Appropriate Use of Common Funds Handling Other People’s Money

Here’s a scenario:  It’s mid-December.  The board has assembled for their last meeting of the year.  The managing agent brings great news: due to several unforeseen factors, including the past year’s mild winter and savings resulting from converting to energy-saving technologies, the association is ending the year with a $10,000 surplus over projected expenses.  Should the board throw an extravagant holiday party for the residents?  Reward their hardworking staff with larger bonuses?  Install a hot tub?  Remember, this surplus is made up of residents’ money—can the board spend it on...whatever?

In a word, “No,” says Cindy Petrenko, president of Complete Property Services located in Vernon. “Common funds are used for the business of the association —i.e., paying bills and contracts.” Boards doing anything unilaterally are asking for trouble. There is no law against it, but there could be hell to pay if financial decisions are made in a vacuum, and according to Petrenko, experience dictates that it’s just poor judgment. An association’s budget drives everything, and if it’s not in the budget, the board would be well served not to spend the money. That doesn’t mean they can’t bring it to the membership and suggest the expenditure and vote on it, however.

Proprietary Rules and Propriety

“You are able to spend money based on what your governing documents say,” says A. Christopher Florio, an attorney and shareholder with Stark & Stark in Lawrenceville.  “What does your original budget set forth subject to your approval process? There are certain funds you can spend without membership approval. Often there will be a dollar amount up to a certain ceiling per year over which the board has discretionary power.”

Florio considered the idea of an end-of-year surplus, and what a board might be able to consider from a discretionary basis. “If your documents give you authorization for say, a large party, then probably yes. However, my recommendation to the board would be that if their documents don’t specifically allow a specific type of expenditure, don’t do it. What they should do with that money in an end-of-the-year surplus is move it forward to the next year. No party!”

Petrenko seconds Florio’s opinion, and says that she is always very clear with her clients that “Governing documents will be specific that there is an operating account and a reserve account—and in the event that the association has a specific component that has to be funded, that will be listed.”

Read More...

Related Articles

Q&A: Rift Over Community BBQs

Q&A: Rift Over Community BBQs

Spotting Financial Irregularities

Red Flags Every Board Member Should Know

Show Me the Money

Collections, Foreclosure & Evictions