association. Regardless of what option you’re considering, remember to check your governing documents and state statutes. In North Carolina, for example, the surplus must be refunded to the members if the governing documents are silent on the issue
. In South Carolina, the matter of surplus funds is left to the governing documents, as the Horizontal Property Act
and Homeowners Act are silent on the subject.
As we said earlier, many boards decide that the best option is to spend money on improvements to the community. This decision will not only benefit current owners, but it also has the potential to attract new owners and increase property values. Additionally, surplus funds that aren’t spent may be considered taxable income, something the board would likely rather avoid.
Board members are responsible for being transparent about how community association funds are used
. For example, surplus funds should be clearly shown on financial reports, and board members should take the time to explain to owners why there’s leftover money and how it will be used. By being open and honest about the community association’s finances, board members can help build trust and confidence among owners. Additionally, financial transparency is required by law in many states, so board members need to be familiar with state statutes. Taking these steps will help ensure that community association funds are managed responsibly and in the best interests of all members.
If your association is approaching the end of the year with a budget surplus, there are a few options for using the extra money. Before making any decisions, be sure to check your association’s governing documents and state laws and always be transparent with community members about where their money is going. By keeping these things in mind, boards can turn surplus funds into something that benefits the entire community.
Could your community use some help with its financials? Reach out to the experts at CAMS today for Trusted Guidance.