In order to operate a successful community association, there are many important facets of association governance that must be understood and implemented by its Board of Directors. One of the most important is the budgeting process. Most associations are “multi-million dollar non-profit corporations.” This means that the association board is often running a small to midsize business --with all of the decisions, exposure, and liability that accompany such a task. Of course, when running this type of organization, boards work with many experts to ensure that everything is run in accordance with the association's governing documents and current laws.
An association's governing documents typically establish the fiscal year-end for that particular association. Most year-ends occur at the end of a calendar year, but this can vary by association. As with any well-run corporation, a budget must be prepared and implemented for the next fiscal year for that corporation. In associations, a budget is extremely important since it establishes how the association's income will be used to run the company and perform necessary maintenance and repairs. Note that the only income for associations is from collection of assessments, which each member pays to cover all of the expenses necessary to operate the corporation.
Therefore, budget preparation must be taken very seriously and prepared with a very detailed hand. The following are different variations of budget preparations that an association's Board of Directors may use when performing this yearly task.
Developer Budgets: When a property is in the process of being built, a budget is prepared by the developer and approved by the initial Board of Directors for the newly formed association. This budget covers all of the components that the association will be responsible for (i.e., operating and reserve expenses). The initial board normally does not change this budget, as this is the one that should be used while the property is built out. The intent of a developer's budget is to ensure that the association is adequately funded when the developer leaves. Once the property is built out and the association is transitioned from declarant to homeowner control, the board may consider other budget preparation methods when performing this yearly task.
Budget Preparation with the Association's Treasurer: Most associations will have their Treasurer or a separate budget committee prepare the budget for the Board of Directors to review and approve prior to it being mailed to all members in accordance with the governing documents or state law. When the Treasurer prepares the next fiscal year's budget, the Board of Directors should consider the following early on:
- Review of all contracts to make sure the association is getting what it wants and is paying the correct price for the services that are being rendered. Boards may want to start the budget process early with regard to contract and pricing review, as the board may consider going out to bid to see what other vendors have to offer. (However, an association should take into consideration all facets when doing this type of bidding, i.e., quality of the workmanship, the established professional relationship, etc.)
- Review of the financial statements (both the income statement as well as the balance sheet) to get a very clear picture of the association's financial position at that moment. This means including a review of the comparative budget for the current fiscal year. Determine where there are excesses and shortages with respect to the current working budget. Adjustments should be made given what is being presented. Also, one must look at the previous year-end to see if the association ended with a positive balance or in a deficit. This, too, should be factored into the figures. If an association is new and does not have a complete year's historic figures to work from, the Treasurer and the board should do its best to determine the figures by analyzing the association's known expenses. Having one full year of actual numbers is very valuable since it shows how the association is trending.
- Contact all utilities to see if they can give you an idea of how much their services are anticipated to increase in pricing for the coming year. Calculate this into the working budget.
- Review the most recent reserve study performed. It is important to make sure that an association's reserves are properly funded so that when a reserve component requires the necessary maintenance, there is money on hand to perform the work. Make sure to allocate the monthly reserve expenses as directed by the professional reserve study analyst in its reserve study report. When boards do not fund the reserves in accordance with the reserve study, there is always the strong possibility that members will be specially assessed for a maintenance requirement. A growing number of states now require that associations have on sight reserve study inspections done at regular intervals.
- Upon gathering all the above information, the Treasurer can prepare the budget for the next fiscal year for the board to review. Sometimes, this will mean a raise in the monthly assessments so that the association can operate in a solvent manner. If the board is in agreement, then the board may approve the budget for the next fiscal year and mail it to all the members for their perusal.
Other options for preparing a budget for the association are:
- The entire board at a special budget meeting. Note, notice of this meeting must be provided in accordance with any statutory open meeting act and members are typically entitled to attend.
- A budget committee can be formed to prepare the budget. This committee is approved by the board to provide recommendations to the board. However, if the budget committee consists of a majority of the board, then the same notice requirements are typically necessary as stated in item one above.
- The property manager can prepare the budget for the board to review. Note: The board is the ultimate authority, as the board must approve the budget before it becomes official.
When preparing the association’s budget, consider the items discussed above, as well as the unique elements of each association. Having current financials, comparative budgets, a current reserve study and a clear understanding of the operations of your association will allow a board to prepare the most accurate budget for the next fiscal year as possible. By reviewing all the above elements, boards will have an understanding of where most of the money is being spent and why. The board will also understand the rational reasons why the monthly assessment may need to be increased (e.g. increased utility costs, increase insurance costs, etc.) and be in a better position to explain and defend such to the members at large.
When preparing a budget, consider speaking with the association's CPA, reservist, attorney, property manager or other experts. These individuals are often an invaluable asset and are most willing to assist boards with important projects such as this.