HOA C.U.R.S.E. No. 5: The unfunded budget

By Deborah Goonan, Independent American Communities

*C.U.R.S.E. – Consumer Unfriendly Regulatory Statute Example

imageA few weeks ago I wrote an article about Sudden Valley homeowners association in Bellingham, WA. Like many aging HOAs and struggling golf communities in the US, Sudden Valley is showing visible signs of deferred maintenance, reportedly due to many years of underfunding its reserve account.

For the past several years, and, more recently, earlier this month, the HOA, working with manager Mitch Waterman, presented a budget to begin tackling needed repairs to roads, storm ditches, the swimming pool, and other common areas. Those budgets were approved by a majority of owners.

However, when the HOA presented the corresponding assessment increase – absolutely necessary to fulfill the revenue required for that budget – the community was unable to obtain the necessary 60% membership vote to approve higher assessment levels.

Sudden Valley rejects dues increases

Property owners in the community-wide homeowners association rejected four dues increases on a Saturday, Nov. 7, ballot, including a 28 percent increase for basic maintenance.

A majority of lot owners participating in the election favored the increase for basic maintenance — 52.3 percent — but a 60-percent vote was required to approve the dues hike.

The other three increases were for specific services: the swimming pool, roadside stormwater control and parks maintenance. They got less than 50 percent approval with 60 percent required to pass.

Read more here: http://www.bellinghamherald.com/news/local/article44306973.html#storylink=cpy

 

The article goes on to lament that, once again, the HOA Board has to adjust their previously approved budget to compensate for the shortage of assessment revenue. Once again, maintenance and repairs will be deferred.

Yet the golf course will continue to operate, even at a deficit. There is still hope that new management will turn things around and start generating some much-needed revenue.

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Be sure to read the comments at the bottom of the article, because it gives the reader a few hints as to why so many homeowners are reluctant to approve assessment increases. Apparently, they do not trust that their money will be spent wisely, because, in the past, assessment dollars were spent on unnecessary improvements rather than essential maintenance. In addition, some homeowners, it seems, no longer want to maintain those fancy but expensive amenities.

And one resident has even created a website (http://www.suddenvalleytoday.com) to chronicle alleged abuses of power by the HOA Board, Security Officer, and Manager. He claims that a great deal of money has been wasted on mistreating residents and racking up legal fees.

Speaking of lawsuits, Sudden Valley HOA was sued by a group of homeowners in 2012 over the issue of budget and assessment increases.

So…when an increased budget is approved, doesn’t that also approve the corresponding assessment increase?

You would think so. It seems like common sense.

But an appellate court recently ruled that Washington statutes do not directly tie ratification of the budget to approval of an assessment increase.

Here’s an excerpt from WA Statute RCW 64.38.025 (emphasis added)

(3) Within thirty days after adoption by the board of directors of any proposed regular or special budget of the association, the board shall set a date for a meeting of the owners to consider ratification of the budget not less than fourteen nor more than sixty days after mailing of the summary. Unless at that meeting the owners of a majority of the votes in the association are allocated or any larger percentage specified in the governing documents reject the budget, in person or by proxy, the budget is ratified, whether or not a quorum is present. In the event the proposed budget is rejected or the required notice is not given, the periodic budget last ratified by the owners shall be continued until such time as the owners ratify a subsequent budget proposed by the board of directors.

The language is a bit confusing, but what this means is that WA statute requires that the budget is ratified (approved) unless a majority of homeowner votes are cast, in person or by proxy, to reject the budget. Furthermore, the appellate court found that the statute does not mention ratification of assessments, and therefore only applies to the approval of annual budgets.

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On the other hand, Sudden Valley HOA’s bylaws require that 60% of homeowner votes are necessary to approve an assessment increase.

Excerpt from appellate court opinion 703293:

The Association derives revenue from a variety of sources, including annual dues and assessments levied on its members, leases of building space to third parties, and usage fees for the swimming pools, fitness center, golf course, and marina. Since its incorporation in 1973, Association bylaws provided that annual dues and assessments must be established by the Board and approved by the members. Article III, section 19 of the bylaws requires approval of annual dues and assessments or special assessments by 60 percent of the members voting at a meeting.

If the Board proposes an increase in the annual dues and assessments for the following year, the Association offers a separate measure for the membership to approve under article III, section 19 of the bylaws. The board includes the additional revenue from that increase in the proposed budget. If, however, the members ratify the budget but reject the increase measure, the projected revenue in the budget is overstated. This occurred in years 2010, 2011, and 2012. The board dealt with the revenue shortfall by adopting a “spending plan” for each of those years. This was an orderly method for the board to adjust expenditures to ensure that annual expenditures did not exceed actual revenues.

To add twists and turns to the dysfunction at Sudden Valley, in 2011, the Board voted to amend ByLaws to remove this discrepancy, thereby resolving that ratification of the budget would automatically also approve the corresponding assessment increase.

However, in the following election, new board members rescinded that amendment to the bylaws, returning to the original system of requiring a 60% membership vote to approve an assessment increase.

According to the appellate opinion, believe it or not, Washington homeowners’ association act does not require simultaneous approval of assessments to support a ratified annual budget, as it does under its condominium act.

To the extent RCW 64.34.360(1) requires assessments to be ratified at the same time and by the same process under the Condominium Act, the legislature did not use the same language in the homeowners’ association act. It did not say—as it did for condominiums in RCW 64.34.360—that assessments must be based on the budget.

It’s enough to make your head hurt.

Of course, as outsiders, we don’t know the entire Sudden Valley story. But it’s clear that internal conflict runs deep, and problems will not be easily reconciled, if ever. And state laws governing HOAs in Washington just contribute to an ongoing impasse.

 

 

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