Monday, March 9, 2009

Is Reserve Funding Mandatory?

Can an Association Legally Defer Funding Reserves Necessary for Repairs and Renovations?

There is a continuing debate in community associations over how much cash an association must set aside to adequately fund its operations and reserve accounts, and at what level the assessments must be set to obtain that cash from the members. Boards of directors frequently face the dilemma of whether to raise monthly assessments in the face of member resistance, or to defer funding certain budget line items--typically reserve funds--to a later time.

California has a mandatory funding statute for community associations. Civil Code Section 1366 says: “Except as provided in this section, the association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this title.”[1] It uses the term “shall” and that means assessments adequate to do the job are mandatory up to the limits of the board’s authority. In California, the board has the authority to increase regular assessments up to 20% over the prior year and can impose a special assessment of up to 5% of the gross budget, all without a vote of the members.[2] So the authority is there. But does the board have to use it?

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[1] California Civil Code Section 1366(a)

[2] California Civil Code Section 1366(b)

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