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I know a great deal about HOAs in that I have been on my HOA Board for 4 years and have been president for 2. I have also read all our state laws governing them (and also those governing condo's--from a technical standpoint, by definitions that is what we are) many times, as well as reading our CC&Rs any bylaws over and over again. I can almost quote the CC&Rs. (I will say though that ours are less than 20 pages whereas some communities have CC&Rs that are hundreds of pages long.)
Anyways, we have NEVER put costs for enforcement into the budget. When we were looking at hiring management a couple of years ago (which we did not) part of what several companies told us, and their fee schedules agreed, was that enforcement pays for itself--fines and fees are assigned to the delinquent/rule breaking property, and do not come from the association's funds. In a lawsuit the party who prevails is assessed all costs of the losing party, whether it be for defending themselves or initiating the suit. Yes, the association may have to front the money, and if it unjustly sued a member, it would have to pay their costs (a reason for prudence in considering a lawsuit). If the suit were lost, there would be good reason to infer that the decision to sue was not a proper business decision, and the board members could then be held personally liable for the costs. We do have a small budget for legal fees. We would much rather get legal opinions up front and pay a small amount for that advice than make inappropriate decisions and risk much larger consequences.
Where we spend assessment monies is strictly set by our governing documents; I cannot imagine that it is not the same with other associations. And I know that in ours we have a large number of members who very closely go over our budget and expense reports.
edited because I am all typo-fingered this morning