Appropriate Use of Common Funds Handling Other People’s Money

Appropriate Use of Common Funds

Here’s a scenario:  It’s mid-December.  The board has assembled for their last meeting of the year.  The managing agent brings great news: due to several unforeseen factors, including the past year’s mild winter and savings resulting from converting to energy-saving technologies, the association is ending the year with a $10,000 surplus over projected expenses.  Should the board throw an extravagant holiday party for the residents?  Reward their hardworking staff with larger bonuses?  Install a hot tub?  Remember, this surplus is made up of residents’ money—can the board spend it on...whatever?

In a word, “No,” says Cindy Petrenko, president of Complete Property Services located in Vernon. “Common funds are used for the business of the association —i.e., paying bills and contracts.” Boards doing anything unilaterally are asking for trouble. There is no law against it, but there could be hell to pay if financial decisions are made in a vacuum, and according to Petrenko, experience dictates that it’s just poor judgment. An association’s budget drives everything, and if it’s not in the budget, the board would be well served not to spend the money. That doesn’t mean they can’t bring it to the membership and suggest the expenditure and vote on it, however.

Proprietary Rules and Propriety

“You are able to spend money based on what your governing documents say,” says A. Christopher Florio, an attorney and shareholder with Stark & Stark in Lawrenceville.  “What does your original budget set forth subject to your approval process? There are certain funds you can spend without membership approval. Often there will be a dollar amount up to a certain ceiling per year over which the board has discretionary power.”

Florio considered the idea of an end-of-year surplus, and what a board might be able to consider from a discretionary basis. “If your documents give you authorization for say, a large party, then probably yes. However, my recommendation to the board would be that if their documents don’t specifically allow a specific type of expenditure, don’t do it. What they should do with that money in an end-of-the-year surplus is move it forward to the next year. No party!”

Petrenko seconds Florio’s opinion, and says that she is always very clear with her clients that “Governing documents will be specific that there is an operating account and a reserve account—and in the event that the association has a specific component that has to be funded, that will be listed.”

What must also be considered is the corporate purpose of the organization. At least as a starting point, the Declarations and other governing documents describe in general terms what the purpose of the organization is: to maintain and enhance the property and to provide certain services to residents. It’s a very utilitarian approach.

Complying With the Documents

Condominium associations and HOAs draw up annual budgets every year based upon prior years’ expenses and the advice of management and accountants. Board members are expected to execute the plan as closely as possible while taking into account day to day changes in situations that may affect expenditures. Boards are charged with running the day-to-day operations of the community. In terms of the expenses that go to day-to-day operation, they generally have ‘carte blanche’ control. Declarations may have restrictions relative to reserve accounts.

Karen Sackstein, CPA and a principal of, The Condo Queens, a Fair Lawn-based accounting firm specializing in community associations, points out that, “Common funds are spent for the maintenance and replacement of the common elements. Those areas are detailed in the association’s governing documents. Each year, a budget covering all operating and expenses should be prepared and voted upon by the board of directors. While it is possible to have non-budgeted expenditures which are legitimate, they should be voted upon by a majority of the board, and should never be for personal purposes.”

Sackstein also says, “The board of directors has the authority through the budgeting process to pay bills in accommodation with the budget. Overall, they have broad control, as long as those funds are being used for the benefit of the community. They have a bit of leeway though. Now, if they start saying, ‘Okay, we have a line item in our budget for a holiday party for $1,000 – but we’re going to throw a bash that’s going to cost say $20,000,’ yes, they have the authority to do that, but they have to document it – and recognize that if they continue to do things like this, they are likely to be ousted by the other owners as frivolous.”  

From the standpoint of individual owners or board members, strict interpretation may appear to be problematic. While on the one hand their decisions might be seen by them to promote the common good of the larger community, it’s worth asking on the other hand whether their actions benefit the personal interests of the board members who might enjoy having a party and receiving credit for it? Board members owe a fiduciary responsibility to the association of good faith and fair dealings. That must be their first and foremost concern.

Safeguards Against Malfeasance

Even with the best of intentions on the part of board volunteers and managing agents, accusations of impropriety can and do arise. It is important to set up the right processes to protect both the association and those who serve on the board. The best system for both preventing the mishandling of funds and to provide proof that no malfeasance occurred is a multi-person money management system that promotes transparency. Have different individuals taking on different tasks, one person who monitors accounts for the association, another who does reconciliation and two who sign checks. Your managing agent can easily set this type of system up. 

As to the question of multiple signatures, it seems to be a tried and true practice in maintaining transparency. The question is whether those signatures should both come from the management company or should one of them be from the association’s board? In any case there should always be two.

Sackstein relates the experience of one of her clients as a cautionary tale. “We had an association wherein one board member had full control over the association’s reserve funds. That board member signed a contract with a vendor and gave that vendor a very large deposit on an upcoming project without the knowledge and approval of other board members, or the managing agent. While the vendor had done work for the association in the past, the projects were minor – a few thousand dollars. This project was several hundred thousand dollars. The vendor fled the country with the association’s funds (nearly a six-figure check) and the money was lost.

She suggests the following precautions to keep things honest. 

• Sealed, competitive bids should be opened by the board.

• Vet vendors to make certain they are a registered business.

• Require proof of insurance coverage before any payment is made.

• Set a dollar limit and dual controls for reserve disbursements.

• Require and document board member approval.

• Monitor financial activity through the accountant and managing agent to alert all board members as soon as the monies are paid.

• Conduct a thorough analysis of your Directors and Officers (D&O) policy to verify that coverage is adequate.

• And of course, require multiple signatures on checks over a few hundred dollars.

When it comes to paying bills efficiently, Sackstein adds the following: “Normally, a managing agent will have control over the operating account. They will either cut checks and sign them, or cut checks and the board will sign them. These days, many management companies have more likely gone over to an [electronic] bill-pay system. There are two large third-party service providers: Avid Xchange and Strongroom. Basically, everything is online, in the cloud. The board members give their approvals of an invoice in a password-protected portal, and the bill is authorized for payment. This system works really well for operating accounts. These systems have eliminated the need for check signing. There are no signings, and the checks are generated by the third party. The bill has been uploaded by the management company, and the board members approve the transaction. By doing things this way, it actually delegates back to the board members the responsibility for overseeing and ‘signing’ without the hassle of FedEx envelopes, delivery and pick-up. This is the way of the future.”

As for what to look for if you suspect malfeasance on anyone’s part, the pros say there are a lot of telltale signs. For instance, when someone is not transparent or forthcoming with information that’s been requested, or is argumentative about those requests. That’s when you know something is not right. It’s also worth noting that most professionally managed associations also require their management company to carry a fidelity bond – a form of insurance protection that covers policyholders for losses they incur as a result of fraudulent acts. That’s another good way to make sure you’re covered.

Best Practices

In the end, transparency seems to be the most important factor in maintaining a sense of propriety with regards to association funds for everyone involved, whether they’re board members, management, or others. Condominium association members and HOA members look to their board leadership for their honest custodial responsibility in protecting everyone’s interests.  While that hot tub or extravagant holiday party or generous appreciation of the association’s employees might make for warm fuzzies, it can potentially lead to disapproval on the part of others.  Board members should know – and respect – the limits of their position, says one pro, who adds: “Limits are memorialized by getting voted out of office.”                                         

A.J. Sidransky is a staff writer and reporter for The New Jersey Cooperator. 

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