Budgeting can be tough. It involves looking at priorities and the needs and wants of your community, the money coming in and going out and making it all balance. Crafting a responsible, effective budget is one of the primary ways that your Maryland community association board members fulfill their fiduciary responsibilities to the community. Planning ahead and knowing what’s expected will help make the process painless and smooth!
Ray Weber is the executive director of client accounting for FirstService Residential. He understands how emotional 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. For example, let's say they've been increasing homeowner assessments by two percent per year and now there's a need for a 10 percent increase - 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 that increase. Sometimes boards aren’t realistic and want to cut numbers that shouldn’t be cut, because they don’t want their neighbors mad at them. Then the community can end up in a worse position and may have to impose a special assessment. They need to lean on us, as their property management company, for expertise in this area, and we can also help soften the brunt of any negative reactions from homeowners.”
Read on for more advice on how to best complete you next annual association budget.
1. Conduct a dedicated strategic planning session.
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. This is a good time for self-evaluation. 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.
2. Rely on your committees.
Coordinating and communicating between the board and your association management company 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. This is probably the best starting point as the group that 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 for budgeting time, but it’s a good option to keep in mind.
3. Review your reserve study and update if needed.
It’s generally accepted that budgets today are 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 help eliminate difficult (and costly) decisions later.
“Reserve studies are expensive. They can cost up to $5000 to conduct. So even if they are required regularly by the bylaws, boards may try to skip them,” Weber said. “But not doing it can create a bigger problem. Ten years ago the roof may have looked like it would last 10 more years, but maybe something happened to shorten that lifespan. Maybe there was a bad storm season or unusual snow falls. If you don’t update that reserve study every few years, you don’t know that.”
4. Know where you want to go.
Take a look at your board’s vision for your community. Where do you want to be in three to five years? What things should be changed? What things should be kept the same and just need to be better protected? What improvements are needed? These are the questions that you should answer before starting to compile an operating budget. This is a good time to get feedback from the community by conducting a survey of your residents.
5. Plan for any taxes.
Are you planning on any projects that will generate revenue 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 make sure your accountant or auditor is able to be part of the planning process.
6. Project your revenues.
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. The avenue you choose depends on your association, but either way, make sure you’re accounting 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 the historic data. If you’ve been collecting 90 percent, for example, they need to factor that in and allow for a little more. Some boards want to think that ‘this year will be better,’ and it seldom is.”
7. Keep an eye on trends.
Look closely at key areas of your operations and 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. Consider what community improvements might be on the horizon. Take a close look at payroll and its projected changes over the next three to five years – healthcare costs, specifically, can have a significant impact on your operating budget.
8. Examine historic data.
Analyzing past balance sheets and financial statements will help you determine what may lie ahead. Compare your actual expenditures which 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, look at unit owner delinquencies (they should be no more than three to five percent), excess operating funds (they should 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 boards by keeping careful notes on the budget throughout the year.
9. Develop the budget.
You’ll do this by analyzing past data, projecting what you’ll need in the future, and getting real cost data from your current contractors and vendors. Your long-term budget should include categories such as 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 and lastly, utilities and capital reserves.
Weber had a final piece of advice: “Stay connected to the budget all year long. It shouldn’t be something you pay attention to once a year. It should be 12 times, every time the monthly financials are generated,” he said. Watch for trends all year long. Pay attention to how much you spend. Keep a close eye on the monthly financials to avoid surprises. A lot of people don’t want to pay attention to the budget constantly because it can be a painful process. But it’s not wise to ignore it until October. Staying on top of the budget makes creating a new one more efficient, too!
There’s no reason to put off your creating your next annual budget. Just remember – you’re not planning for the next year, you’re planning for the long-term quality and longevity of your community. To learn more about how to optimize your operating budget, contact FirstService Residential
, Maryland’s leading association management company.