What does an association do when the money runs out? I hope we’re not going to find out too soon, but we are living in interesting times.

Despite government assurances that the recession is over and things are getting better, the real story on the street seems different. The most recent jobs report indicated that unemployment has dropped from 6.7% to 6.6%. While that’s being spun as an “improvement” in the economy, what it actually represents is that hundreds of thousands of workers have simply given up looking for employment, so they are no longer included in the jobless statistics. They certainly aren’t showing up in the new jobs gained. In fact, job gains aren’t even keeping up with the number of new people entering the workforce. To make matters worse, unemployment benefits, which had been extended for longer than any time in history, are also now ending for hundreds of thousands of workers.

The American economy hasn't seen anything like this in the nearly 100 years since the Great Depression of 1929. Have we really come out of the current recession, or are things simply changing from “very bad” to “less bad”? And will that be good enough? The Federal Reserve is “tapering” the quantitative easing, which is estimated to remove nearly a quarter trillion dollars from the economy in 2014. The Fed has acknowledged that the “taper” will hurt job growth. What will happen? The fact is, nobody knows for sure, and while nobody can predict what’s next, it appears that we’re in for several more years of financial uncertainty.

Let’s return to the question posed above. What does an association do when the money runs out? Homeowners’ associations can also face a time of financial uncertainty. Many associations have entered a period when the available cash pool is drying up. The reasons are many: foreclosures, job layoffs, developer bankruptcy, or owners simply deciding to conserve their cash for personal needs rather than paying assessments. The reason doesn't matter; the result is the same: fewer assessments being collected, and less cash in the association's bank accounts.

Association assessments move down the list of priorities for an owner when times are tough. The fact is that many owners see no value in continuing to pay a mortgage - much less assessments - on a condominium unit that has no equity due to the major hit that the real estate market has taken. As a result, many associations face tough collection situations. Collection actions don't work when the owner is out of work and is struggling to feed his family. You can't garnish wages that don't exist. Recording a lien and foreclosing is difficult when the lender has a senior lien and there is no equity in the property. Small claims court may get you a judgment, but it is of little value if there are no assets to attach.

So what does the association do when the money runs out? If there’s not enough money to pay all of the association’s expenses; and you can’t get any more from assessments; and you can’t borrow any more from reserves; and you can’t borrow from a bank; then it's time to prioritize expenses. Who does the association pay? Who does it not pay? Imagine discussing that in your next board meeting.

When considering priorities, you may have to (for the first time) ask the question of what is the most important obligation of the homeowners’ association. The health and safety of the owners should be top priority. Here is a list of typical expenses that should have very high priority:

• Water bill
• Electricity bill
• Garbage collection
• Security services
• Insurance premiums

The next tier of expenses to be paid would include management services and accounting services.

Other operating expenses and contributions to reserves come next.                                           

What expenses should be last in terms of priority - or better yet, what services should be postponed or cancelled, at least for the short-term? How about closing down the pool? That saves money on gas for the heater, electricity for the pump, and water for the pool. Reducing frequency of landscape services is another short-term option. Postponing or cancelling window washing is another possibility. Cable TV service for the clubhouse is another expense that is a convenience, but since it does not promote health or safety for members, it can be eliminated. Lastly, consider postponing any repairs that do not promote health or safety for the members - but be cautious of postponing any repairs that might result in much larger long-term costs.

Most directors have never had to face a situation like this - and should they ever, feedback from those members that are still paying assessments is likely to be very loud and very negative. If you do find yourself in these circumstances, you should communicate with all members, share your decisions and reasoning, and perhaps even ask for other suggestions.

Before taking any of the above actions, consult with your manager (assuming he or she is not the one that first brought this matter to your attention). Consider consulting with your accountant, as he/she is the financial expert. Contact your reserve professional to recast the reserve study funding plan to shift dollars away from immediate years to future years ( a short-term solution only). Most importantly, consult with association legal counsel to make sure your actions are in compliance with both statutes and the association’s governing documents.

Worst-case scenario? Well, it could be worse - bankruptcy of the association is the next step.