Numbers Crunch

Getting Started

Allow Ample time.  Allow two to three months to plan the next budget.  If the association’s fiscal year begins Jan. 1, start preparing in September.  Check the governing documents to determine when the budget has to be approved and work backward on the calendar to set preliminary deadlines. 

Does the budget have to be approved by all homeowners or just the board?  If a general membership meeting is required, the board must plan ahead so proper notification is given.  Governing documents and some states may require at least a 30-day notice of an assessment increase. 

Do your homework. Ideally, the manager or treasurer has been tracking trends in expenditures throughout the year.  In addition to reviewing past bills, a quick review of contracts can help the board develop more accurate projections of increased expenses for the coming year.

Most existing associations develop budgets based on historical trends.  They begin with last year’s budget and expenses and adjust for the coming year. We always recommend a line-by-line review.  You need to justify every line that’s in there because it prepares board members to answer homeowners’ questions.

Assume nothing.  In doing this, we sometimes find that associations are paying for street lights or traffic lights that the developer never transferred to the municipality, and the association has been paying for them in some cases for many years.  Using the historical trends budget, you would never find that. 

Decision Time

Set realistic fees. Base assessments on the actual needs of the community.  Board members often shy away from raising assessments for fear of alienating their neighbors. 

Frequently, boards make the mistake of first determining the amount of assessments then trying to make the budget work with that amount of revenue.  The fear and danger in doing this is you can be shortchanging your residents and the actual needs of the association.  It really doesn’t speak to the fiduciary duty of the board to budget effectively for the proper operation and maintenance of the community.  The board should establish the expense side first, including MONTHLY RESERVE CONTRIBUTIONS, then reconcile the income to those expenses.

Another mistake is simply adding 5% to every line item in this years budget.  Without the proper research, the board can be leaving itself with few options when unexpected expenses pop up later. 

Establish priorities.  One way to prioritize is to list expenses in three categories:  Those the board must include because they are required by state law or the governing documents; those that the board needs to add to maintain property values or ensure the health and safety of residents; and those for projects the board would like to do.

By categorizing projects, the discretionary items are forced to compete against each other.  It’s a way to eliminate nonessential suggestions that people make.

Some associations are forced to make severe spending cuts because they are having difficulty collecting assessments.  Find areas to cut that won’t cause harm over the long term.  For example, the board can reduce the hours or the days that the pool is open with minimal impact, but postponing maintenance could invite long-term problems. 

Don’t skip annual reserve fund contributions. The association’s annual reserve contribution should be treated as a “must-do” item.  “often boards, when looking to cut back, will turn to the reserves, That’s a fatal mistake, especially in older communities where the need for repairs is only going to get greater.  If the association has has a recent reserve analysis, it should recommend how much should be saved in reserves and how much should be allotted for capital improvements. 

Keep homeowners informed. As with most aspects of association governance, communication is essential.  Solicit homeowners’ ideas at the outset through a survey or at a public meeting.  Update them once a draft budget has been developed.  And, don’t forget to explain it all again once the final version has been approved. 

Be flexible. Finally, remember that sometimes even the best plans change.  The budget is really a road map, sometimes you have to take a detour.

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