HOA California Law Requirements for Approving Annual Budgets

California, like most states, has passed legislation defining how HOAs manage their affairs. Here, it’s called the Davis-Stirling Act. Davis-Stirling includes provisions for many aspects of HOA governance, but its requirements for annual disclosures to homeowners and to the state are most important.

These disclosures can be broken down into three broad categories: the annual budget report, the annual policy report, and miscellaneous other requirements.

Requirements of the annual budget report

California law Civil Code Section 5300(b)(1) requires that an annual operating budget is distributed to the membership every year. The law requires associations to prepare pro forma operating budgets that include all estimated expenses and revenues using the accrual basis method of accounting.

Annual budget report requirements

The accrual basis of accounting is vital for Homeowners’ Association (HOA) financial management, ensuring a more accurate depiction of the association’s financial status. By preparing the annual operating budget and subsequent Income Statement on the accrual basis, the HOA maintains consistency, enabling direct comparisons between actual and budgeted figures. This approach offers valuable insights into financial performance, identifying areas of overage or shortfall for informed decision-making. Additionally, the accrual basis provides a realistic representation of revenue recognition and expense allocation, especially important for HOAs with income and expenses not always aligning with cash flow.

The annual budget report serves as a consolidated disclosure statement which must include all of the basic information as well as any additional requirements imposed by the association’s governing documents.

Disclosure categories

These disclosures must be provided 30 to 90 days prior to the start of your HOA’s fiscal year. The requirements include:

• A full budget or a summary of your HOA’s pro forma budget, showing anticipated revenue and expenses on an accrual basis
• A summary of the HOA’s reserves and the procedure(s) used to calculate them
• A summary of the reserve funding plan and the mechanism(s), such as assessments, borrowing, etc. to those reserves, and whether or not special assessments will be needed
• Any outstanding loans and associated information (balance, payee, term, interest rate, etc.)
• A summary of your HOA’s insurance

Legal Compliance

The annual budget report must be distributed to all members by individual delivery, and can be distributed as either the full annual budget report, or as a summary. If it’s a summary, it must include a general description of the content of the annual budget report, as well as instructions on how the member may request a complete copy of the annual budget report. Those instructions must be printed on the first page of the summary.

Providing these disclosures can get complicated, too – the law often requires the use of specific forms, formats, and even font size, so it’s important to read through the regulations thoroughly before preparing your report.

Best practices

• Keep Thorough Records: Maintain meticulous records of financial transactions, board meetings, and budget-related decisions. Accurate and transparent record-keeping is not only good governance but also essential for demonstrating compliance with California law during audits or inspections.
• Timely Preparation: Start the budget preparation process well in advance to ensure ample time for review and approval. California law often specifies a timeline for budget approval, and adhering to these deadlines helps avoid unnecessary complications or penalties.
• Engage Homeowners Early: Foster open communication with homeowners throughout the budgeting process. Provide clear and timely information on proposed changes, financial priorities, and potential impacts on assessments. This proactive approach encourages transparency and minimizes surprises during the approval process.
• Conduct Regular Financial Reviews: Periodically review the association’s financial health and budget performance throughout the year. Regular financial assessments help identify potential issues early on, allowing the board to make informed decisions and adjustments as needed.
• Seek Professional Guidance: Work with financial professionals or legal experts familiar with California HOA laws. Their expertise can help ensure that the budget aligns with legal requirements and industry best practices, minimizing the risk of compliance issues.
• Comprehensive Budget Presentation: When presenting the budget to homeowners, provide a detailed breakdown of income and expenses. Clearly outline any proposed increases in assessments and explain the rationale behind these adjustments. A comprehensive presentation fosters understanding and support from the community.
• Conduct Open Board Meetings: Hold open board meetings during the budget approval process to encourage homeowner participation and input. California law may require the board to allow homeowners the opportunity to express their opinions before finalizing the budget.
• Compliance with Governing Documents: Ensure that the proposed budget aligns with the association’s governing documents. California law often requires consistency between the budget and the rules and regulations outlined in these documents.
• Adopt a Reserve Funding Plan: Comply with California laws regarding reserve funding. Establish a reserve funding plan, conduct regular reserve studies, and ensure that the proposed budget adequately addresses the association’s long-term financial obligations.
• Document Your Decision-Making Process: Clearly document the decision-making process for budget approvals. Include minutes from meetings, records of votes, and any supporting documentation to demonstrate compliance with California law.

It’s important for all California HOAs to stay up-to-date with the newest laws that might impact their communities. If your HOA is looking for an experienced HOA management company, APS Management can help. Browse our services or contact us to request a proposal today.

FAQ

Q: What is the Davis-Stirling Act, and how does it relate to HOA annual budget preparation in California?
A: The Davis-Stirling Act is a set of California laws governing common interest developments, including homeowners’ associations (HOAs). It outlines the rights and responsibilities of both associations and homeowners. Regarding annual budget preparation, the Act provides guidelines on the budget approval process, assessment collection, and financial transparency requirements that HOAs must adhere to.

Q: When should an HOA start the annual budget preparation process?
A: The Davis-Stirling Act doesn’t specify an exact timeline for budget preparation, but it’s advisable to start the process well in advance. Many HOAs begin the budget preparation several months before the fiscal year begins to allow ample time for review, adjustments, and compliance with any specified timelines in their governing documents.

Q: What information should be included in the annual budget?
A: The annual budget should include a detailed breakdown of anticipated income and expenses. This typically covers operating costs, reserve funding, and any proposed increases in assessments. The budget should align with the association’s governing documents and comply with the Davis-Stirling Act. Clear explanations for proposed changes and financial priorities should also be included.

Q: Can the HOA increase assessments without homeowner approval?
A: The authority to increase assessments without homeowner approval depends on the association’s governing documents. However, California law requires a reasonable opportunity for homeowners to express their opinions on proposed budget increases. Generally, open board meetings provide this opportunity, and the Davis-Stirling Act emphasizes transparency and homeowner involvement in the budget approval process.

Q: Is the HOA required to conduct a reserve study for budget preparation?
A: While the Davis-Stirling Act does not explicitly mandate reserve studies, it encourages associations to conduct them regularly. A reserve study helps assess the long-term needs of the community and informs the reserve funding portion of the annual budget. Many HOAs adopt the best practice of regularly conducting reserve studies to ensure financial preparedness for major repairs and replacements.

Q: How often should the HOA review and adjust the budget?
A: Regular reviews of the budget throughout the year are advisable to assess the association’s financial health. While the Davis-Stirling Act does not specify a frequency for budget reviews, periodic assessments help identify potential issues early on, allowing the board to make informed decisions and adjustments as needed.

Q: What happens if the HOA fails to comply with the Davis-Stirling Act during budget preparation?
A: Non-compliance with the Davis-Stirling Act can lead to legal consequences. Associations may face legal challenges, fines, or penalties if they do not adhere to the Act’s requirements. It’s crucial for HOAs to understand and follow the guidelines outlined in the Act to maintain legal compliance and avoid potential legal issues.

This FAQ section is intended as general guidance, and it’s advisable for HOAs to consult legal professionals with expertise in California HOA law for specific situations.