It’s Budget Season! Revisiting a Board’s Fiduciary Duties to the Association

If the nights are getting chillier, the leaves are beginning to change color, and kids have gone back to school, what season is it?  Fall?  Nope. It’s budget season!

Since most associations’ fiscal year coincides with the calendar year, many associations are in the throes of planning and budgeting for the upcoming year.  As the numbers begin to add up, some boards may be tempted to adopt a new budget that does not reflect any increases in the annual assessment for the upcoming year, just to avoid heated discussions with the members of the community about any increase.  While no one like to pay more for things, it may not be a prudent decision to forego any increase in the annual assessments from year to year.  Such decisions call to mind the Board’s fiduciary responsibilities to its association.

Briefly, an association’s board owes several duties to the association’s membership:

  • Duty of Care – The duty of care requires a Board member to discharge duties “in good faith, in a manner one reasonably believes to be in the best interests of the organization, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” (See Section 317A.251 of the Minnesota Nonprofit Corporations Act.)
  • Duty of Loyalty – The duty of loyalty requires each member of the Board, when making a decision or acting on behalf of the association, to set aside personal or conflicting interests and act solely in the best interest of the association as a whole.
  • Duty of Obedience – The duty of obedience requires the directors to obey all laws pertaining to association and act in furtherance of the association’s purposes.

Adopting an overly conservative budget simply to avoid any assessment increases arguably breaches the directors’ fiduciary duty of care owed the association.  In short, an association’s Board of Directors has an obligation to set a budget where it should be to cover association expenses (including reserve contributions) – not where owners might like it to be to avoid assessment increases.

Keeping that obligation in mind is especially important for those associations in which increases over a stated percentage must be approved by owners.  If the Board does not increase assessments at least a little each year, it runs the risk that, when a more substantial increase is needed, the owners will not approve it.  That creates a dilemma for the Board, since the association’s expenditures have not changed (nor have its maintenance obligations), but without the approved increase, the Board does not have sufficient funds to meet expenditures.   Without adequate funding, the Board may have to make difficult decisions about how the association’s available funds are spent, which can lead to delayed maintenance and a deterioration of the buildings and grounds of the association.  While owners sometimes grumble about yearly increases, small increases are more easily incorporated into household budgets than a large increase or a special assessment, and will better enable an association to meet its obligations and keep the community looking sharp and appealing.

Every association’s Board of Directors takes on the responsibilities of being a steward of the association’s assets, both physical and financial.  Boards need to bear in mind the association’s best interests at all times, but especially when establishing the annual budget.

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