California Civil Code 1365: Annual Budget and Policy Disclosures

California Civil Code Section 1365 is the former home of the state’s HOA annual disclosure rules. The Legislature recodified those rules in 2014 as part of the Davis-Stirling Common Interest Development Act, and the substance now lives in Civil Code Sections 5300 through 5320. Every California homeowners association must still send its members two documents each year: an Annual Budget Report covering finances, reserves, and insurance, and an Annual Policy Statement covering operational rules and member rights. Both must go out between 30 and 90 days before the end of the association’s fiscal year.

Where Section 1365 Lives Now

If you look up Civil Code 1365 today, you’ll find an archived statute. The Annual Budget Report requirements that used to sit in old Section 1365 are now in Civil Code Section 5300. The Annual Policy Statement requirements moved to Section 5310. The reviewed-financials obligation landed in Section 5305. The underlying requirements didn’t change dramatically during recodification, but the numbering is entirely different, and some provisions were expanded or clarified.

These rules apply to every type of common interest development in California, whether it’s a condominium project, planned unit development, or cooperative. An HOA’s own governing documents can impose stricter disclosure standards, but they cannot relax what the statute requires.¹

What the Annual Budget Report Must Contain

The Annual Budget Report is the centerpiece of the framework. It gives homeowners a forward-looking picture of the association’s financial health for the coming fiscal year. At a minimum, it must include a pro forma operating budget showing estimated revenue and expenses on an accrual basis.¹

Beyond the operating budget, the report must include several specific disclosures:

A summary of the association’s reserves, prepared from the most recent reserve study, printed in boldface type.
A summary of the board’s plan for funding reserves, with notice that the full plan is available on request.
A statement about whether the board has decided to defer repairs or replacement of any major component with 30 years or less of remaining life, along with the board’s justification.
Whether the board anticipates levying special assessments to cover reserve shortfalls, including the estimated amount, start date, and duration.
How the board plans to fund reserves, whether through assessments, borrowing, or other approaches.
Any loans with an original term over one year, including the lender, interest rate, balance, annual payment, and payoff date.
A summary of the association’s insurance coverage.
For condominium projects, a statement about the development’s FHA-approval status.

The report must also describe how reserves are calculated, including the formula used. The statute caps the assumed rate of return on cash reserves at 2 percent above the Federal Reserve Bank of San Francisco’s discount rate.¹

The Reserve Study Behind the Numbers

The reserve disclosures depend on a current reserve study. California law requires the board to conduct a reasonably thorough visual inspection of accessible major components at least once every three years, provided the total replacement value of those components equals or exceeds half the association’s gross annual budget, excluding the reserve account itself.²

The study must identify every major component the association maintains that has a remaining useful life under 30 years, estimate each component’s remaining life and replacement cost, and calculate the total annual contribution needed to cover those costs. It also must include a funding plan showing how the association intends to meet those obligations.

Alongside the Annual Budget Report, the board must distribute an Assessment and Reserve Funding Disclosure Summary. This is a standardized form, laid out in Civil Code Section 5570, that reduces the reserve picture to a single digestible page. The form shows the current regular assessment, any scheduled future assessments, whether projected reserve balances will be sufficient over the next 30 years, and the association’s current percent-funded level. For many homeowners, it’s the most informative page in the whole packet because it answers one basic question: does the association have enough set aside for future repairs?

The Insurance Summary

The Annual Budget Report must summarize the association’s property, general liability, earthquake, flood, and fidelity insurance policies. For each policy, the summary must list the insurer’s name, coverage type, policy limit, and deductible. The association can satisfy this requirement by distributing copies of the policy declaration pages, as long as those pages contain all the required information.¹

The insurance summary must carry a prominent notice, printed in at least 10-point boldface type, warning members that the summary is not a substitute for the actual policy terms. The notice must also explain that the association’s insurance may not cover individual property, personal belongings, or improvements within a member’s unit, and that members could be responsible for all or part of a deductible. If any policy is approaching nonrenewal and the association won’t have replacement coverage before the old policy lapses, the board must notify members immediately.

