Associations: Weathering a financial crisis

You cannot turn on a television or radio, open a newspaper or magazine without being told bad news about your 401(k) or IRA.

Associations have a complex relationship with their owners since the board is entrusted with the duty of administering and maintaining the property using other people's money. Board members are deemed by statute and at common law to be fiduciaries on behalf of the members. In those associations using a calendar year for tax purposes, it is this time of the year when the board must do careful financial planning for the coming year.

Ideally, an association should have a one-, three-, five- and 10-year financial plan, however, not surprisingly, many associations have boards that give no real thought to the coming year.

The manager hands the board or the finance committee a pro forma budget that includes the anticipated expenses for the coming year and some allocation for reserves. The board approves it and that's it.

This is very poor financial planning and will have short- and long-term consequences. A board may get lucky but right now, when the American economy is facing the biggest crisis in confidence in over 70 years, a board cannot just stick its head in the ground like an ostrich.

First, in dealing with the day-to-day expenditures paid from the operating budget, from a fiscally prudent point of view each and every item should be reviewed. See if there is any better or cheaper way to do everything, even fixed expenses, which cannot be obtained for less money; however, there are cost-saving measures an association can take to have items delivered more economically, i.e. energy-saving light bulbs, brokering natural gas, etc.

Second, are the reserves properly invested so as to resist the drop in value of principal in fluctuating securities markets? This is where associations frequently err, though they may be within the bounds of a reasonable person standard. However, unless a board has not consulted with a professional money manager and not selected an investment strategy where the principle is protected and only the gain speculative, the question is has a board breached its fiduciary duty by mis-investing association funds?

Next, numerous financial institutions have either voluntarily or been compelled to offer its borrowers in dire financial straits "deals" on their mortgages. Is an association obligated to do the same? Although condominiums are prohibited from "foreclosing" on the collection of assessments and boards can certainly negotiate payment plans with owners who claim hardship, can a board agree on a lesser amount than what is owed with an owner who is about to have his mortgage foreclosed? The better question is, should they? Extraordinary circumstances may necessitate emergency measures.

For example, if the association has a long track record of high delinquencies, a prudent board must now plan for a like number of foreclosures and collect enough money to cover all of its operating expenses and reserve allocation less a theoretical amount of foreclosure write-offs. Anything collected in the future to offset this, would then be found money.

A board of directors can bury its head in the sand like an ostrich and ignore reality or plan ahead for winter, like the squirrel.

• Jordan Shifrin is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions to him at jshifrin@ksnlaw.com. This column is not a substitute for consultation with legal counsel. Past columns can be read at www.ksnlaw.net.