Proper Disclosure of Borrowing from Reserve Fund
Dennis:
Our Condo Assn is in serious financial difficulty. Under several previous BOD, Association fees had not been increased for several years and apparently there had not been a reserve study since 2005. Fees were not increased in 2023 even though a 2022 reserve study clearly indicated our reserve fund was seriously underfunded and the budget would not even meet realistic current operating costs.
Sometime during the months ending:
3/31/23, $75000 was transferred to Operating, 7/31/23, $10000, 8/31/23, $17000, 10/31/23, $10000 and 12/31/23, $10000 for a total of $122000 “borrowed” from the reserve fund to meet current operating expenses. Aside from financial statements distributed at BOD meetings and eventually displayed on the Property Manager’s web pages for our Assn, there is no mention of this “borrowing” in any set of BOD meeting minutes available. When I asked about the $122000 that appears in the Balance Sheet’s reserve column as an asset:” Due from Operating 122,000” with an offsetting liability entry in the Homeowner’s questions session at the end of the meeting, the property manager gave me a bunch of mumbo jumbo about accrual accounting and, of course there was no mention of my inquiry in the minutes.
Under the new 2024 BOD, which consists of the 2 members (plus a new “truth and transparency disciple”- now a 3-member BOD) that were always on the wrong side of many, many 3/2 votes of the 5-member 3- “insider” board that had helped this mess develop for many years as they ran a popularity contest instead of a HOA, sometime during the month ending 6/30/2024, “borrowed” another $20,000 for new total of $142000. Again, the only notice was the publication of the balance sheet now showing the new total as part of the agenda for the late July BOD meeting. Meeting minutes still fail miserably to document the actions taken during the BOD public sessions and if there is any documentation for the approval of transferring reserve funds to meet current operating expenses it seems to be “privileged information”
Armed with the information I’ve shared above and knowing I would be stonewalled again asking at a BOD meeting, I wrote to XmgmtCo,
“Documentation of Reserve Funds being “borrowed” for Operating Expenses. I totally understand that things must be done and paid for to keep our community operating within a reasonable standard of “livability” and appearances that physical facility is not being left to neglect. If I am reading the 6/30/24 balance sheet correctly, it would seem that the IOU has increased by $20,000 since the previous balance sheet. Again, I understand that bills must be paid but doing so in this manner with the only notice to the homeowners that I can divine other than some numbers being juggled on the financial statement? No where in the article I’m linking here does it suggest that this act should be kept a secret from the homeowners. https://www.ch-pm.com/blog/can-the-hoa-board-borrow-money-from-the-reserves#:~:text=Boards of HOAs have a, information about borrowing from reserves.
IMHO (implied always in all my communications) Every individual from top to bottom of XmgmtCo should be wanting to CTAs by documenting the advice and counsel that has been given to this and past BODs regarding this practice and why it seemed a good idea not to clearly inform the homeowners of what had to be done. I would ask that all levels of XmgmtCo supervision and XHOA BOD be copied on any and all XmgmtCo responses.”
Obviously, our BOD and XmgmtCo have very different ideas than mine about how they go about carrying out their fiduciary obligations to the Members of the Association. I received the following reply from the lowest rung of the XmgmtCo ladder but all supervisors were copied along with our BOD, “In response to your Ask A Manager submission dated 7/20/24, please be advised that your reference to “juggled numbers” are actually the monthly financials prepared for the Association. These financials are quite detailed in the information provided contradicting your assertion that transactions are being executed in secret. The monthly financials are posted each month to the XmgmtCo website and available to the residents for their review. In addition, the Associations financials are audited each year by a 3rd party CPA firm as required by the CC&Rs and Arizona State Statute. The monies being transferred from Reserves to Operating are a result of the operating expenses exceeding the operating income. The Association is obligated to pay for the services rendered such as landscape maintenance, pool maintenance, water and sewer, insurance to name just a few. It is the intent of the Association to replenish the borrowed reserve monies contingent upon the financial performance of the Association for the balance of the year.
