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Boards are supposed to take a number of factors into consideration when constructing annual budgets and setting owner fees. At our association we have had a handful of board members who steadfastly insist that there must be annual fee increases. Period.
This has led to some battles on the board in recent years and is one of the reasons I am no longer on the board.
So what should board members consider when constructing budgets and levying fees?
- Identified cost increases for the following year.
- Identified Reserve increases for the following year, in accordance with the reserve study.
- Condition of reserves.
- Amount of projected surplus at the time the budget is constructed.
- Financial condition of the unit owners (this in accordance with the Illinois Condominium Act).
When I was a board member I researched possible utility increases, contract changes, the condition of reserves and expenses projected 5-years into the future. I also closely monitored the number of owners who were seriously in arrears and constructed 70 consecutive monthly spread sheets which I provided to the entire board.
In fact, the association has been funding reserves at a higher rate than that indicated by the reserve study and has been running Operations & Maintenance surpluses for a number of years. The recent annual surpluses are noted in the chart at the beginning of the post.
Here is the exact text of the Illinois Condominium Act pertaining to the budgets and
I have highlighted the text that the board chose to ignore when constructing the budget in October 2018, and which the president at the time has chosen to ignore each and every year that she and I served on the board. Of course these issues were discussed:
(765 ILCS 605/9) (from Ch. 30, par. 309) Sec. 9(c) Budget and reserves:
"(2) All budgets adopted by a board of managers on or
after July 1, 1990 shall provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements. To determine the amount of reserves appropriate for an association, the board of managers shall take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv)
the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing."
Here are the board members who ignored the budget surplus in 2018 and voted for a fee increase during the budget meeting of 2018.These are in descending years of service on the board. The first three have a combined 40+ years on the boards of this association:
- President: Sheryl Bailey
- Vice-President: John Scudder
- Welcoming Director: Sondra Seery
- Rules & Regulations: Mary Prendiville
- Newsletter: Cara Calvo
- Treasurer: Andrea Winship
What did the board of 2018 do with the projected surplus?
The October 2018 letter which the board instructed management to send to owners advised owners of about $20,000 in cost increases for 2019 and advised that because of this a 1.88% fee increase was necessary. The letter ignored the overall budget surplus of about $124,000, although looking at the budget worksheet provided to owners, it was there. Which is how I am aware of this.
A handful of owners attended an association meeting and "testified" that a small increase in fees was okay by them. Apparently they were testifying that the fee increase was fine because they could afford it. However, the board did not present to the owners the fact that 24 owners were seriously in arrears and delinquent by an amount totaling $19,564. The board conveniently ignored the plight of these owners. In fact, as of August 2018 a total of 41 owners were past due, some by small dollar amounts.
Choosing to ignore the seriously delinquent owners seems to be a breach of board duties, in my humble opinion.
What did the board decide to do with the surplus? We don't know because owners were not informed. The Illinois Condominium Act provides a board with options, as follows.
(765 ILCS 605/9) (from Ch. 30, par. 309) Sec. 9(c) Budget and reserves:
"5) At the end of an association's fiscal year and
after the association has approved any end-of-year fiscal audit, if applicable, if the fiscal year ended with a surplus of funds over actual expenses, including budgeted reserve fund contributions, then, to the extent that there are not any contrary provisions in the association's declaration and bylaws, the board of managers has the authority, in its discretion, to dispose of the surplus in one or more of the following ways: (i) contribute the surplus to the association's reserve fund; (ii) return the surplus to the unit owners as a credit against the remaining monthly assessments for the current fiscal year; (iii) return the surplus to the unit owners in the form of a direct payment to the unit owners; or (iv) maintain the funds in the operating account, in which case the funds shall be applied as a credit when calculating the following year's annual budget. If the fiscal year ends in a deficit, then, to the extent that there are not any contrary provisions in the association's declaration and bylaws, the board of managers has the authority, in its discretion, to address the deficit by incorporating it into the following year's annual budget. If 20% of the unit owners of the association deliver a petition objecting to the action under this paragraph (5) within 30 days after notice to the unit owners of the action, the board of managers shall call a meeting of the unit owners within 30 days of the date of delivery of the petition. At the meeting, the unit owners may vote to select a different option than the option selected by the board of managers. Unless a majority of the total votes of the unit owners are cast at the meeting to reject the board's selection and select a different option, the board's decision is ratified."
Why do fees increase even when budget surpluses exist?
For a period of years three entrenched board members voted as a group for fee increases. However, during the budget meeting in October 2015 one of this group swung over to the other side, and so there was a majority vote for a fee decrease. However, the ringleader of the "fee increase" contingent complained at the next meeting and stated the dissenting board member had changed his mind. That ringleader also accused the finance committee of "malfeasance" in an attempt to discredit the vote of three board members.
This went to the Association attorney and in a 3-page letter to the board the attorney stated "
At this point in time, based upon the information conveyed to me, it appears to be that the 2016 budget is properly in place."
I always broached delinquent owners during the budget discussions I led or was a part of. During one memorable budget battle one board member stated "We don't cater to the lowest common denominator."
However, permanent damage had been done. I no longer trusted the ringleader in any situation and I decided I would complete the tasks I set out to do and would then depart the board. In September 2018 I did just that.
Recently one of the board who voted for the 2019 fee increase and should have known better asked me why I was being “an asshole”. Now you know one of my reasons.
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(c) N. Retzke 2019 "all rights reserved"
