Association Structure and Funds
In general, the owners cannot override a board, committee, officer or manager decision. If the owners are unhappy with a board decision, they can convene a meeting, vote to remove one or more directors, and hope the replacement directors make a more satisfactory decision. If the owners are unhappy with a committee, officer, or manager decision, they can attempt to convince the board to overrule it or, if that does not work, vote to change the board. Alternatively, one or more owner could challenge any board, committee, officer or manager decision through litigation or arbitration on the basis that the decision was not reasonable, made in good faith, and/or in compliance with formally established policies or procedures. One notable exception to the general rule is that, in some circumstances, an owner may be authorized to convene a meeting and overturn a new Rule enacted by the board.
Homeowner associations are required to pay federal and state income tax only if they generate income from sources other than the collection of assessments and fees from the owners, and then only if the income from these other sources, offset by the expenses associated with generating it, exceeds $100. The only non-assessment income most associations generate is interest on association funds. Federal and state income tax is owed on this income to the extent it exceeds $100 per year, but most associations avoid paying tax by carrying forward any potentially taxable income by applying it to the next year’s budget.
In general, the distribution of power and authority within the HOA is determined by the governing documents. Where the governing documents simply give the association power to do or approve something without specifically requiring owner approval, the power can be exercised by the board of directors without owner approval. In practice, most governing documents require owner approval for a variety of major decisions including changing the items which the association is responsible to maintain, changing the owners’ assessment percentages, changing the unit or lot boundaries, and imposing leasing or resale restrictions.
The board of directors has complete control over all committees, officers, and managers. This means that the board decides who will serve in these capacities, and what authority they will have, subject only to restrictions in the governing documents. The board retains the power to override the decision of any committee, officer, and manager.
The first step in homeowner association decision making is determining whether the course of action under consideration would be reasonable and in the best interests of all owners. If this question can be answered affirmatively, the next step is to review the governing documents with the following questions in mind:
- Is a particular action or decision required under the governing documents and/or the law?
- Is a particular procedure for making the decision required under the governing documents and/or the law?
- Does the decision under consideration require an owner vote?
Questionable action should be reviewed by an attorney. If the action could have a significant impact on one or more owners, it is wise to get a written opinion of counsel before acting upon which the board can rely in the event of a legal challenge. A legal opinion may protect the board from liability for an erroneous decision by allowing it to assert reasonable reliance on the advice of counsel as a defense. But remember that the failure of an association to follow the advice of counsel or its own internal decision-making procedures will make inappropriate action vulnerable to a legal challenge.
The law requires that an HOA segregate its reserve funds from its operating funds and perform an annual financial review. Some governing documents increase the scope or frequency of this review and require periodic audits that are more thorough than financial reviews.
The law also requires preparation and distribution of a budget and financial report each year as described under the heading “Association Budgeting, Reserve Planning, and Reporting Requirements” above.
Reserve funds can be used only for repair, restoration, replacement or maintenance of the portions of the property that the association is obligated to maintain, or litigation involving these items. In some circumstances, the association can borrow reserve funds to cover operating expenses, but a plan to replenish the reserve funds must generally be adopted within one year.
The board is responsible for fulfilling the association’s accounting responsibilities, but it can delegate this responsibility to an officer, committee, or professional manager provided the board retains final authority.
An HOA operating budget is a projection of the money needed by the association to cover its recurring operating expenses and it should also include a line item for the amount to be transferred to fund the association’s reserve fund. Washington and Oregon law requires that the HOA adopt an operating budget every year. In practice, this means the HOA revises its budget from the previous year to consider changes in its financial position and cost structure. The budget adoption process is typically controlled by state law, but procedures are included in some governing documents. In most associations, the governing documents provide that the budget is adopted by the board rather than by a vote of the owners. However, even when the documents give the board the right to adopt the budget, a vote of the owners may be required to ratify the budget or to adopt a budget that would require a significant increase in regular assessments (aka owner dues) as discussed below. The HOA must distribute its budget to all owners.
The law states in Washington and Oregon that the signatures of at least two directors is required for withdrawals from the association reserve account(s). Withdrawal requirements for other association accounts are usually set in the governing documents, but if they are not, the requirements can be established by the board.
The decision of whether the association should enter into a particular contract is made by the board unless the governing documents require owner approval, or unless the board has delegated the decision to an officer, committee, or manager.