Dealing with a Strata Budget Deficit

WHAT HAPPENS IF THERE ISN'T ENOUGH MONEY IN A STRATA BUDGET?

Budgeting is a key responsibility for Strata Corporations. The budget is usually approved at the Annual General Meeting and includes an estimate for both operating expenses and the contribution to the contingency reserve fund. The strata fees payable by each strata lot is calculated based on these estimates.

As we described in another article, the operating budget is divided into a series of “category of expenditure”. When the amount budgeted as expenses for a particular category is less than the actual expenses there is a deficit. When there is a deficit, the Strata has four general options:

1. Raise money by Special Levy.

2. Borrow from the Contingency Reserve Fund.

3. Borrow from a lender.

4. Go 'Overbudget' if there is a retained surplus.

CAN A STRATA USE A SPECIAL LEVY IF THERE IS NOT ENOUGH MONEY IN THE OPERATING BUDGET?

The Strata can choose to collect funds from the owners through a special levy. This is essentially a 'bulk payment' to address the shortfall when strata fees collected are inadequate to cover the actual expenses incurred. This situation may arise if the estimated costs were too low or if an unforeseen expense occurred. Implementing a special levy requires a resolution passed by a ¾ vote at an annual or special general meeting.

CAN A STRATA BORROW FROM THE CONTINGENCY RESERVE FUND TO MAKE UP FOR AN OPERATING DEFICIT?

The Strata Property Regulation permits borrowing from the Contingency Reserve Fund to meet operating expenses only if two conditions are met:

1. The expense is in the budget but fees have not been paid.

2. The amount borrowed will be repaid in the same fiscal year.

The requirement that the expense was included in the budget but that strata fees have not been collected yet means it cannot be used for unexpected expenses, or expenses that are more than expected.

An example of when money could be borrowed from the Contingency Reserve Fund is when the Strata’s insurance premium is due on the first day of the fiscal year but the Strata has not collected enough strata fees to pay that large payment. In that situation, it would be possible to borrow from the Contingency Reserve Fund to pay that expense.

The second requirement is that the loan must be repaid by the end of that fiscal year.  This means that the Strata cannot use the Contingency Reserve Fund to subsidize or reduce the amount of money that needs to be collected by strata fees as part of the operating budget.

There is often a temptation for a Strata to ‘dip into’ the Contingency Reserve Fund to meet expenses. It is important that a Strata exercise restraint and ensure that it is done only when these two conditions are met.

CAN A STRATA BORROW MONEY FROM A 'BANK' WHEN IT HAS AN OPERATING DEFICIT?

The borrowing of money is not uncommon when there are extraordinary expenses that do not occur annually, for example major repairs. These expenses are not part of the operating fund and our experience is that borrowing to cover operating expenses is very rare.

However, although very rare, a Strata can borrow money from a lender if approved by a ¾ vote at an annual or special general meeting. It is often a requirement of these loans that the Strata must secure the repayment of the money borrowed in this way by an assignment of unpaid strata fees or money payable under a special levy.

CAN A STRATA GO OVERBUDGET IF IT WAS UNDERBUDGET IN A PRIOR YEAR?

Sometimes Stratas have carried forward a balance in the operating fund from prior years during which expenses were lower than anticipated. If the Strata has a carried forward surplus, it can spend that surplus. However, the Strata in the next fiscal year must budget to meet all the expenses of that year plus the amount that was spent. For example, if a Strata spends $100,000 of surplus funds from the Operating Fund in year 1, in year 2 the total contributions to the Operating Fund need to be the expenses for year 2 plus an additional $100,000.

We discuss the options when a Strata has a surplus at the end of a fiscal year in this article.

CAN A STRATA AMEND ITS BUDGET DURING THE YEAR?

As we mentioned, when the amount budgeted as expenses for a particular category is less than the actual expenses there is a deficit. Frequently we are asked if, instead of raising money by Special Levy, a Strata can amend its budget to cover the deficit in a particular category. For example, can a Strata reduce the amount budgeted for professional services in order to have more money for exterior maintenance? Our opinion is that the budget can be amended, but it requires a resolution passed by a majority resolution at a general meeting. The reason why we believe that a resolution is required is because the Owners have approved the budget based on categories of expenditure and therefore the Council does not appear to have the lawful authority to unilaterally amend the budget.

WHEN THE BUDGET IS INACCURATE, IT DOES NOT RELIEVE THE STRATA OF MEETING ITS OBLIGATIONS

There is an expectation that the Strata will raise enough money by way of strata fees in a fiscal year to satisfy the expenses that the Strata will incur in that fiscal year. However, sometimes the budget is wrong and the Strata’s expenses are more than the money collected. In that circumstance, the Strata still needs to meet its obligations, and it needs to be deliberate and thoughtful about how it deals with that deficit.

A benefit of having a robust and resilient Strata Community is that Owners can reasonably discuss how to deal with the consequences of an inaccurate budget.