Slouching Toward the Annual Budget

The Worst of Times. It’s also that time of year when budgets fail. Property managers are left turning, turning in the wind. Community Associations, like wingless rocks, descend into the fiery bowels of budget hell. Attorneys—rather than accountants—balance the books. And the property itself—once a precious jewel glinting in the sun—begins a death spiral toward a certain future that includes a dry community swimming pool filled with leaves and parched frogs.

Slouching Toward Bedlam and Madness. We should celebrate the associations that soar. But celebrating success is boring. Let’s instead dwell for a moment on what’s gone wrong with your budget-making process:

• You never maintain your books;
• Terry[1] estimated future expenses during marathon showings of Spongebob Squarepants;
• You adopted the association’s budget in a secret meeting that included dark hooded robes, candles, and a pentagram;
• The budget had three line items: (a) revenue; (b) expenses; and (c) total estimated surplus: $ -14,232
• A summary of the three line-item budget, which includes only next year’s monthly assessment, is personally delivered on the back of cocktail napkins embossed with “Steve and Mary celebrate their wedding, March 4, 1973” to a few of the board members’ closest friends at a private party;
• At the special meeting called to recall the entire board, seven attorneys, a deputy sheriff, three bodyguards, a “paralawyer” (who markets himself as a nontraditional advocate for property rights), and the association’s new accountant are invited to be “neutral observers”.
• Your collection efforts against delinquent owners, costing well over $20,000 in legal fees, have to be written off because of invalidly adopted budgets.

Getting the Process Right. If any of the above sounds familiar, it’s not too late to turn it around, do it right, soar with the eagles. A detailed budget-making process might be found in your governing documents. Or it might be found in State statutes that prescribe the process for budget-making. (Note that State law may override less restrictive requirements in your governing documents, so you need to know which controls.)

Standards to Start With (and the Usual Caveats). You ought to consult with your attorney before deciding which process is right, or required, or fair, or mandatory. For example, if you are a condominium formed under the Horizontal Property Regimes Act (RCW 64.32), your budget-making process might be found in your declaration or bylaws and the following may be fascinating to you but irrelevant.

Having said that, and with the usual caveats aside, here are some standards to start with if you’re a New Act Condo formed after July 1, 1990, and subject to RCW 64.34, or a non-condo homeowner’s association subject to RCW 64.38:

• The properly elected Board prepares a detailed budget that includes replacement and other required reserves, and possibly a contingency fund (in other words, a detailed spreadsheet showing expected revenue and expenses in appropriately and clearly named columns).
• The Board votes to submit the proposed budget to the owners for their ratification; the Board reasonably believes, in doing so, that the budget will be ratified by the owners. PRACTICE TIP: Use the word proposed until the budget is actually ratified.
• Within 30 days of voting to submit the proposed budget to the owners for their ratification, the Association mails a notice to all owners that states the time and place of a meeting with budget confirmation on the agenda (it may be the only item on the agenda). The meeting is scheduled more than 14 days and less than 60 days after the date the notice is deposited in the U.S. Mail, first-class, postage pre-paid. A summary of the proposed budget as well as the detailed proposed budget is attached to the notice.[2] PRACTICE TIPS: mail, don’t hand-deliver, the notice and summary, keep your resident roster up-to-date, and track returned mail for follow-up).
• Whether or not a quorum is present, following a presentation of the proposed budget, the Board submits the proposed budget to the owners for a vote. The Board makes it clear that the proposed budget includes what the Board, having relied on experts, historical data, and information from its major vendors (e.g., insurance carriers, landscapers), believes its expenses will be next year. Unless a majority of the allocated votes in the association (or any larger percentage specified in the declaration) rejects the budget, the budget is adopted.

Budget Confirmation. The Legislature uses the word “ratification” to describe step 4 of the above standards. Ratification means the owners’ “confirmation” of a previous act done by the Board. A majority (usually) of total allocated votes (not just the votes present at the meeting) has the right to reject the budget. If the majority doesn’t exercise that right, the Board’s proposed budget is adopted.

Not surprisingly, everyone gets confused by the owners’ “vote”, which is really the fairly limited power to veto the Board’s proposed budget. How the Association handles “ratification” can determine whether the Association, otherwise prepared, soars or crashes and burns. All of the Board’s hard work in drafting the proposed budget can be for nothing if “ratification” is screwed up. Here are my ABCs for getting “ratification” right:

• Don’t call it budget ratification. Call it budget confirmation.
• “We’re ready to call for a vote.” Explain that the budget will be adopted unless a majority (or whatever larger percentage specified in your Declaration) in the Association rejects it. “Under State law, our budget will be adopted unless [a majority] [or whatever larger percentage specified in the Declaration] rejects it. That means that unless [for example, 76 owners] reject the budget, the proposed budget will be adopted. We of course want you to adopt this budget. That’s why we’re recommending it.”
• Whether the voting is conducted orally or in writing, call for votes in favor of the budget first. If you’re using a printed ballot, use a larger bold font for the “yes” box and state that the Board recommends you vote “Yes” on this budget. Call for votes rejecting the budget. Count the votes. “Less than [for example, 76 owners] rejected the budget, so that means the budget is adopted.”
• Don’t send out proxy forms with the notice.
• Don’t try to amend the proposed budget at the owner’s meeting.

Worst-Case Scenarios. If your Association doesn’t follow the process required by law, any of the following “worst-case scenarios” could happen: (1) your owners cease to have a duty to make payments; (2) the last approved budget continues (if there’s a saving clause); (3) an owner who challenges in court an invalidly adopted budget may be excused from paying (this happened in one case in a different state); and (4) your property, the thing you cherish most as a community association member, accelerates its death spiral.

A Final Twist and Conclusion. Remember: owners hold the power not to confirm the proposed budget, along with the authority to elect incompetent directors, and the authority to recall competent directors. We reap what we sow.

I’ve tried to include a simple script above to help make the thorny and tortuous vote a little easier. But the experiences of those participating in the budget confirmation process vary widely. I’d be interested in suggestions on other ways to present the “ratification” vote, ways that advance the interests of the association (budget passage) while respecting the owners’ legitimate interest in not being confused or feeling dismissed.[3] We all want to avoid the recent “huh?” I heard at a recent budget confirmation meeting where 20 owners cared enough to attend, where 15 votes were cast to reject the budget, and the budget passed (31 votes were need to reject the proposed budget).

[1] Not Terry Leahy.

[2] Both RCW 64.34.308 and RCW 64.38.020 state that the meeting must be scheduled “not less than fourteen nor more than sixty days after mailing of the summary . . . .”

[3] No one responded the last time I requested suggestions. Let’s try a little harder this time!