What Happens When There is Surplus in Community Association Funds

Each year, community associations attempt to predict their expenses through a detailed annual budget and then use that information, in addition to other estimates and projections, to divide the cost appropriately and set their annual assessments. Some years they are probably able to project revenue and expenses pretty accurately, but other years they may be off by quite a bit. Inflation and supply issues have wreaked havoc on association budgets over the past few years. 

Allocating Association Funds and Managing Budget Surpluses

During the budget process, most associations allocate an amount to fund the association reserves (usually at least 10% but often more), some to any needed special projects, and most to the routine annual costs such as insurance, taxes, utilities, management fees, attorney fees and upkeep of the shared community or condo building. In years that an unexpected cost didn’t crop up, the association will have collected more than it needed and end up with a budget surplus. 

In this case, your association may find yourself with a surplus of funds at the end of the year. When your associations find themselves in this situation (which is always better than the alternative!), it's important to proceed in compliance with the law and in the best interest of your community.

How Surplus Occurs in an Association Fund

Surpluses occur when expenses are lower than predicted in a given year or when revenue exceeds expectations. While having a surplus is a positive financial outcome, it is essential for the board to act thoughtfully and strategically when deciding how to allocate these funds. Homeowners will want assurance that their money is being managed responsibly, and a surplus may lead to expectations of reduced assessments in the future. Transparent and thorough communication with residents is key to maintaining trust and setting appropriate expectations.

One use of surplus funds is to allocate them toward unexpected future costs, such as emergency repairs, rising insurance premiums, or unforeseen maintenance needs. Setting aside funds for these potential expenses can help prevent financial strain and ensure the long-term stability of the community.

Some associations may also choose to use surplus funds to reduce or eliminate special assessments, which can help alleviate financial burdens on homeowners. By proactively managing the budget and using surplus funds wisely, the board can minimize the need for unexpected charges, making financial planning easier for residents.

To ensure the surplus is managed properly, the board may consider conducting a financial audit or review. This process can provide transparency, confirm that all financial decisions align with the community’s governing documents, and demonstrate fiscal responsibility. 

Check Your State Laws for Guidance

First, check your state laws, as there may be specific guidance or requirements regarding how surplus funds must be handled. Some states have clear regulations on how these funds should be reported in annual financial filings, ensuring transparency and compliance with state-mandated financial practices. Failure to adhere to these requirements could lead to penalties or legal complications, making it crucial for the board to be aware of any applicable rules.

Additionally, some states have laws that dictate how surplus funds should be managed if an association’s reserve fund exceeds a certain percentage of annual assessments. In such cases, surplus funds may need to be redistributed to homeowners, used to offset future assessments, or allocated to specific projects. Understanding these regulations can help the board avoid mismanagement of funds and ensure compliance with legal obligations.

Beyond state laws, the governing documents of the community may outline specific steps the board must follow when handling a surplus. These documents may dictate whether funds can be rolled over into reserves, used for operational expenses, or refunded to homeowners. Since each community’s governing documents are unique, reviewing them carefully is essential.

If there is any uncertainty regarding state requirements or the association’s governing documents, it is always best to consult the association’s attorney. Legal counsel can help clarify any required or prohibited actions, ensuring that the board remains in compliance while making informed financial decisions.

Credit the Surplus to Next Year's Expenses

Although uncommon and potentially an accounting challenge, some associations apply surplus funds as a credit toward next year’s expenses and member fees. This is typically done by adding an additional income line to the next year’s budget, providing an equal credit to all members.

Careful calculation is essential to avoid over- or underestimating future costs. An inaccurate credit could lead to budget shortfalls or missed opportunities to ease financial burdens on homeowners. Applied strategically, these credits can help offset higher-than-usual expenses, such as rising insurance premiums or major repairs, reducing financial strain on residents.

Crediting surpluses can also help maintain stable association fees over time, preventing drastic assessment increases and promoting financial predictability. This approach demonstrates responsible fiscal management while benefiting homeowners.

Refunding a Surplus

In some cases, an association may choose to refund the surplus directly to members via check or credit. The amount is typically divided equally based on the assessment allocations. However, this method is less common due to the administrative costs involved. Printing and mailing checks can be expensive, and many members would prefer to see a reduction in their assessment for the following year rather than receiving a one-time check.

Refunding surplus funds may only be a viable option if the surplus is large enough to justify the administrative costs. In such cases, the board must carefully consider whether the benefit of issuing refunds outweighs the logistical and financial burden.

For some communities, issuing refunds can be a way to directly return value to residents, which may help boost satisfaction and foster goodwill within the community. This approach may be seen as a tangible benefit, especially if homeowners are aware that the board has made a decision to share the surplus with them directly.

If an association decides to refund surplus funds, it is essential to clearly outline the refund process to residents. Transparent communication is vital to ensure that homeowners understand how the refunds will be distributed, any potential fees or deductions, and the timeline for receiving them. Providing this information upfront helps avoid confusion and ensures the process is smooth and equitable.

Transfer the Surplus to Reserve Funds

A common choice is to transfer any surplus to the association’s reserve funds. Some community associations may already have a policy in place that directs surplus to the reserve fund. 

Transparency and Legal Compliance is a Must

As with all financial matters related to the association, including an association budget surplus, transparency and legal compliance are crucial. Using surpluses responsibly, such as allocating them to reserve funds, can significantly improve the association's long-term financial health. Building up reserves helps the association become more resilient to economic fluctuations and ensures it is prepared for unexpected costs in the future.

This option is especially important if there is anticipated infrastructure work or repairs that will require additional capital. By earmarking surplus funds for reserves, the association can avoid sudden increases in assessments or the need for special assessments when these expenses arise.

Transferring surplus funds to reserves can also improve the association's creditworthiness, which could be vital if the board ever needs to take out a loan for large projects or emergency expenses. A healthy reserve fund demonstrates fiscal responsibility and strengthens the association’s financial position, making it more appealing to lenders.

Final Thoughts