Budget Ratification: Understanding the Ghost of Budgets PAST When Preparing for the Future

It's that time of year again.  The holidays are upon us, and the end of the year is drawing near.

As we reflect on the unprecedented past year, many of us begin to look forward and think, "What's next?"  With a New Year right around the corner, community associations need to begin considering the PAST in order to prepare for the upcoming year.  So "What's next?" for community associations?  The answer: budget ratification.  For a better understanding of what a community association is all about, please check out Unwrapping the Riddle: What is a Community Association.

Each year community associations are faced with the task of preparing an annual operating budget for the upcoming year.  The North Carolina Planned Community Act ("Chapter 47F") and the North Carolina Condominium Act ("Chapter 47C") both require the Board of Directors ("Board") to prepare, adopt, and submit a proposed annual budget for the coming year to the membership for ratification.  Budget ratification requires following a precise process, and understanding the differences between budget ratification in a homeowners association versus a condominium association is crucial.  But no need for any Bah, Humbug's because this article summarizes the differences between community associations and provides a step-by-step approach for budget ratification.

Community Differences

First, the statutory budget ratification process found in Chapter 47C for condominium associations applies to all condominiums in North Carolina, regardless of when created.  However, the process for planned communities found in Chapter 47F is not retroactive and only applies to planned communities established after January 1, 1999.  Accordingly, planned communities established before January 1, 1999, need only follow the ratification process found in their governing documents.  In other words, unless the governing documents say otherwise, planned communities created before January 1, 1999, do not have to send their budget to the membership for ratification.

Second, the notice requirements for budget ratification meetings differ between community types.  Chapter 47F and Chapter 47C both require the Board to send a summary of the budget and set a date for a budget ratification meeting not less than 10 nor more than 60 days after the proposed budget is mailed to the owners.  However, Chapter 47F also requires that the notice of meeting include a statement that the budget may be ratified without a quorum of the owners present at the meeting.  Chapter 47C, governing condominium associations, does not require the Board to include such a statement in the meeting notice. 

PAST, Present, Future

No matter the type of community association, following a step-by-step approach is the best way for Boards to successfully navigate the budget ratification process.  The procedural requirements for budget ratification can be summarized in four steps.  Just remember: don't forget the PAST when planning for the future.

  1. Prepare. The budget ratification process starts when the Board prepares an annual operating budget.
  2. Adopt. The Board then adopts the proposed budget based on the requirements set forth in their governing documents.
  3. Send notice. After adoption, the Board must send notice of the meeting to consider ratification of the budget to all owners in the community. Additionally, the notice must include a summary of the proposed budget.  Owners should receive an annual budget package that includes a summary of the proposed budget, notice of the meeting to consider ratification of the budget, and if the association is governed by Chapter 47F, the meeting notice must include a statement that the budget may be ratified without a quorum. 
  4. Take Note. The Board must take note of the specific timing requirements set forth in Chapter 47F and Chapter 47C. The meeting notice and budget summary must be sent to all owners within 30 days of the Board's adoption of the budget.  Additionally, the budget ratification meeting must take place at least 10 days after the mailing of the budget summary and notice, but no later than 60 days after the mailing of the summary and notice.  For example, if the Board mailed out the notice and summary on January 1st, the earliest the meeting could take place is January 11th, and the latest the meeting could take place is March 1st.

Looking Ahead

After tackling the PAST, the last step is the budget ratification meeting.  A budget ratification meeting is a meeting of the owners of the association to consider the proposed budget that has been adopted by the Board.  Again, there is no requirement that a quorum be present in order for the budget to be ratified.  At the meeting, the budget is ratified unless a majority of all the owners in the association (or a larger vote, if required by the governing documents) reject the budget.  In other words, the budget is approved unless more than half of the owners in the ENTIRE association reject the budget, not just a vote of those owners in attendance at the budget ratification meeting. 

Lastly, what happens if the owners reject the budget? In the event the proposed budget is rejected, the last budget ratified by the owners will be used until the owners ratify a later budget proposed by the Board. 

Taking a page from Scrooge, reflecting on the past is helpful in preparing for the future.  Make sure you understand the budget ratification process and your community association's governing documents.  If you need help navigating budget ratification or other association matters, do not hesitate to reach out to community association legal counsel to help you along the way.

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© 2021 Ward and Smith, P.A. For further information regarding the issues described above, please contact Madeline C. Lipe.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

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