Best Practices to Ensure a Fiscally Sound 2022 Community Association Budget – A Primer for Board Members
Although temperatures are still very warm out there, the 2022 budget season is quickly approaching. And with all the uncertainty around Covid-19 and variants, the job market and work-wide supply chains, it is extremely important to ensure community association board members approve fiscally responsible 2022 budgets.
Which leads to the following question: What exact is a fiscally responsible budget? A fiscally responsible budget is one that considers the day-to-day necessary operating expenses while ensuring the reserves are properly funded for large-scale projects. Approving a fiscally responsible budget is not just about cutting expenses, it is also about ensuring the reserves are property funded and large-scale projects are identified, and desired completion dates are established. All too often, associations are stuck not having enough in the reserves for large scale projects because there has been little to no long-term planning. Capital planning must include setting desired completion dates and not just creating a wish list of projects.
As a result, let me share with you the key necessary steps to ensure a fiscally responsible 2022 budget:
- Approve the budget before the start of the 2022 calendar year. Most association budgets coincide with calendar years. In those circumstances, it is necessary to approve the 2022 budget before the January 1, 2022. Better yet, approve the 2022 budget by the end of November so the approved budget notice can be sent out well in advance of the start of 2022.
- Cut expenses by obtaining lower competitive bids for contract services such as insurance, waste removal, snow removal and other high expense line items.
- Establish a preventative maintenance program for all life/safety, plumbing and mechanical equipment. This will typically extend the life of equipment and save the association money over the long term.
- Install new LED light fixtures and other energy saving equipment. Don’t hold off on this endeavor any further – 2022 is the year to take this step. The long-term cost saving benefits far outweigh the benefits of holding off. Make sure the LED lighting is commercial grade and not the low-end light fixtures found at big-box stores.
- Develop a long-term capital plan or update your reserve study. This is extremely important, and furthermore it is equally important to share this plan with all the homeowners. This will help justify the assessment increase that the board has been holding off on for so many years.
- Form a Capital Plan Committee. If you have enough participants from the association, it would be best to form a capital planning committee. This committee would handle most of the legwork involved in creating a list of long-term projects (using a capital plan and/or reserve study) and prioritizing them based on expert feedback and homeowner surveys.
- Obtain a loan and/or pass a special assessment. How is this acting in a fiscally responsible fashion? Many association board members are afraid of the backlash that might result in raising assessments, passing a special assessment and/or getting a loan. Taking this step is a strong statement from the board that they find it very important to maintain the association regardless of the negative reaction from some of the homeowners. Furthermore, taking these steps shows that the board wants to ensure the homeowners see a return in their investment in the association.
- Replace aging equipment. Yes, sometimes it saves you money by spending money. For example, it is mostly likely cheaper to proactively replace a domestic hot water tank system rather than waiting for the system to fail. In this example, it could be about 25% cheaper to replace the system through a planned replacement strategy than waiting for it to fail. This is especially true if the failure takes place in the evening, weekend, or a holiday weekend.
- Include a line-item in the operating budget for roof preventative maintenance. One of the costlier reactionary expenses that associations incur is due to roof leaks. This is especially true during the winter months. A simple way to avoid most if not all roof leaks is to hire a very goof roofer and have them come out at least 1x per year or in the bast case scenario, 2x per year, spring and fall.
- Replace an underperforming management company. This is one of the best ways to save money and to ensure more funds go into your reserves. An underperforming management company is not going to scrutinize expenses, look at ways to save money and take the necessary time to properly bid out services. Most importantly underperforming management firms are not going to put in the effort to properly bid out large scale projects and ensure the association gets the best value for their money.
The best way to ensure a successful 2022 for your community association is to make sure the association passes a fiscally responsible budget. The necessary steps to do so include: the board must ensure that there is proper preventative maintenance, long term planning, expense reduction and planned equipment replacement. Furthermore, there must be proper communication with the homeowners so that all the community members are involved and feel a part of the process of fiscal responsibility.