The time has arrived to start focusing on the preparation and approval of the 2014 budget for your community association. In order for community associations to create and maintain healthy reserves and to have financial stability, it is critical for associations to budget properly. This means not only preparing and approving an annual operating budget but also preparing and approving a 5 year capital plan. The focus on this article is on preparing and approving the 1 year operating budget.
For most community associations, the fiscal year coincides with the calendar year. If that is the case for your association, then your budget should be approved by no later than end of November so that the homeowners are properly noticed for the potential changes in assessment levels starting January 1, 2014. You will also want to send the proposed budget to all the homeowners ahead of the budget approval meeting in accordance with your state laws. Here are the top 10 key elements to successfully preparing and approving a 1 year operating budget for a community association:
1) Review current budget and historical activity and take into consideration recent changes (i.e. recent reduction in waste services).
2) Review existing vendor contracts to factor in any increases in services and factor a 3-5% increase for utilities and take into consideration any added services (i.e. new lawn sprinkler system will likely use more water)
3) Create projection for delinquent units and legal fees as a result of collection effort and incorporate into budget planning
4) Allocate a contingency fund on the expense side for unforeseen expenses ie. uncollected assessments, heavy snow season which results in extra charges, etc…
5) Use capital plan to factor in capital expenditures; in the absence of one, just prioritize projects. This is an important factor in determining how much your reserve contribution needs to be to appropriately fund the reserves. It is ALWAYS best to plan ahead especially for large scale and high cost projects.
6) Be realistic about the necessary assessment increase and related expenses necessary to operate and maintain the association (i.e. don’t cut an expense just to balance the budget or so that an assessment increase is not necessary)
7) Avoid making up financial shortages via a special assessment unless absolutely necessary; Only major improvements or emergencies should be paid via a special assessment as a last resort.
8) We recommend the association to contribute at least 10% to reserves each year, however, it will ultimately depend on the capital plan of the association. A rough rule of thumb is for associations to have AT LEAST 1 year’s worth of assessments in the reserves as a minimum. Ideally, the association should not have to pass special assessments and all capital plans should be paid for through reserve contributions.
9) Keep in mind that at the end of the day, the objective is to collect the necessary funds to operate the association for the year and to save for long term capital expenditures. This is the ideal situation but in reality many associations choose to keep assessments as low as possible as they feel this will make the units within the association more appealing to prospective buyers. This is no longer necessarily true as buyers are becoming more savvy and are asking for more information before buying and are particularly paying attention to the reserves of an association and what capital projects are coming up within the next 5 years.
10) Finally, follow your governing documents and state law for notification to owners and approval meeting requirements. All budgets must be in place by the start of your fiscal year.
A special thank you to Rosa Lopez, accounting manager, at Chicago Property Services, for her contribution to this article.