Association Budgets

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September 4, 2020
HOA Management Services in South Carolina
September 22, 2020

Association Budgets

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As community association managers, board members, and unit owners are aware, condominium and homeowners’ associations (HOAs) are required by law and, generally, by the association’s governing documents, to prepare annual budgets. The annual budget requires considerable effort and is, in essence, a financial plan for the upcoming year.

The budget is the benchmark/guideline by which an association’s results of operations are measured. If actual expenses approximate those budgeted, it is perceived that the budget was well-thought-out, and the financial management of the association was effective. If, on the other hand, there are substantial variances between the budgeted and actual expenses, this may suggest that the budget was poorly prepared and/or the association’s operations were poorly monitored.

Generally, the community association manager (CAM) is charged with the responsibility for preparing the preliminary draft of the budget and presenting it to the budget or finance committee for its review and approval. The budget committee, as appointed by the Board of Directors, and, ultimately, the Board itself, is responsible for the adoption of the association’s annual budget.

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It is recommended that the budget process begin early in the third quarter. Although budgets are typically approved at annual meetings occurring in either November or December, there are many considerations that must be addressed before then. We ask that all budgets be approved by the Board no later than Friday, November 6th to ensure that there is sufficient time to notify the membership and print coupons.

PLEASE NOTE: The company that prints your coupons receives a lot of orders around the same time because it is budget season for the majority of the planned communities.  The earlier your budget is turned in, the earlier your coupon order will be placed, thus reducing the risk of printing delays and homeowners receiving late notification of 2021 dues.

Budget Meetings

Budget Meetings do not require a quorum if they are held separate from Annual Meetings.  This year because of COVID-19 you may need to have a virtual meeting to ensure all Owners have an opportunity to vote on the proposed budget.  Below is a link from one of the attorney offices we use, and it provides some details on Virtual Meetings:

VIRTUAL MEETINGS

Budget Basics

Budgets are often a guideline, but accurate and realistic annual budgets are possible with proper forethought and preparation.  Accurate and realistic budgets are essential in the planning of upcoming and future budget years. Budget shortfalls and failing to properly fund reserves can have a negative effect on the financial stability of the association which can eventually hurt overall property values.  When an association starts under-funding annual budgets, it can be difficult, if not impossible, to correct in future years without extreme measures such as large dues increases, special assessments, or bank loans. A realistic annual budget now can hopefully prevent these measures in future budget years.

Calculating a non-profit association’s budget differs from calculating a budget for a for-profit corporation. For-profit corporations estimate income and profits first and then expenses.  A non-profit association first estimates expenses and then the income needed to cover those expenses; this way, dues amounts are the end result.

Guidelines to consider when preparing the Association’s Budget:

1st: Review the previous year’s budget as compared to the actual expenses incurred.

2nd: Identify inflation effects from increases in utilities, landscaping, pool, insurance, and other regular services. Review contracts and contact the vendors to prepare for any increases.

3rd: Identify any special projects or areas of focus in the upcoming year.

4th: Reserve funding: Is a reserve study needed to help plan for future capital improvements?   A board may want to budget for a reserve study in the upcoming year.

5th: Calculate the annual income needed: Annual Expenses + Annual Reserves = Annual Dues Amount.

6th:   A well-documented budget should include notes on how each budget line item was established. This is particularly important if there are significant changes from the current year’s budgeted and/or actual amounts.

This amount is divided equally amongst the membership or by ownership percentage as prescribed in the association’s governing documents.

A key point to keep in mind regarding dues increases is that gradual increases to keep up with inflation are always much more palatable to memberships than drastically increasing dues in one budget year.

It goes without saying that no one likes dues increases and no one likes serving on a board when there is an increase in dues; but delaying this usually makes matters worse in the coming years.

If your governing documents limit increases, and there is an unavoidable shortfall in the annual budget, a budget plan for deferring or eliminating certain expenses is many times the only acceptable option.  Expenses such as landscaping (pine needles, flowers, etc.), social committee activities can be decreased or eliminated to decrease expenses and balance the budget.

Care must be exercised in delaying painting and other preventative maintenance items.  Failing to paint or clean out gutters can cause wood rot and other water damage that would create future expenses that would greatly exceed any benefit that would come from delaying these expenses.

While nothing can typically be done for an association’s past budgeting shortfalls, proper planning for the future can greatly improve the financial stability of the association.

Quick Points Regarding Budgets

While calculating future expenses, consider if a prior year expense was a one-time expense and will not occur again in the coming year.

When calculating seasonal expenses such as pool and landscaping, care needs to be taken to ensure these expenses are charged during the months they will be expensed.  Example:  The pool is usually open from May to September so this expense should be spread out over these months and not all twelve months to provide a more accurate budget allocation of expenses and receivables.

If an association’s board approves a budget with a dues increase and the association’s governing documents do not specify a notification date for an increase, we strongly recommend a 30-day notification by mail to the membership.

When there are dues increases, coupons with the new dues amount noted are generally sufficient notification of an increase to the membership unless the association governing documents require another form of notification.

Don’t tell me what you value, show me your budget, and I’ll tell you what you value.”