BILL NUMBER: AB 1048 CHAPTERED 10/10/99 CHAPTER 898 FILED WITH SECRETARY OF STATE OCTOBER 10, 1999 APPROVED BY GOVERNOR OCTOBER 9, 1999 PASSED THE ASSEMBLY SEPTEMBER 8, 1999 PASSED THE SENATE SEPTEMBER 3, 1999 AMENDED IN SENATE AUGUST 31, 1999 AMENDED IN SENATE JUNE 30, 1999 AMENDED IN ASSEMBLY MAY 27, 1999 AMENDED IN ASSEMBLY MAY 19, 1999 AMENDED IN ASSEMBLY APRIL 12, 1999 INTRODUCED BY Assembly Member Firebaugh FEBRUARY 25, 1999 An act to amend Sections 1365 and 1365.5 of the Civil Code, relating to common interest developments. LEGISLATIVE COUNSEL'S DIGEST AB 1048, Firebaugh. Homeowner associations: reporting. (1) Under existing law, unless the governing documents impose more stringent standards, an association is required to prepare and annually distribute a pro forma operating budget that includes certain financial documents to its members. This bill would require an association to include in the pro forma operating budget as a line item under cash reserves, the amounts of funds received from either a compensatory damage award or settlement from any person or entity for injuries to property, real or personal, arising out of any construction or design defect, and to report on the expenditure of those funds, as specified. The bill also would provide that in lieu of providing the information described above with the pro forma operating budget, the association may include the statement in the review of the association's financial statement that is required by existing law under specified circumstances. (2) Existing law prohibits the board of directors of the association from expending reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain and for which the reserve fund was established. Existing law authorizes the temporary transfer of money from a reserve fund to the association's general operating fund under specified conditions. Existing law requires the board, if necessary, to levy a special assessment to recover the full amount of any expended funds. This bill would revise the definition of reserve funds for purposes of the above described provisions to include funds received and not yet expended or disposed from either a compensatory damage award or settlement to an association for injuries to property arising out of any construction or design defects. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 1365 of the Civil Code is amended to read: 1365. Unless the governing documents impose more stringent standards, the association shall prepare and distribute to all of its members the following documents: (a) A pro forma operating budget, which shall include all of the following: (1) The estimated revenue and expenses on an accrual basis. (2) A summary of the association's reserves based upon the most recent review or study conducted pursuant to Section 1365.5, which shall be printed in bold type and include all of the following: (A) The current estimated replacement cost, estimated remaining life, and estimated useful life of each major component. (B) As of the end of the fiscal year for which the study is prepared: (i) The current estimate of the amount of cash reserves necessary to repair, replace, restore, or maintain the major components. (ii) The current amount of accumulated cash reserves actually set aside to repair, replace, restore, or maintain major components. (iii) If applicable, the amount of funds received from either a compensatory damage award or settlement to an association from any person or entity for injuries to property, real or personal, arising out of any construction or design defects, and the expenditure or disposition of funds, including the amounts expended for the direct and indirect costs of repair of construction or design defects. These amounts shall be reported at the end of the fiscal year for which the study is prepared as separate line items under cash reserves pursuant to clause (ii). In lieu of complying with the requirements set forth in this clause, an association that is obligated to issue a review of their financial statement pursuant to subdivision (b) may include in the review a statement containing all of the information required by this clause. (C) The percentage that the amount determined for purposes of clause (ii) subparagraph (B) equals of the amount determined for purposes of clause (i) of subparagraph (B). (3) A statement as to whether the board of directors of the association has determined or anticipates that the levy of one or more special assessments will be required to repair, replace, or restore any major component or to provide adequate reserves therefor. (4) A general statement addressing the procedures used for the calculation and establishment of those reserves to defray the future repair, replacement, or additions to those major components that the association is obligated to maintain. The summary of the association's reserves disclosed pursuant to paragraph (2) shall not be admissible in evidence to show improper financial management of an association, provided that other relevant and competent evidence of the financial condition of the association is not made inadmissible by this provision. A copy of the operating budget shall be annually distributed not less than 45 days nor more than 60 days prior to the beginning of the association's fiscal year. (b) A review of the financial statement of the association shall be prepared in accordance with generally accepted accounting principles by a licensee of the California State Board of Accountancy for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement shall be distributed within 120 days after the close of each fiscal year. (c) In lieu of the distribution of the pro forma operating budget required by subdivision (a), the board of directors may elect to distribute a summary of the pro forma operating budget to all of its members with a written notice that the pro forma operating budget is available at the business office of the association or at another suitable location within the boundaries of the development, and that copies will be provided upon request and at the expense of the association. If any member requests that a copy of the pro forma operating budget required by subdivision (a) be mailed to the member, the association shall provide the copy to the member by first-class United States mail at the expense of the association and delivered within five days. The written notice that is distributed to each of the association members shall be in at least 10-point boldface type on the front page of the summary of the budget. (d) A statement describing the association's policies and practices in enforcing lien rights or other legal remedies for default in payment of its assessments against its members shall be annually delivered to the members during the 60-day period immediately preceding the beginning of the association's fiscal year. (e) (1) A summary of the association's property, general liability, and earthquake and flood insurance policies, which shall be distributed within 60 days preceding the beginning of the association's fiscal year, that includes all of the following information about each policy: (A) The name of the insurer. (B) The type of insurance. (C) The policy limits of the insurance. (D) The amount of deductibles, if any. (2) The association shall, as soon as reasonably practicable, notify its members by first-class mail if any of the policies described in paragraph (1) have lapsed, been canceled, and are not immediately renewed, restored, or replaced, or if there is a significant change, such as a reduction in coverage or limits or an increase in the