Making Things Simple: HOA Budget Best Practices
Planning a budget ranks with a visit to the dentist for most people. But as a community association board member, crafting a workable budget for your community is one of your chief responsibilities. “The board of directors has the role to preserve, protect and enhance the community,” said Rachel Gold, a community manager at FirstService Residential. “The budget is absolutely critical to that.”
Gold is a portfolio manager, so she is responsible for assisting several communities with creating their annual budgets, a task she is passionate and enthusiastic about. “I love doing budgets,” she said. “I have three for next year done as of July, and several more in the works. The final one will be completed in September. You should begin working on your next budget no later than midway through the current budget year.”
“A quality professional manager should provide strong guidance through the budgeting process to make sure everyone understands the purpose of each item and the needs of the community. We’re the impartial body,” Gold said. “Board members are often emotionally invested, and it’s our job to provide them a budget that provides what they need. Of course, it’s ultimately on the board to adopt that budget, or not. They have a fiduciary duty to the community to provide sound business judgment. A homeowners association is about a neighborhood and community, but it’s also a business. The decisions the board makes are business decisions. Sometimes interests are contra-indicated to what the business needs. That can be a very hard seat to sit in sometimes.”
Budgeting is important, and it can be complicated. Fortunately, there are some steps you can take to make the process as painless as possible. Here they are.
1. Hold a 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.
“It’s important to review with the board every year their goals for the community,” Gold said. “It’s imperative, to me as a manager going into budget season, that they understand that financial stability for the association and low assessments are not necessarily the same thing. If they can be, great! But the stability is most important.”
2. Assemble a committee.Coordinating and communicating between the board and your association management company should be the purview of your budget committee. Ideally, this committee will consist of the manager, president, treasurer, and the chair of your finance committees. This is probably the best starting point as the group that will plan and run your strategic planning session.
3. Make sure your reserve study is current.“The boards need to understand that they need to have a reserve study done every three to five years. The reserve study, and the way it needs to be funded, will change based on the market, on sun exposure, on the age of facilities,” Gold explained. “Let’s say you’re responsible for paving streets inside the community. If the cost of petroleum spikes, it will affect the cost of paving. That, in turn, affects the cost of reserve planning, so the budget needs to be updated with this information.”
Gold said she recently took over management of two communities that hadn’t done reserve studies in about 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 needed. 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 get where you’re going.”
4. Set goals.Where does your community 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? These are the questions that you should answer before budgeting begins. To do so, consider issuing an owner survey. Another fruitful way to gather this data is through committee input.
Gold recommends planning with one year, three year and five year goals. “It’s easier to think of the here and now. Most people take a 30 year mortgage, but don’t plan to live in the house for the length of the mortgage,” she said. “Thinking about what you need in the short to mid-term will help you achieve what you need in the long term, as long as you review your goals on a yearly basis.”
5. Understand taxes and insurance“If you’re planning to add a physical property improvement out of the reserves, you have to understand the implications for the operating budget in terms of higher insurance and utilities,” Gold said. “We have a neighborhood built by a developer who went bankrupt. It was up to the community to complete all the promised features: tot lot, parking, additional gates, tennis court, and basketball court. The board did their research and passed a special assessment. As part of their quotes, they got the costs of insurance for each features, for annual repairs, for necessary lighting. So they had money budgeted to pay for lighting the tennis court as soon as it was completed and it was immediately useful to everyone. A lot of capital improvements simply come with additional costs. All of those need to be included, not just the improvement itself.”
Gold also recommended careful consideration of revenue-generating operations on the property. “A snack bar at the pool may sound like a great idea, but if the revenue it generates has a negative impact on the association’s tax position, it may not be the right choice,” she said.
6. Project revenue.Take a look at all of your revenue streams, especially investments. The income generated by those investments can be applied to your reserves or your operations and should be budgeted accordingly. The avenue you choose depends on your association, but either way, make sure you’re accounting for the next three to five years.
Now’s the time to look 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. Work with your professional property management company to negotiate with vendors – or find new ones. 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 bottom line.
7. Keep an eye on trends.
8. Look to the past.Analyzing past balance sheets and financial statements will help you determine what may lie ahead. To get more out of this part of the process, compare your actual costs to what was previously budgeted. This can help you avoid costly oversights or miscalculations in your upcoming budget. To assess your full financial stability, look to unit owner delinquencies (they should be held at 3-5%), excess operating funds (they should equal 10-20% 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.
When it comes to both trends and historic data, Gold strongly suggests notating the current budget as needed throughout the year. If there was a new water feature added to the property or a leak from the pool, note that on the water bill line items that have increased bills. Include why the cost is higher, and if it’s expected to be ongoing or due to an issue that was resolved. That way, future board members have “the why behind the what” when they’re analyzing the association’s financial data.
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, 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.
There’s no reason to put off 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. For more on long-term budgeting, contact FirstService Residential, North Carolina’s leading association management company.