By: Shelby D. Bennett, Esq.
In August, we noted that Assembly Bill 2050 (“AB 2050”) was pending in the Legislature and that reserve funding legislation could still change before it became law. AB 2050 has now been signed.
The good news for boards is time: the new requirements do not become operative until January 1, 2032. The less comfortable news is that the final law goes further than requiring a new line item in the reserve study. For associations whose reserves are underfunded today, the next several years are the window of time to close the gap gradually rather than all at once.
What the Law Says Now
Currently, associations must conduct reserve studies every three years with annual reviews to project major component replacement costs and establish sufficient funding plans to meet their obligations. The law does not establish a minimum funding level that the association must maintain, other than an ill-defined “prudent fiscal management” standard. (Civ. Code Sec. 5515(e).)
Under Civil Code Section 5550, at least once every three years the board must have a reasonably competent and diligent visual inspection performed on the accessible areas of the major components the association is obligated to repair, replace, restore, or maintain, as part of a reserve study. This applies when the current replacement value of those components is at least one-half of the association’s gross budget (excluding the reserve account). The board must review the study annually and consider and implement necessary adjustments. The study identifies major components with a remaining useful life of less than 30 years, estimates their repair and replacement costs, and includes a reserve funding plan.
These existing rules stay in place until January 1, 2032. AB 2050 does not change the requirements for the reserve study your association commissions this year or next.
What Changed
Beginning in 2032, AB 2050 mandates that reserve studies identify the minimum annual reserve contribution necessary to ensure balances do not fall below zero over a 30-year period, so that the association can fund the reserves at or above the minimum level and, if necessary, transfer funds from the operating budget or utilize a reserve special assessment.
The final statute includes several details boards should understand and start considering now:
- New reserve study content. The reserve study must include “the minimum reserve contribution level to prevent the projected association reserve account balance from falling below zero over the following 30 years”, along with a statement informing the association of the requirements described below.
- Annual funding at the minimum. The association must fund the reserve account each year in at least the minimum reserve contribution level identified in its most recent reserve study (new Civ. Code § 5552(a)).
- A 15 percent transfer when projections fall below zero. If the reserve balance is projected to fall below zero at any time over the following 30 years, the association must transfer a minimum of 15 percent of its gross annual budget to its reserve account each year until the balance is no longer projected to fall below zero.
- Reserve funding special assessments. If the association cannot fund the minimum level through its gross annual budget, it must levy a “reserve funding special assessment,” subject to the same provisions as a standard special assessment under Civil Code Section 5605. Section 5605 currently limits the special assessments a board may impose without member approval to 5 percent of the association’s budgeted gross expenses for the fiscal year. If that cap keeps the association from reaching the minimum, the membership must vote on approving the amount above the cap.
- Guardrails. Money collected through a reserve funding special assessment must be deposited into the reserve account and treated as reserve funds, and an association may not levy a reserve funding special assessment more than once every nine years.
The Legislature also reaffirmed that reserve funds must be safeguarded and used for the repair, restoration, replacement, or maintenance of the major components they were established for (or related litigation), consistent with Civil Code Section 5510, and not for routine operations.
What Boards Should Do
Associations should update reserve-study procedures, work with reserve specialists ahead of the 2032 operative date to ensure long-term funding plans satisfy the requirements, and phase in necessary adjustments.
In practice, that can mean:
- Ask the 2032 question now. Although not yet required, consider asking your reserve specialist to show, as a planning figure, the minimum contribution needed to keep the 30-year projected balance above zero, and whether your balance is projected to dip below zero at any point.
- Compare that figure to today’s contribution. If there is a gap, closing it over several budget cycles is likely to be far less disruptive than a mandatory 15 percent transfer or a special assessment in 2032. Gradual increases also help boards work within the existing 20 percent annual limit on regular assessment increases without member approval under Civil Code Section 5605(b).
- Revisit the assumptions. As we discussed in August, construction inflation, labor shortages, and supply-chain disruptions have pushed replacement costs higher. A minimum contribution is only as reliable as the cost and useful-life estimates behind it.
- Communicate early. Owners respond better to steady, explained increases than to surprises. Use the annual budget process to explain what AB 2050 requires and how the board plans to get there.
- Coordinate with legal counsel. Boards should review how their governing documents and assessment procedures will interact with the new requirements, including the membership vote that may be needed to exceed the special assessment cap.
The Timeline
- Now through December 31, 2031: Current Section 5550 continues to govern reserve studies.
- January 1, 2032: The new Section 5550 and new Section 5552 become operative, including the minimum reserve contribution requirement, the 15 percent transfer, and reserve funding special assessments.
The Bottom Line
A 2032 operative date can feel distant, but for reserve planning it is only a couple of reserve study cycles away. Associations that start measuring their 30-year position now, and adjust steadily, will be in the strongest position when the new rules arrive, and they may see the benefits sooner, including at insurance renewal time.
If you have questions about how AB 2050 may affect your association, please consult your association’s legal counsel.
Shelby D. Bennett, Esq. is an associate attorney at Beaumont Tashjian, where she provides general counsel services and advises associations on the preparation and redrafting of CC&Rs, Bylaws, and related documents.
