The Annual Budget Ratification for Homeowner Associations with Outdated Budgets

The Annual Budget Ratification for Homeowner Associations with Outdated Budgets

Question: My homeowners’ association (“HOA”) board presented members an outdated budget for us to ratify for the current year. How can an outdated budget, not previously seen or discussed, be legal?

Answer: Most HOAs in North Carolina are organized as non-profit corporations. North Carolina law requires that HOAs hold an annual budget ratification meeting in advance of each fiscal year (though the law doesn’t apply to planned communities formed prior to 1999). Quite often this meeting is combined with the annual meeting of the HOA, when the election of board members takes place.

Keep in mind that a budget is not necessarily legally binding on the HOA board – it is simply a forecast of the expected income and expenses of the HOA for the following year. Unexpected expenses and uncollected assessments may be encountered during the year –though the board should take these factors into consideration when formulating the budget. While the board should approve a budget and schedule the ratification meeting in advance of the coming fiscal year, the reality is that some do not because the boards are staffed by unpaid volunteers who may be unfamiliar with state laws on accounting, corporate protocol and HOA governance. A professional HOA management company can help the board navigate these requirements.

The budget should reflect not only operating income and expenses, but also any expected special assessments and capital expenditures – such as remodeling of a clubhouse, constructing a playground, re-paving and re-roofing projects.

The budget can be ratified at a meeting of owners, whether or not a quorum is present (a quorum is the minimum percentage of members that must be present at a meeting for any votes to be taken). If proper notice is given for the budget ratification meeting, the budget is automatically approved unless a majority of all members of the HOA (not just those in attendance at the meeting) vote to reject the budget. In other words, the budget is automatically approved unless 51% or more of the members reject it. If the proposed budget is rejected, then the HOA continues to operate under the prior year’s budget until a new budget is ratified by the members.

This column was originally published in the Charlotte Observer on August 19, 2017. © All rights reserved.