While HOA surplus funds don’t arise frequently, board members must know how to handle them if they do. Surplus funds are not an excuse for associations to spend money on superfluous things. There are certain requirements and procedures to follow, as well as a commitment to transparency.
What are HOA Surplus Funds?
In a condo or HOA, a budget surplus happens when the association collects more money than it spends during a fiscal year. In simple terms, the association ends the year with funds left over after covering operating expenses and reserve contributions.
Surplus funds don’t automatically mean good or bad things for the association. In many cases, a budget surplus shows that the board budgeted conservatively or had lower expenses than expected. Still, boards should understand why the surplus occurred in the first place, as it can also signal budgeting problems or deferred expenses.
How Should an HOA Handle Surplus in the Association Fund?
To understand what an association should do with surplus funds, it is important to check state laws and the governing documents. In Illinois, 765 ILCS 605/9 specifies four distinct options available to condominiums.
1. Deposit Into Reserve Account
The first option is to move the surplus into the reserve fund. This will help save for future major repairs and replacements. It also brings the association one step closer to the ideal funding level.
2. Credit Against Monthly Dues
The second option is to apply the surplus as a credit toward unit owners’ future dues and assessments. For example, owners may pay slightly lower monthly dues for a period. This helps alleviate the financial burden on owners, even if only for a short while.
3. Return to Owners Directly
The third option is to refund the surplus directly to unit owners. The board can do this by providing owners with checks or other forms of payment. This is a good choice if boards are aware that more owners are struggling financially.
4. Apply to Next Year’s Budget
The fourth and last option is to keep the surplus in the operating account. This way, the board can use the funds to reduce the amount needed in next year’s budget. It is an indirect way to lower monthly dues and avoid increases.
The Importance of Transparency and Reporting HOA Excess Funds
No matter what an association opts to do with the surplus, it must practice utmost transparency. Board members have a fiduciary duty to prioritize the best interests of the community as a whole, including in decision-making.
To do this, board members must share the decision with owners at a properly noticed meeting. It helps to present a summary of the surplus through a report. Additionally, the meeting minutes must clearly reflect this portion of the session.
In Illinois, under 765 ILCS 605/9, if owners disagree with the board’s decision regarding the surplus or deficit, they have the right to object. To formally object to the decision, at least 20% of the owners must sign and submit a petition. They must do this within 30 days after receiving notice of the board’s decision.
If enough owners object, the board must hold a membership meeting within 30 days. At the meeting, owners can vote for a different way to handle the surplus or deficit.
Still, the board’s decision remains in place unless a majority of all owners votes to reject the board’s choice and a majority selects a different option. If that majority vote does not happen, the board’s original decision automatically remains in effect.
Why an HOA Budget Surplus Happens
At the end of the fiscal year, the board may notice excess funds in the budget, yet have no idea why it’s there. Here are the top causes of HOA surplus funds.
1. Lower Operating Expenses Than Expected
One of the most common reasons for a surplus is that actual expenses came in below budget projections. There are many things that can trigger this, such as lower landscaping expenses, minimal snow removal, and no necessary repairs. If the board budgets conservatively, the association may naturally end up with extra funds.
2. Delayed or Deferred Maintenance
Sometimes, a surplus happens because the association postponed projects or repairs. For example, the board may have delayed asphalt repairs or painting projects. Perhaps roof work isn’t urgent and may be rescheduled for the following year.
Whatever the reason, delayed maintenance can require additional funding. At first glance, the surplus may appear positive. Still, deferred maintenance can create larger financial problems later on if the association continues postponing necessary work.
3. Higher Income
Another thing that can lead to HOA surplus funds is collecting more revenue than expected. This can happen in a number of ways, such as dues increases, special assessments, and new owners.
Additionally, the association may have earned more income from rentals or services. Reduced delinquency rates, whether due to more paying owners or more robust collection efforts, can also contribute to an increase in year-end balances.
4. Conservative Budgeting
Many boards intentionally adopt a more cautious approach when budgeting. To avoid deficits, the board might overestimate repair costs, add buffers or contingencies, or factor in a higher-than-expected inflation rate. This approach can help protect the community financially, especially during volatile economic conditions.
5. Fewer Emergency Expenses
Unexpected emergencies can heavily affect an association’s finances. If the association experiences fewer emergencies than anticipated, expenses may remain lower than projected.
Common examples include no major plumbing failures, fewer storm-related damages, and no legal disputes. The community can also experience reduced vandalism or fewer equipment breakdowns. All of this can contribute to a year-end surplus.
Are HOA Surplus Funds Good or Bad?
A relatively small surplus is usually considered healthy because it gives the association greater financial flexibility. A surplus can help bolster reserves, offset future expenses, and reduce the risk of special assessments.
Still, an unusually large surplus may raise questions. Owners may wonder whether their dues and assessments are too high. They might suspect projects are getting delayed on purpose. They may even think the board is budgeting inaccurately.
It is important for the board to explain the reasons behind the surplus. A well-prepared summary or report can clarify concerns, promote transparency, and build trust.
A Well-Intentioned and Transparent Approach
Board members are responsible for managing the association’s finances, including HOA surplus funds. Fortunately, Illinois law provides some guidance on what condo associations can do with extra money. Boards just have to ensure they base their decisions on what’s best for the community and clearly communicate them to owners.
First Community Management provides expert HOA, condo, and co-op management services to communities in Chicago. Call us today at (312) 829 8900 or contact us online to learn more!
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