What the Annual Policy Statement Must Contain

Separate from the budget report, the board must distribute an Annual Policy Statement covering the operational side of community life. This document is less about dollars and more about rules, procedures, and member rights.³

The Annual Policy Statement must include:

The name and address of the person designated to receive official communications on behalf of the association.
An explanation that members can request notices be sent to up to two addresses and can opt to receive general notices by individual delivery.
Notice of a member’s right to receive copies of board and member meeting minutes.
The association’s rules for collecting assessments, including its lien enforcement rights and other legal remedies for nonpayment.
Any schedule of penalties for violating the governing documents.
A summary of internal dispute resolution and alternative dispute resolution procedures available under the Davis-Stirling Act.
A summary of any requirements for board approval before making physical changes to a member’s property, including the review procedure.
The mailing address for overnight assessment payments.

The board can also include any other information it considers appropriate. Well-run associations often use the policy statement as a chance to remind members about parking rules, pet policies, and other frequently violated provisions, even though those aren’t strictly required.

Reviewed Financials for Larger Associations

Associations with gross annual income over $75,000 must have their financial statements reviewed by a licensee of the California Board of Accountancy. The review must follow generally accepted accounting principles, and the reviewed financials must be distributed to all members within 120 days after the close of each fiscal year.⁴

The $75,000 threshold is a statutory floor. Most associations of any meaningful size clear it easily, so this requirement applies broadly. Governing documents can impose a stricter standard, such as a full audit rather than a review, and some larger associations voluntarily opt for audits even when not required.

When and How the Documents Must Reach You

Both the Annual Budget Report and the Annual Policy Statement must be distributed 30 to 90 days before the end of the association’s fiscal year. For an association on a calendar fiscal year ending December 31, that window runs from early October to early December.¹³

The documents must be sent by “individual delivery,” which under Civil Code Section 4040 means the association must use whichever delivery method the member has selected. If a member hasn’t specified a preference, the association falls back to first-class mail, certified mail, express mail, or overnight delivery to the member’s address on file.⁵

Members can also request copies be sent to a secondary address, such as a property manager’s office or a second home. The association must honor that request for both the Article 7 disclosures and assessment-related documents. One wrinkle worth knowing: an unrecorded provision in the governing documents stating that a particular delivery method applies does not count as the member’s agreement to receive documents that way.

If the association distributes only a summary of the Annual Budget Report rather than the full document, the summary must describe what the full report contains and explain how a member can request a complete copy at no charge. The Assessment and Reserve Funding Disclosure Summary form must accompany either the full report or any summary.

What Happens If the Board Misses the Deadline

This is where the disclosure rules gain real teeth. If the board fails to distribute the Annual Budget Report as required under Section 5300, it loses the ability to unilaterally increase regular assessments or levy special assessments. Any such increase or levy then requires approval from a majority of the membership. For most associations, that means organizing and funding a formal election with an uncertain outcome, all because the board missed a disclosure deadline.

The practical consequences cascade. Without the ability to raise assessments, the board may need to cut services or borrow from reserves. If member apathy prevents reaching a quorum or majority vote, the association can find itself unable to fund basic maintenance obligations. Reserve study projections may need to be revised, and deferred maintenance can drive down property values across the development.

Your Right to Request Records

The annual disclosures are what the association must push to you. You also have the right to pull records on your own. Under Civil Code Section 5200, members can inspect and copy the association’s books and records, including financial documents, governing documents, insurance policies, contracts, election materials, tax returns, meeting minutes, bank statements, and check registers.

The production timelines are tighter than many boards realize:

Current fiscal year records must be produced within 10 business days of your request.
Records from the previous two fiscal years must be produced within 30 calendar days.
Meeting minutes must be made available within 30 days of the meeting and provided to any member who requests them.
The membership list must be produced within 5 business days.

Your request must be for a proper purpose reasonably related to your interests as a member. In practice, that bar is low for financial and governance records. The association is not required to retain records beyond the current fiscal year and two prior years, except for meeting minutes, which must be kept permanently.

1
California Legislative Information. California Code Civil Code CIV 5300
2
California Legislative Information. California Code Civil Code CIV 5550
3
California Legislative Information. California Code Civil Code 5310
4
California Legislative Information. California Code Civil Code 5305
5
California Legislative Information. California Code Civil Code 4040