Co-op / Condo Budgets: Is Your "Miscellaneous" Line Item a Slush Fund?
Feb. 3, 2010 — Your budget year is over, and you've a couple of thousand dollars left in your co-op or condo's annual operating budget. It's been a long year, and you've devoted a long of time and effort toward your building or complex. And, hey, how much difference can a couple of thousand dollars make in the long run? Maybe it's time to reward yourself — and your shareholders/unit-owners, of course — with a party.
That's a slippery slope, warns Matt Humphrey, president of HOAleader.com, an organization devoted to what its tagline calls "practical advice for condominium and homeowners associations" and co-op boards. Such groups sometimes "take leftover money in a miscellaneous or contingency budget account and fritter it away," he says. And there are consequences to that.
Jeff Vinzani, an attorney at the law firm Nexsen Pruet in Charleston, S.C., has served on two homeowners association boards and represents homeowners associations. "I've learned that you have to be careful how much money you put in that miscellaneous budget item," he counsels. "Normally it's in place for a rainy day. But if it's unused by the end of the year, it should be carried over to the next year. Instead, some boards use it as a slush fund."
Simply because it's not the kind of slush fund you read about in the news that pays off Watergate burglars and such, and because using it for something fun won't seem to hurt anyone, that doesn't mean it's still not a breach of your fiduciary duty. "[I]t's not a social line item but a miscellaneous line item," says Vinzani. "This budget category needs to have a list of possible uses, so the board and the management company have some guidance on how to proceed in spending the funds."
It's an area a board should
look closely at, because an
opportunity for fraud exists.
It's true that there's a fine line between legitimate expenses and abuse of co-op/condo funds, says Lisa A. Magill, a shareholder and association attorney at the accountancy Becker & Poliakoff in Fort Lauderdale, Fla. "Directors don't have unlimited authority regarding the use of funds belonging to" a co-op/condo, she explains. "You must use funds belonging to the association for legitimate association expenditures. Throwing a big party or event for the residents doesn't necessarily seem like an abuse of the association's funds, but it may be beyond the powers and duties of the corporation."
Though he recognizes the potential for abuse of a miscellaneous line item, Robert White, managing director of KW Property Management & Consulting in Miami, which oversees about 125 associations totaling 30,000 to 35,000 units, hasn't seen it yet.
"All associations have some contingency or miscellaneous expenses, but in none I've seen are people doing hanky panky with it," he says. "Do I think it creates an opportunity for that? In buildings with in-house management, that would be an area the board should really look closely at because an opportunity for fraud exists. The onsite manager may be going out to lunch and putting it on the association's tab or going to Home Depot for his home and putting the cost in that line item."
Might Not Miss "Miscellaneous"
You may not even need a miscellaneous line item in your budget. "Having a miscellaneous line item isn't necessarily a bad practice, but it's unnecessary," says Magill. "Your board, along with management, should be able to estimate the expenses associated with each budget category, and evaluating the expenses from the previous year is always a good place to start."
But White does see a purpose. "We call it a contingency line item," he explains. In every co-op/condo, "especially in older ones where maintenance can pop up, you're working to get the budget as close to actual as possible. But we usually build that line item in there for a couple of reasons. One, in older properties, you always have an expense that pops up that wasn't accounted for in the budget." As well, "We've always had a line item for bad debt…. There are things like that that you can't plan for and can't hit perfectly, for which you need to have a little money in there."
If your co-op or condo doesn't use the full amount budgeted during the year, White recommends reduce the amount for the next year. "If the contingency amount was $100,000 and you had $60,000 of items you didn't budget for, you'd reduce your contingency budget the next year by that extra $40,000. As long as you take that approach, I don't think a so-called slush fund will accumulate."
Matt Humphrey is president of the Alameda, California-based HOAleader.com. A journalist and entrepreneur, he is a graduate of the Wharton School.