[ Blog/News ]
Budget Ratification Best Practices
Budgeting is a critical function of every condominium and homeowners association. Yet the laws governing the budget process are technical and often poorly understood, leading to sloppy practices. This article will explain the three key elements of the process from a legal standpoint—adoption, notice and ratification—and discuss best budget practices for board members and association managers.
The Condominium Act provides that assessments must be made against all units “based on a budget adopted by the association.” RCW 64.34.360(1). And both the Condo Act and the HOA Act authorize the association to “adopt and amend budgets for revenues, expenditures, and reserves, and impose and collect assessments for common expenses.” RCW 64. 34.304(1)(b); RCW 64.38.020(2). Budget adoption is therefore the predicate for imposing and collecting assessments to fund common expenses.
How should the budget be adopted?
First, budget adoption is a board function. Even if the association is assisted by a professional manager or accountant, the responsibility for developing the budget and adopting it rests with the board. Directors should ask questions and make sure they understand all line items; they should not “rubber stamp” the work of others. Although most associations prepare a new budget for each fiscal year, there is no legal requirement to revise the budget annually. Unless doing so would impose an unreasonable hardship, however, an association must update its reserve study annually. As a practical matter, annual updates to the reserve study make annual budgeting a necessity.
Second, the budget must provide for “revenues, expenditures and reserves.” Although the requirement to budget for reserves has long been part of both the Condo Act and the HOA Act, the 2011 amendments to both acts impose new and detailed notice Requirements, discussed below. These notice requirements impact how the board must address reserve funding.
Notice to Owners
Within 30 days after the board adopts any proposed budget, it must provide a “summary” of the budget to the owners and must set a meeting “to consider ratification” of the proposed budget. RCW 64.34.308(3); RCW 64.38.025(3) The date for the meeting must be not less than 14 and not more than 60 days after the summary is mailed. While it is customary to provide each owner with the complete budget, the law only requires that a summary be provided.
However, as part of the summary, the following detailed information must now be provided regarding reserves:
- The current amount of regular assessments budgeted for contribution to the reserve account, the contribution rate recommended by the reserve study, and the funding plan upon which the recommended contribution rate is based.
- If additional regular or special assessments are scheduled to be imposed, the date the assessments are due, the amount of the assessments per each unit per month or year, and the purpose of the assessments.
- Whether (based upon the most recent reserve study) currently projected reserve account balances will be sufficient at the end of each year to meet the association’s obligation for major maintenance, repair or replacement of reserve components during the next 30 years. If account balances are not projected to be sufficient, the summary must indicate what additional assessments may be necessary to ensure that there will be sufficient reserve funds when needed, including the approximate dates when assessments may be due and the amounts thereof “per unit per month or year.”
- The estimated amount in the reserve account at the end of the current fiscal year according to the most recent reserve study, the projected cash balance in the reserve account at the end of the fiscal year (i. e., estimated vs. actual), and the percent funded at the date of the last reserve study. The same information must also be given for each of the next five budget years.
- Finally, the summary must indicate the projected reserve account cash balance and the percent funded in each of the next five budget years, if the funding plan approved by the association is implemented.
These new disclosure requirements force the board, as part of its budgeting process, not only to disclose projected shortfalls in reserve balances but to state how and when any such shortfalls will be funded and the dollar impact on each owner.
The Condo Act and the HOA Act require a budget ratification meeting; this step cannot be eliminated even if the bylaws allow voting by mail or email. The budget ratification meeting may be scheduled back-to-back with the annual meeting but it should be treated as a separate meeting because, while a quorum is required to conduct business at an annual meeting, a quorum is not required at a budget ratification meeting. RCW 64. 34.308(3); RCW 64.38.025(3).
At the budget ratification meeting, unless the budget adopted by the board is rejected by a vote of a majority of the total voting power of the association (or any larger percentage specified in the governing documents), the budget “is ratified.” In other words, the owners do not approve the budget—the budget is automatically approved unless it is rejected by a majority of the total voting power. Thus, if less than a majority of the total voting power is present in person or by proxy at the budget ratification meeting, it is legally impossible for the budget to be rejected and ratification is automatic.
Because the budget is automatically ratified if not rejected by at least a majority of the total voting power, it is neither necessary nor appropriate to call for “approval” of the budget at the ratification meeting and the president or other presiding officer should not request a motion to approve the budget. Rather, after the budget has been presented (typically by the treasurer), the presiding officer should explain that, under Washington law, the budget is automatically ratified unless it is rejected by at least a majority of the total voting power, whether or not a quorum is present. Because this procedure is unusual and some may view it as undemocratic, the board may want to explain the process in the meeting notice as well.
Once questions about the budget have been answered, if no owner has moved to reject the budget, the presiding officer should announce that the budget has been ratified, no motion to reject having been made. Alternatively, if less than a majority of the total voting power is present in person or by proxy at the meeting, making rejection legally impossible, the presiding officer should announce this. It can be helpful to script out these words to be read at the meeting. The script can follow one of the following simple formats: (v1) PRESIDING OFFICER: “No motion to reject the budget having been made, the budget is ratified.” (v2) PRESIDING OFFICER: “Since a majority of the total voting power of the association is not present in person or by proxy at this meeting, it is legally impossible for the budget to be rejected. The budget is therefore ratified.”
If a majority or more of the voting power present in person or by proxy votes to reject the budget, “or the required notice is not given,” then the prior budget remains in effect “until such time as the owners ratify a subsequent budget prepared by the board of directors.” This throws the process back onto the board to revise the budget or to convince owners that the budget that was originally proposed is appropriate and should not be voted down. When the board is ready to seek ratification again, it should formally adopt the new proposed budget, then properly notice and conduct a ratification meeting for the revised budget.
Budget ratification for condominium and homeowner associations is technical and has become increasingly complex. By mastering the three elements of the process—adoption, notice and ratification—boards and managers can meet their statutory obligations and provide strong leadership for their communities.