BILL ANALYSIS AB 1098 Page A Date of Hearing: April 26, 2005 ASSEMBLY COMMITTEE ON JUDICIARY Dave Jones, Chair AB 1098 (Jones) - As Amended: April 11, 2005 As Proposed to be Amended SUBJECT : HOMEOWNER ASSOCIATIONS: RECORDS AND ELECTIONS KEY ISSUE : SHOULD ELECTION PROCEDURES REGARDING VITAL ISSUES IN COMMON INTEREST DEVELOPMENTS BE STRENGTHENED AND THE DISCLOSURE OF FINANCIAL RECORDS IMPROVED IN ORDER TO PRESERVE COMMON INTEREST DEVELOPMENTS AS AFFORDABLE HOUSING? SYNOPSIS No longer limited to condominium associations, common interest developments are now reported to be the dominant form of new housing construction in California. As the author reports, the homeowner associations that run these developments have important responsibilities and extensive power over the homes of people who purchase properties in these developments. In light of these powers and responsibilities, supporters argue, this bill is necessary to establish clear and fair election procedures regarding key association functions, and to promote fairness and transparency in the management of these associations by detailing the financial records that homeowners are entitled to inspect. Association representatives, however, argue that the compliance with the bill may be costly, and consequently suggest that the reforms envisioned by the bill should be voluntary or restricted. SUMMARY : Establishes election and financial records rules for common interest developments. Specifically, this bill : 1)Requires associations to comply with specified procedures relating to election rules, voting, proxy ballots, and election audits in any election regarding certain subjects, including, among other things, the amendment of any governing documents of the association and the membership of the governing board of the association, and authorizes a member of the association to enforce his or her rights under these provisions and require a court to void the results of the election upon a finding that the election procedures were not AB 1098 Page B followed. 2)Requires associations, including an association still under the control of a developer, to make specified association records, such as the accounting books and records and the minutes of proceedings of the association available for inspection and copying by a member of the association, or the member's designated representative, within 3 days of receipt of the request, and applies these provisions to any community service organization or similar entity that is related to the association. EXISTING LAW provides, pursuant to the Davis-Stirling Common Interest Development Act, for the creation and regulation of common interest developments, requires them to have a recorded declaration containing specified information, permits them to levy assessments, establishes, in certain situations, voting requirements for amendment of the declaration and the levy of assessments, and requires that a common interest development be managed by an association. (Civil Code section 1350 et seq.) FISCAL EFFECT : As currently in print, this bill is keyed non-fiscal. COMMENTS : The author identifies the purpose of the bill as preserving common interest developments as affordable housing by establishing clear election procedures and detailing the financial records that are subject to homeowner inspection. Ensuring Clear and Fair Election Procedures . The author states that the bill will promote the affordability of homes in common interest developments by establishing clear election procedures in order to ensure their integrity. Supporters note that elections are used to seat board directors of California associations. Directors now reportedly control between $6-7 billion in homeowner assessments and conduct elections to set special assessments. According to the author, AB 1098 will require that: (1) incumbents no longer control elections; (2) ballots shall be secret; (3) opposition candidates shall have equal access to the association's communication outlets; (4) ballots shall be tallied by a neutral third party; and (5) election outcomes can be audited. These fundamental rights would be enforceable by association members in a civil action; a finding of non-compliance by the court would void the election and require the reimbursement of the member's attorney's fees, AB 1098 Page C along with a civil penalty in the discretion of the court. The sponsor, California Alliance of Retired Americans (CARA), states that these protections are necessary to ensure greater integrity in elections. "Such integrity is vital to the Californians living in associations," CARA argues, "because elections are used to choose board directors, who control assessment dollars. Elections are also used to impose special assessments, amend governing documents, and sell and acquire common areas." CARA adds, "We have documented many instances of tainted - if not downright fraudulent - elections used to impose assessments on seniors, assessments which outstrip their fixed incomes. We have documented cases where seniors were intimidated and threatened by the board or the property manager if they didn't vote to agree to expensive assessments." Promoting Openness in Association Records . This bill would also define in detail the "financial records" of the association, and of its community service organization, and provide that homeowners shall have the right to inspect and copy the financial records of both. CARA argues that this provision will promote greater transparency in association operations. According to CARA, "Every year, California's 35,000 homeowner associations collect an estimated $200 million in homeowner assessments. Right now they control an estimated $6-7 billion in cash." CARA comments, "In its study of the state's 36,000 common interest developments, the California Research Bureau reported that associations either do not disclose to homeowners how their money is being spent or else they report it inaccurately. Homeowner testimony to the California Law Revision Commission confirms the Research Bureau's report. The report also states that between 14-20 percent of all lawsuits filed by shareholders against associations are for financial mismanagement. AB 1098 corrects this lack of disclosure by association boards and lack of knowledge by homeowners. It assures that association shareholders - that is to say, homeowners - have access to the association financial records to find out how boards are spending the billions under their control. It makes good fiscal sense that homeowners - who have the biggest financial stake - should be watching the books. AB 1098 Page D ARGUMENTS IN OPPOSITION: The Executive Council of Homeowners (ECHO) states that it opposes the bill unless it is amended. ECHO argues, "The electoral procedures outlined in this bill are patterned after public sector voting practices which, in many regards, are inapposite and unaffordable as a general rule in nonprofit corporations. No one has calculated the cost to individual homeowners of imposing government-like election practices in their small communities, when spread across a payer base that is nothing like the populations of cities or counties. (An "opt-in" system would be much more practical.) Moreover, no one has calculated the cost - or the resulting unlimited liability - to associations and homeowners of statutes that mandate records access of such massive public scope in private communities. The proper limitation is to 'financial books and records,' properly defined." ECHO argues that community associations are more like nonprofit corporations than local governments. According to ECHO, "The average community association has about a hundred members, which is hardly government-like. Community associations cannot fairly and responsibly be commanded to operate like local government when they've been granted neither government-like immunities nor legislative privilege and have no elaborate staffs to guide them. Their exposure to liability without immunity or privilege or commensurate guidance has no limit, a consequence we hope was not intended." The Community Associations Institute has a similar position regarding the disclosure of association records. It states that opening "all" records and accounting materials to association members is "problematic" and it is willing to work with the author to find more appropriate wording. Author's Technical Amendment . In order to correct a drafting error on page 5, line 10, the author properly proposes to amend the bill so that it reads: "Any member whoinitiatesprevails in a civil action shall be entitled to reasonable attorney's fees and court costs, and the court may impose a civil penalty of up to one thousand dollars ($1,000) for each violation. REGISTERED SUPPORT / OPPOSITION : Support California Alliance of Retired Americans (sponsor) AB 1098 Page E Attorney General Opposition Community Associations Institute Executive Council of Homeowners Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334