deductible, as to any of those policies. If the association receives any notice of nonrenewal of a policy described in paragraph (1), the association shall immediately notify its members if replacement coverage will not be in effect by the date the existing coverage will lapse. (3) To the extent that any of the information required to be disclosed pursuant to paragraph (1) is specified in the insurance policy declaration page, the association may meet its obligation to disclose that information by making copies of that page and distributing it to all of its members. (4) The summary distributed pursuant to paragraph (1) shall contain, in at least 10-point boldface type, the following statement: "This summary of the association's policies of insurance provides only certain information, as required by subdivision (e) of Section 1365 of the Civil Code, and should not be considered a substitute for the complete policy terms and conditions contained in the actual policies of insurance. Any association member may, upon request and provision of reasonable notice, review the association's insurance policies and, upon request and payment of reasonable duplication charges, obtain copies of those policies. Although the association maintains the policies of insurance specified in this summary, the association's policies of insurance may not cover your property, including personal property or, real property improvements to or around your dwelling, or personal injuries or other losses that occur within or around your dwelling. Even if a loss is covered, you may nevertheless be responsible for paying all or a portion of any deductible that applies. Association members should consult with their individual insurance broker or agent for appropriate additional coverage." SEC. 2. Section 1365.5 of the Civil Code is amended to read: 1365.5. (a) Unless the governing documents impose more stringent standards, the board of directors of the association shall do all of the following: (1) Review a current reconciliation of the association's operating accounts on at least a quarterly basis. (2) Review a current reconciliation of the association's reserve accounts on at least a quarterly basis. (3) Review, on at least a quarterly basis, the current year's actual reserve revenues and expenses compared to the current year's budget. (4) Review the latest account statements prepared by the financial institutions where the association has its operating and reserve accounts. (5) Review an income and expense statement for the association's operating and reserve accounts on at least a quarterly basis. (b) The signatures of at least two persons, who shall be members of the association's board of directors, or one officer who is not a member of the board of directors and a member of the board of directors, shall be required for the withdrawal of moneys from the association's reserve accounts. (c) (1) The board of directors shall not expend funds designated as reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components which the association is obligated to repair, restore, replace, or maintain and for which the reserve fund was established. (2) However, the board may authorize the temporary transfer of money from a reserve fund to the association's general operating fund to meet short-term cash-flow requirements or other expenses, provided the board has made a written finding, recorded in the board' s minutes, explaining the reasons that the transfer is needed, and describing when and how the money will be repaid to the reserve fund. The transferred funds shall be restored to the reserve fund within one year of the date of the initial transfer, except that the board may, upon making a finding supported by documentation that a temporary delay would be in the best interests of the common interest development, temporarily delay the restoration. The board shall exercise prudent fiscal management in maintaining the integrity of the reserve account, and shall, if necessary, levy a special assessment to recover the full amount of the expended funds within the time limits required by this section. This special assessment is subject to the limitation imposed by Section 1366. The board may, at its discretion, extend the date the payment on the special assessment is due. Any extension shall not prevent the board from pursuing any legal remedy to enforce the collection of an unpaid special assessment. (d) When the decision is made to use reserve funds or to temporarily transfer money from the reserve fund to pay for litigation, the association shall notify the members of the association of that decision in the next available mailing to all members pursuant to Section 5016 of the Corporations Code, and of the availability of an accounting of those expenses. Unless the governing documents impose more stringent standards, the association shall make an accounting of expenses related to the litigation on at least a quarterly basis. The accounting shall be made available for inspection by members of the association at the association's office. (e) At least once every three years the board of directors shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components which the association is obligated to repair, replace, restore, or maintain as part of a study of the reserve account requirements of the common interest development if the current replacement value of the major components is equal to or greater than one-half of the gross budget of the association which excludes the association's reserve account for that period. The board shall review this study annually and shall consider and implement necessary adjustments to the board's analysis of the reserve account requirements as a result of that review. The study required by this subdivision shall at a minimum include: (1) Identification of the major components which the association is obligated to repair, replace, restore, or maintain which, as of the date of the study, have a remaining useful life of less than 30 years. (2) Identification of the probable remaining useful life of the components identified in paragraph (1) as of the date of the study. (3) An estimate of the cost of repair, replacement, restoration, or maintenance of the components identified in paragraph (1) during and at the end of their useful life. (4) An estimate of the total annual contribution necessary to defray the cost to repair, replace, restore, or maintain the components identified in paragraph (1) during and at the end of their useful life, after subtracting total reserve funds as of the date of the study. (f) As used in this section, "reserve accounts" means both of the following: (1) Moneys that the association's board of directors has identified for use to defray the future repair or replacement of, or additions to, those major components which the association is obligated to maintain. (2) The funds received and not yet expended or disposed from either a compensatory damage award or settlement to an association from any person or entity for injuries to property, real or personal, arising from any construction or design defects. These funds shall be separately itemized from funds described in paragraph (1). (g) As used in this section, "reserve account requirements" means the estimated funds which the association's board of directors has determined are required to be available at a specified point in time to repair, replace, or restore those major components which the association is obligated to maintain. (h) This section does not apply to an association that does not have a "common area" as defined in Section 1351.