All in Good Fun(d)

HOW AB-1101 LIMITS FUND TRANSFERS WITHOUT BOARD APPROVAL

BY A.J. JAHANIAN, ESQ.

You may recall that, not too long ago, California legislators took steps to protect association finances by mandating greater oversight by boards of directors. Specifically, the Civil Code was revised in 2019 to require monthly financial reviews and also prohibit any fund transfers or expenditures that exceed $10,000 or five percent (5%) of an association’s total combined reserve and operating account deposits (whichever is lower), without the prior written approval of the board. This meant that community association managers were required to obtain the written approval of the board first, before paying invoices, making expenditures, or otherwise transferring association monies in excess of the threshold.

With the passing of Assembly Bill 1101 (“AB- 1101”), this approval requirement is new and improved based upon the size of the community; specifically, written board approval will be required for fund transfers or expenditures which exceed the following thresholds:

• If the association has fifty-one (51) or more separate interests, the board must give its written approval for transfers of $10,000 or five percent (5%) of the estimated income in the association’s operating budget for the year (whichever is less); and

• If the association has fifty (50) or less separate interests, the board must give its written approval for transfers of just $5,000 or five percent (5%) of the estimated income in the operating budget for the year (whichever is less).

These changes are somewhat intuitive, since it makes sense that smaller associations are subject to a stricter approval requirement; after all, $5,000 may go much further and have a great impact on a smaller association and therefore, smaller budget.

On the other hand, regardless of size, boards may find these requirements to be overly burdensome and restrictive of their ability to delegate routine expenditures to their trusted community managers.

Managers may find that obtaining board approval for each of these transfers, no matter how routine and recurring they are, unnecessarily slows the association’s ability to get things done. Whichever side you fall on, there are ways to ensure compliance with the new laws, without necessarily impeding your routine operations.

For example, the board may authorize and sign a resolution which expressly delegates to management the right to make certain recurring expenditures and fund transfers, even if those transfers exceed the Civil Code thresholds. A resolution can serve as “standing approval” for management to proceed with business as usual, so that they do not have to obtain written board approval for each and every transaction.

Boards should exercise due care whenever it comes to the association’s finances. This means documenting compliance with the Civil Code and the association’s governing documents and noting in meeting minutes when fund transfers are approved or delegated to management for handling. A board resolution can serve dual purposes: documenting compliance, while also authorizing trusted agents to meet the association’s routine financial obligations on a recurring basis.

Either way, boards should consult with their association’s legal counsel, community managers, and CPAs, in deciding what works best for the community. Some boards may prefer to retain greater oversight over the association’s fund transfers and ensure they are involved in each decision subject to AB-1101’s limitations. Others may prefer to delegate these decisions to management, via board resolution, when it comes to specific invoice and expenditures only. Whatever your preferred approach, always remember to document, document, document!

A.J. Jahanian, Esq.

A.J. Jahanian, Esq., is an associate attorney with Beaumont Tashjian that specializes in preparation and enforcement of governing documents and contracts, risk management, dispute resolution, fair housing compliance, and all other issues impacting community associations.