What Should My Association Consider When Planning a Budget?

Posted on Friday September 22, 2017 |



Budgeting can be tough. It requires that boards look at their priorities and the needs and wants of the community, plus the money coming in and going out -- and making it all balance. As an association board member, producing a responsible, effective budget is one of your primary responsibilities.
 
Without a carefully crafted budget, your community won’t be able to achieve its goals or further its vision. Board members’ fiduciary responsibility to their communities is their most important role. If your community isn’t fiscally sound, you can’t implement preventative maintenance, properly fund your reserves, maintain your amenities or host community activities. Both property values and your community’s quality of life will decline as a result.
 
Raymond Weber, executive director of client accounting for FirstService Residential, understands how stressful the budgeting process can be for board members. “The board doesn’t want to be the ‘bad guy’ and raise assessment fees by a lot, even when that is clearly necessary. It can get emotional! They will go line-by-line and look at numbers, trying to find places to cut so they don’t have to impose a significant increase. They need to lean on their property management company or other financial management experts for expertise in this area.”

Read on for more about how to best complete your next annual association budget, a budget that will enhance your property values and improve your residents’ lives.

1. Plan strategically and understand your community’s vision.

Get your board and association management team together to make sure everyone has an aligned vision when it comes to the future of your community. If possible, it’s great to include an auditor, attorney and insurance agent as well. Set priorities for the coming year, and pin down your level of commitment to each one. Evaluate the property in relation to its surroundings. Consider if the look or branding need to be refreshed and if those things will have the return on investment that makes an increase in assessments worthwhile.
 
“It’s important for the board to review and align on their goals for the community every year,” Rachel Gold, community manager at FirstService Residential, said. “It’s imperative all board members understand that maintaining the association’s financial stability and keeping assessments low are not always possible. If they can be, great! But sustaining financial health is most important.”

 
2. Rely on your committees for input and advice.  

Coordinating and communicating between the board, your management team should be the purview of your ad hoc planning task force. Ideally, this task force will consist of the manager, president, treasurer, and the chairs of your finance and budget committees, and should exist only for the purpose of creating your budget. This is probably the best starting point as this group will plan and run your strategic planning session. 
 
If your budget committee or finance committee is on top of your budget all year long, you may not need to create a task force, but it’s a good option to keep in mind.
 
Timothy Snowden, executive director of high-rise operations for FirstService Residential, said he feels that assembling a “task force” adds a note of panic to budget proceedings. “We teach people in Philadelphia that budgeting should be a smooth process,” he said. “If you have a management company, your community association manager should prepare an initial draft and share it with the association treasurer. If there is a budget or finance committee, then they should look it over and approve it.”
 

3. Review your reserve study and update if needed.

Budgets today are usually focused around a three- to five-year plan, which is the perfect timeline for planning scheduled replacements of reserve items and ongoing preventive maintenance programs. Factoring these elements into your budget now helps alleviate difficult (and costly) decisions later. 
 
Gold said she recently took over the management of two communities that hadn’t conducted reserve studies in 15 years. “We immediately conducted new reserve studies, and it turned out that both communities were dramatically underfunding their reserve funds,” she said. “They didn’t understand that outside factors, including the 2008 financial downturn, affected what they need. Too many people don’t understand the difference between a transition study, which only needs to be done once, during the turnover from developer to association, and the reserve study, which must be updated regularly. Your reserve study is a living, breathing document that helps you achieve your association’s goals and achieve financial stability.”
 

4. Create a plan for long-term goals.

Take a look at your board’s vision for your community. Where do you want to be in three to five years? This is a good time to seek feedback from the community. Consider distributing a survey to your residents.  
 
“When you get into talking about a five-year plan, you’re laying out expectations right there,” Snowden said. “How often do we renovate corridors? How often do we update the lobby?  Some places want the corridors updated every three years, whether or not they need it, and that needs to be factored into the budget as part of the association’s long-term plan.”
 

5. Plan for any taxes.

Are you planning to implement any revenue-generating projects for your community? Unless those revenues are offset by related expenses, you will have to pay taxes on that income. If any of your upcoming projects will have tax implications, then make a plan for it now so you’re not surprised later. A major reserve expenditure will affect your taxes as well, so include your accountant or auditor in the budget planning process.
 
“Make sure you understand your taxes. Condominiums and HOAs will pay very little in taxes, but co-ops are taxed differently. It’s important to plan for that,” Snowden said. “I worked with an association that leased two parking spaces for 99 years each, but then they got hit with pretty high taxes on that revenue. Associations need to consider and plan for taxes where applicable.”
 

6. Project your revenues.

Of course, your assessment fees are the bulk of your income. But you need to take a look at all of your revenue streams, especially investments. The income generated by those investments can be applied to your reserve funds or your operating budget and should be planned for accordingly. Regardless of where you plan to direct the incomes from your investments – to operating budget or your reserve fund -- make sure to account for the next three to five years. 
 
“Associations need to realize that they can’t count on collecting every dollar from homeowners,” Weber said. “Look at your historic data. If you’ve been collecting 90 percent, for example, you need to be realistic and factor that into your annual budget. Some boards want to think that ‘this year will be better,’ and it seldom is.”
 

7. Examine historic data.

Analyzing past balance sheets and financial statements will help you determine what may lie ahead. Compare your actual expenditures against the amounts that were budgeted for them. This can help you avoid costly oversights or miscalculations in your upcoming budget.
 
To gauge your full financial stability, you should also consider the information listed below.
  • Assess your association’s delinquencies (keep it under three to five percent),
  • Excess operating funds (strive to equal 10 to 20 percent of annual assessments), and
  • Adequate cash reserves.
It will help if the past association board has left detailed rationales for their expenditures. If they haven’t done so, it’s time for you to begin. Assist future board members by keeping detailed notes on the budget throughout the year.
 

8. Keep an eye on trends.

Look closely at key areas of your operations including their historical costs and benefits. Talk to your utilities and service contract providers about anticipated increases and decreases. Explore ways to lower costs through technology, such as energy-efficient appliances and lighting.
 
“I managed a high-rise luxury condo with just under 300 units that was seeing their electric bill trend upward in use. To reduce the property’s energy consumption, we installed motion detector switches in trash rooms, utility closets, storage areas and other spaces that didn’t need to be lit 24/7,” Phil Pool, vice president of FirstService Residential, explained. “We were able to pay for the installation of the switches with the savings in the first nine months.”
 

9. Develop the budget. 

You’ll do this by analyzing past data, projecting what you’ll need in the future and getting actual costs from your current contractors and vendors. Your long-term budget should include the following categories:
Income (or revenues), which includes assessments and interest from investments;
  • Administration, which includes the cost of consulting, insurance, management and audits, along with bank charges and computer services
  • Services or contracts, which includes costs from recreation, landscape and maintenance vendors;
  • Property protection, which encompasses preventive maintenance and repairs whose costs are spread out evenly over time
  • Utilities
  • Capital reserves 

10. Don’t put the budget on auto-pilot.

Stay connected to the budget all year long. It shouldn’t be something you pay attention to once a year. Instead, it should be reviewed 12 times a year, every time the monthly financials are generated.
 
There’s no reason to put off generating your next annual budget. Just remember – you’re not planning for the next year, you’re planning for the longevity of your community. For more on how to build your association's financial stability, complete the form below to download our comprehensive financial management white paper.

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