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Your Declaration May Require the Association to Refund a Budget Surplus
In the past, many (if not most) condominium associations that ended their fiscal years with a budget surplus (that is, a net excess of income over expenses) would add that additional money to the association’s reserve account. Doing so benefited the association in a number of ways, including:
- Provided extra cash in the bank for a “rainy day”
- Reduced the need to raise assessments or to adopt a special assessment
- Minimized tax liability for the association by “zeroing out” income for the year
However, a little over one (1) year ago (January 1, 2018), the Illinois legislature amended Section 9(c)(5) of the Illinois Condominium Property Act (“ILCPA”) to require associations to strictly follow the requirements of their respective governing documents (i.e., declarations and bylaws), meaning that while many associations automatically transferred the surplus into reserves despite any other requirements in the declaration, the ILCPA now clearly states that such activity is no longer acceptable.
Why are we bringing this up now, some 15 months after the effective date of the amendment? Because many associations are just now reconciling their books for the 2018 fiscal year and wondering what should be done with a budget surplus (or deficit) in light of the amendment.
The good news is, for associations that do not have any specific requirements for disposition of surpluses or deficits written into their governing documents, the ILCPA allows the board a great deal of discretion in disposing of the surplus (for example, if the board wants to dump the money into reserves, it can feel free to do so). The bad news is for those associations that do have specific requirements in their governing declarations must follow those requirements to the letter to avoid any liability exposure. For certain, refunding money that could be used in the reserve account is far from ideal, and the actual assessment credit/refund process is administratively burdensome. However, the ILCPA is clear, and boards would be wise to review the association’s documents to make sure that it’s handling the year-end bookkeeping properly.
The association always has the option of amending its declaration and bylaws to free up the board to dispose of the money as it sees fit. If your association has any such requirements, speak with your attorney about amending the declaration to give the board more latitude.