Where to Start When Creating Your HOA Budget
Keep Your Association Fiscally Fit
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What is an HOA Budget?
A homeowners association (HOA) budget is a financial plan consisting of an HOA's estimated revenues, expenses and reserve funds over a period of time, which is most often a year. Creating and maintaining the budget is an important part of managing any HOA, and as most board members know, can be a stressful and daunting task. A budget template helps to create a smooth process as it lists the most essential items you need to keep top of mind. Items such as insurance, maintenance needs, reserve fund contributions and more. It also provides the opportunity to ensure your community’s financial health. In fact, your HOA depends on the budget for both its short-term and long-term planning.
Where to Start with an HOA Budget?
Before your HOA board begins its work, be sure you and your peers are familiar with Illinois HOA laws and regulations. For example, Section 18(a) (8) of the Illinois Condominium Property Act states that owners can object to a budget if assessments exceed 115% of those of the previous year. If this happens, objectors must file a petition signed by at least 20% of the homeowners within 14 days of the budget’s adoption. The board must then hold an owners’ meeting within 30 days. Unless a majority of homeowners vote to reject the budget at that time, the budget stands as is.
You also need to be aware of any recent changes to existing laws, such as the amendment to Section 18(a)(6), which went into effect in 2016. It allows you to provide homeowners with a copy of the proposed budget 25 days (rather than 30 days) before adopting it. This change enables you to mail your proposed budget at the same time as your annual meeting notice.
How do you Create an HOA Budget?
Assuming you know applicable Illinois law, here are nine ways that you can help you create a workable HOA budget for your future needs.
1. Keep homeowners at the forefront
The interests of your community and its members should be your first priority, meaning you must not allow politics to affect your budget process. What you do impacts all your homeowners, no matter what kind of community you live in, so remember why you became involved in your HOA in the first place. It’s imperative you maintain your commitment to enhancing everyone’s quality of life.
2. Review expenses with a fine-toothed comb
It’s not sufficient to simply annualize expenses from one year to the next. Instead, you must look over your fixed expenses, and ask service providers to supply information on expected cost increases. It’s worth re-evaluating expenditures that you removed or considered unnecessary in the current fiscal year’s budget, and you should take into account any new expenditures you will need to operate your HOA.
3. Reduce or eliminate delinquencies
An unfortunate part of HOA life is having to deal with delinquencies. When creating the budget, account for expected delinquencies as bad debt expenses. To help reduce delinquencies, make sure you apply late fees consistently. An aggressive collection approach will help you manage delinquencies, but you cannot avoid them completely. Remind residents that high receivables put basic services at risk for everyone.
4. Make those difficult decisions
It is next to impossible to develop a budget and avoid making hard choices. If your property manager included a letter with your audited financial statements that outlined recommendations, look over that letter now. You might need a line item in your budget to account for accumulated deficit or a potential shortfall. Another option is to levy a special assessment.
5. Check your operating balance
You should have an operating fund that is at least enough to cover the cost of one month of maintenance. If you don’t, consider adding a special assessment to close the gap. Above all, do not add a contingency line item in your budget. It will only present problems down the road. Be sure you consider all possible sources of revenue.
6. Plan for your long-term needs
In addition to planning for the next year, create a three- and five-year plan, too. Illinois law gives your board a good bit of flexibility in funding your reserves, so look over anticipated projects that you can’t fund with your current reserves and include them in your future planning. Also review your current vendor list to see if you may need to plan for fee increases. You may be able to take advantage of your community management company’s purchasing power to help you negotiate better rates.
7. Don't be afraid to make conservative projections
Expenses can be extremely unpredictable year to year. What you spent a significant amount of money on in one year may not be the same in another. While it can be difficult to plan for expected costs to an exact amount, you can ensure you are prepared for any emergency. Some ways to do this are to project expenses based on the current economy and using unused operating funds from the previous year to cover a small percent of your yearly dues.
8. Establish clear dates and timelines
By having due dates for notices, budget approval, budget meetings, and so on, it makes for a clearer process for all. This can be especially helpful in knowing what tasks are most important to be prioritized first, keeping everyone in the conversation up to date.
9. Process makes perfect
Don’t overlook the manner in which you accomplish your goals. Having proper internal controls in place will help you avoid risking any possibility of misappropriation or waste. Creating a process around preparing your HOA budget and documenting that process will also make it easier as board members change, and new people become part of budgeting for the community.
A well-developed annual HOA budget is crucial for the financial stability of your HOA. Follow these nine tips to create a budget that keeps your community on track and lean on your property management company’s experience for guidance through the process. For more insights on how you can apply best practices to your budgeting process, contact FirstService Residential, Illinois’ leading community management company.