It is the end of your association’s fiscal year. Your association has paid all of its expenses when your board members happily discover that after paying the bills, some money remained in the association’s coffers. How should your board handle this overage? The answer depends on how your governing documents and, if applicable, the Colorado Common Interest Ownership Act (“the Act”) define your association’s authority and obligations with respect to surpluses. The following steps should help your board to determine the correct way to handle its surplus funds.
Step One: Determine whether the remaining money qualifies as surplus funds. Section 38-33.3-314 of the Act defines “surplus funds” as the funds remaining “after payment of or provision for common expenses and any prepayment of or provision for reserves.” However, your board must also consult your governing documents as they might provide a different definition, which would control. Ensure that your association has an actual surplus and that all your financial requirements have been met.
Step Two: Check your governing documents to determine your board’s authority and obligations in relation to the surplus. A board has general authority over its association’s funds; however, an association’s governing documents will often contain provisions that expressly control how to distribute surplus funds. For example, some governing documents might contain a provision that specifically requires the association to apply the surplus to its reserve funds. Other governing documents might require the board to refund the surplus pro-rata to owners. Additionally, the governing documents might require membership approval before using association funds, including surplus funds, in any particular manner.
In the event that your governing documents do not address the matter, your board may make a business decision about how to handle the surplus. (i.e., roll it over into next year’s budget, offset future operating expenses, refund it, use it for pending capital improvements, etc.). However, before making any decisions, your board should determine whether Step Three applies to your association.
Step Three: Check whether the Act applies. If your association was created on or after July 1, 1992, the Act requires, unless the declaration provides otherwise, that your association refund the surplus to the unit owners in proportion to their common expense liabilities. In the alternative, the Act also allows a board to credit the surplus to the unit owners to reduce their future common expense assessments. Therefore if your association was created within the applicable timeframe, and your declaration is silent or does not otherwise provide a specific manner in which to handle surplus funds, your board must refund or credit the unit owners as stated above.
Step Four: Be certain and document. If you are unsure of the rights and/or obligations your association has with respect to surplus funds, be sure to consult your homeowners association accountant or attorney. In addition, you may wish to consult with your accountant regarding the tax consequences of various treatments. Once the decision is made, the appropriate motion should be made and voted on by the board of directors.
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