Budget Process of an HOA
Created After July 1, 1992
The Colorado Common Interest Ownership Act (CCIOA) indicates that HOAs created after July 1, 1992 need to follow the following process for creating and passing a budget for the association:
- Draft and adopt a budget,
- Provide notice of the adopted budget to the membership, and;
- Set a meeting for association members to review and consider a veto of the budget.
Unless a majority of the owners veto the proposed budget (or such higher percentage as established in the Declaration), the proposed budget becomes the approved budget of the association. Additionally, associations can require owner approval of the budget, as allowed by CCIOA. Associations also have the power to amend their budgets for revenues, expenditures, and reserves.
Created Prior to July 1, 1992
For communities created prior to July 1, 1992, CCIOA does not define the budgetary requirements needed to pass an association’s annual budget, therefore look to the association’s governing documents for the budget process.
Financial Audit or Review
At the discretion of the executive board or upon owner request, the books and records of the association shall be subject to an audit, using generally accepted auditing standards, to be performed by a certified public accountant.
An audit shall be required only when both of the following conditions are met:
- The association has annual revenues or expenditures of at least two hundred fifty thousand dollars ($250,000); and,
- An audit is requested by the owners of at least one-third (1/3) of the units represented by the association.
- A review shall be required only when requested by the owners of at least one-third (1/3) of the units represented by the association.
- Section 38-33.3-303(4)(B)(b)(I), C.R.S.
As an alternative, and HOA may request a review, which uses statements on standards for accounting and review services by an independent and qualified person selected by the board, which person shall have at least a basic understanding of the principles of accounting as a result of prior business experience, education above the high school level, or bona fide home study.
HOA Owners Assessments
Authority of Association to Levy Assessments
CCIOA states that an association, without specific authorization in the declaration, may adopt and amend budgets for revenues, expenditures, and reserves and collect assessments for common expenses from unit owners.
Regular and Special Assessments
Regular assessments (also known as “dues”) are typically paid on a monthly, quarterly, or annual basis, and go towards the overall operational maintenance costs of the association.
Special assessments are usually less frequent and made on an ad hoc basis, and go towards a specific purpose, such as a repair, replacement, or new construction.
An HOA can typically raise dues as much as it needs in order to meet its annual budget requirements. Any exception to this would be included in the association’s governing documents and usually listed as an annual cap on the amount an Executive Board may raise assessments from the previous years. You will need to review your association’s governing documents to determine if such a cap exists.
Use of Reserve Funds
An HOA’s reserve fund is an account dedicated to unanticipated and deferred expenditures, especially large ones. The association allocates money toward its reserve account over time so that, when a costly repair or financial outlay becomes necessary, cash reserves are available to handle the expense without sacrificing day-to-day functions.
The use of reserve funds is generally at the discretion of the Board, unless the governing documents require membership approval.
A reserve study is an examination conducted by a reserve specialist, consultant or accounting firm for the purpose of analyzing any probable long-term expenses. The reserve analysis is then used to estimate the association’s reserve needs as accurately as possible.
Although the CCIOA does not require a reserve study, it does address it in several of its sections.