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HOA California Law Requirements for Approving Annual Budgets

February 08, 2021 | Accounting

California, like most states, has passed legislation defining how HOAs manage their affairs. Here, it’s called the Davis-Stirling Act. Davis-Stirling includes provisions for many aspects of HOA governance, but its requirements for annual disclosures to homeowners and to the state are most important. 

These disclosures can be broken down into three broad categories: the annual budget report, the annual policy report, and miscellaneous other requirements.

Requirements of the annual budget report

California law Civil Code Section 5300(b)(1) requires that an annual operating budget is distributed to the membership every year. The law requires associations to prepare pro forma operating budgets that include all estimated expenses and revenues using the accrual basis method of accounting.

Because the annual operating budget must be prepared using the accrual basis, the Income Statement should follow on the same basis. The Income Statement compares actual expenses and revenues reported for the period with estimated expenses and revenues reflected in the budget.

The annual budget report serves as a consolidated disclosure statement which must include all of the basic information as well as any additional requirements imposed by the association’s governing documents.

These disclosures must be provided 30 to 90 days prior to the start of your HOA’s fiscal year. The requirements include:

  • A full budget or a summary of your HOA’s pro forma budget, showing anticipated revenue and expenses on an accrual basis
  • A summary of the HOA’s reserves and the procedure(s) used to calculate them
  • A summary of the reserve funding plan and the mechanism(s), such as assessments, borrowing, etc. to those reserves, and whether or not special assessments will be needed
  • Any outstanding loans and associated information (balance, payee, term, interest rate, etc.)
  • A summary of your HOA’s insurance

The annual budget report must be distributed to all members by individual delivery, and can be distributed as either the full annual budget report, or as a summary. If it’s a summary, it must include a general description of the content of the annual budget report, as well as instructions on how the member may request a complete copy of the annual budget report. Those instructions must be printed on the first page of the summary.

Providing these disclosures can get complicated, too – the law often requires the use of specific forms, formats, and even font size, so it’s important to read through the regulations thoroughly before preparing your report. 

It’s important for all California HOAs to stay up-to-date with the newest laws that might impact their communities.  If your HOA is looking for an experienced HOA management company, APS Management can help. Browse our services or contact us to request a proposal today.