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Mandatory Funding?

The Board's Decision to Fund a Community Association is not Discretionary in California

Did you know that California has a mandatory full-funding statute for community associations? Civil Code Section 5600 says: “Except as provided in Section 5605, the association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this act.1 (Emphasis added) It doesn't say, “May” or “Only when I feel like it” or “let me think about it.” It says “shall” and that means assessments adequate to do the job are mandatory up to the limits of the board's authority. In California, the board has the authority to increase regular assessments up to 20% over the prior year and can impose a special assessment of up to 5% of the gross budget, all without a vote of the members.2

Not to put too fine an edge on it, but in legal terms “shall” means: “As used in statutes, contracts, or the like, this word is generally imperative or mandatory...the term 'shall' is a word of command, and one which has always or which must be given a compulsory meaning; as denoting obligation...The word in ordinary usage means 'must' and is inconsistent with a concept of discretion.3 And further: “It has the invariable significance of excluding the idea of discretion, and has the significance of operating to impose a duty which may be enforced, particularly if public policy is in favor of this meaning...4

Legislators use the word “shall” when they want to eliminate options. So as used in Civil Code Section 1366(a) it is the stated intention of the legislature that boards of directors of community associations be legally obligated to assess as necessary to achieve the funding goals of the association. Now, the while law limits the board's authority to the caps indicated above, it requires a board to fully fund within the limits of its authority. This is typically not done, however, and boards of directors commonly view various funding goals, such as those set out in their reserve study, as optional.

Recent surveys revealed that the average association has only 50% of the cash in reserves that its reserve study calls for. That's not 50% of the funds that they will eventually need, that's 50% of the cash that the reserve study calls for them to have on hand now. That can only be achieved by ignoring the funding goals set by the reserve study and setting assessments below that which is necessary to fully fund the reserve account. But if the law is that assessments must be set at levels necessary to fully fund the association's various obligations, why are so many reserve budgets funded at levels way less than 100%?

The problem is that board members are owners too, and any increase in assessments affects them just as much as any other member, and therein lays the rub. Notwithstanding that a board has a statutory duty to impose adequate assessments and, unlike a lot of other states, also has the discretion to raise assessments without a vote of the members up to the statutory limits - they rarely exercise that authority. And if that's the case, where is the other 50% going to come from when it's needed? And when it is needed, raising 50% more than you have on hand by relying on the members to approve a large special assessment is usually a doomed scenario and future owners will eventually have to make up the difference, while present owners may escape the obligation.

The truth is that maintaining underfunded budgets in the face of clear statutory mandates is only possible because there is no enforcement mechanism provided in the law. There is no government audit, for example, of association budgets. There is no specified penalty for violating the provisions of the statute. There is not even a state agency in California whose job it is to oversee this and similar provisions of the Davis-Stirling Act. The California Department of Real Estate parts company with every community association once the last unit is sold by the developer. With no state oversight, strict mandates which can be routinely ignored become no better than simple advisories. Of course, an owner, perhaps called upon to approve a large special assessment necessary to make up for years of underfunding, might voice their displeasure at being put into this situation by claiming that the association and its prior boards failed in their statutory duties--and some day a court might agree, given that violation of a statutory obligation can constitute negligence.5

And then there is the need to uphold respect for the law in general. There is a legal maxim that says something to the effect that: “If you want to know what the law really is, ask someone who routinely flaunts it and they'll tell you what they can get away with.” In the case of community associations we're not suggesting that directors lack sufficient appreciation or respect for the law, but rather that they sometimes fail to understand the nature of their obligations. Perhaps if it was explained more carefully, they would follow the law and impose assessments that will adequately fund their associations.

Or not. Let's not forget what we stated above, that without enforcement, politics, and not economics are going to carry the day when it comes to setting assessments. Perhaps it's time to put an end to voluntary compliance and put some teeth in the law. This may be necessary if we are going to protect future generations of owners from having to pay the deferred obligations of their predecessors.

  1. California Civil Code Section 5600.
  2. California Civil Code Section 5605.
  3. People v. Municipal Court, 149. C.A. 3d 951, 197.
  4. People v. O'Rourke, 124 Cal App. 752.
  5. The “negligence-per-se” doctrine provides that in certain situations an administrative regulation or municipal ordinance may be used to set the standard of care in a negligence case.
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