As always, we thank you for your community concern”
To date, I’ve heard nothing additional from any party. I must state here that given limitations on how much Association Fees can be increased each year and many other considerations, I totally sympathize with the current BOD as to the financial challenges they face but totally disagree with their chosen course of keeping this mess under wraps as I feel this totally undermines the cooperation and understanding they are going to need from the members to run a much tighter and leaner ship and raise Fees at every permitted opportunity until some semblance of financial stability is attained. I fear Special Assessments will have mis/underinformed owners running for the exits with no conception that the body has been consuming itself during the many years of “low fees”.
I’m considering poking the bear again by inquiring if documents can be produced showing compliance with our CC&Rs regarding the following provision taken directly from same, “Withdrawal of funds from the Association’s reserve account shall require the signatures of either (a) two (2) members of the Board of Directors; or (b) one (I) member of the Board of Directors and an officer of the Association who is not also a member of the Board of Directors” but I think I will wait to see if you feel that the BOD and XmgmtCo are fulfilling their fiduciary responsibilities in the best manner possible and I have unreasonable expectations.
Speaking of running for the exits, do you have any idea if having a real good understanding of the Association’s being in serious financial trouble constitutes a “material fact” that should be disclosed on a SPDS?
Your comments and advice will be most appreciated.
Thank you
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Terry,
First, let me thank you for your contribution to the coalition, but I simply want to remind you and everyone that I’ll answer any question posted as best I can, totally free of charge or any expectation for any financial contribution. We run this coalition for the benefit of all homeowners in this state. The board of directors has a duty to the community under current Arizona Case law to be transparent and prudent in the association’s financial affairs. The veil of secrecy imposed by the board and their advisors is nothing short of a direct violation of State transparency laws (open meeting statutes and records request statutes). Secondly, the association is authorized and obligated to provide budget for the operating expenses reasonably necessary to cover the anticipated operation and administrative costs of the association and to provide for the reserve accounts authorized in the declaration for the long-term maintenance and upgrade of the common property. Clearly, past boards have failed in their duty to the community, and the current board is stuck with the need to address those failures. However, the reserve accounts were put in place to deal with the association’s long-term needs and not act as a slush fund to cover the inability of the board to budget their operating expenses adequately. To take money from those accounts to deal with operating shortfalls is a total breach of the board’s fiduciary responsibility to the members. The board can take money from you today to pay for future expenses that you may never realize while you remain a homeowner in the community, but they cannot then use that money to pay for something else and leave you with the need to raise additional money when the actual long-term maintenance is required. The association can approve a supplemental operating budget to cover shortfalls in its budgeted operating cost.
While I’ve presented legislation in the past to codify into law the true duties of the board to their members, that has yet to be enacted into law. I’ll continue to propose that legislation until we finally get it passed. Unfortunately, what happens in your community relative to fiduciary responsibility frequently occurs across the state. Because of that, I’ve already drafted proposed legislation for the next session to address the budgeting process and the need to ratify budgets that increase assessments by a specified amount. This legislation will also address the necessary approval of any loans and prevent the use of any money from reserve accounts not specifically authorized in the declaration for that account. I’ve already targeted a legislator for this legislation and will work through the fall to get it introduced and passed. It’s time to establish some state policy on these associations’ power to totally mismanage their communities’ finances.
You do have some recourse to expose the truth through records requests for any minutes of any board meeting where the loans from the reserve accounts were authorized. If they conducted those meetings outside of an open meeting, they violated the law and can be held accountable for those violations. You also have a cause of action against the board for breach of duty with the mismanagement of their reserve accounts. That would have to be pursued in Superior court, and any litigation against the association includes extensive financial risk to the plaintiff. Only you can decide, with the advice of counsel, the viability of any litigation against the community.
Dennis