I know that no one wants to think about it, but that dreaded time has come again. It’s time to get to work on the annual Association budget. While the budget process is very straight forward, the emotions it often brings out in owners, board members, and residents are not. The budget process has to balance competing interests, some want the lowest possible increase while some want more services, better amenities, or improved maintenance. All of these have to be balanced with what is required in addition to the resources of the Association and its owners.

A few budget facts you should know:

  • Association budgets work from the bottom up. This means that the monthly or quarterly assessments are a function of the Association’s operating costs, maintenance and other services as prescribed by the Association documents. The board and the Gods of budgeting can’t just decide they want to have less of an increase or lower the assessments, this can only be done by reducing services or other expenses, which is often easier said than done.
  • Many of the items that must be covered in your budget are outside of the Association’s control. The costs for insurance, utilities, cable, telephone, and trash removal are set by and/or controlled by governments and/or contracts that are already in place and which have extended terms.
  • Shortcutting or delaying necessary maintenance and repairs is never as cost effective as it’s made to sound. When these budget line items are reduced most of the time it will result in increased costs, special assessments, and the inconvenience of disasters at the worst possible time.
  • The budgeting process is an art, not a science, so leave some room for unplanned expenses. No one ever complains when the Association runs a surplus and this can easily be carried over to reduce next year’s assessment if the board so chooses but a shortfall means a special assessment and this will not make anyone happy.
  • The sooner you start and the more homework you do the better off you will be.

The first step is to gather information. Start with the year to date financial information for your Association. You will also need the current year’s budget. Copies of any long term contracts your Association has which will have to be reviewed annual increases. Check with managers or maintenance supervisors for extraordinary upcoming maintenance and repair items. Get a wish list of projects and their projected costs for the board and don’t forget to check the newspaper or call local utility companies for information on pending or recent fee increases. Since one of the largest single costs for many associations is insurance it’s also a good idea to call your insurance agent and see if they can shed some light on next year premium.

Now comes the fun part. Take the current year to date financial information and project it through the end of the year. Compare it to the budget for the current year and review each line looking for any extraordinary items that are non-recurring. Note these items on your current year financial projection and make notes as based on the other information you have gathered. For example if water and sewer rates increased by 4% make the note next to water and sewer costs. When you have marked down all the items that will affect the amounts the Association will have to pay, you can begin to project the expenses for the coming year. After you have projected all the expenses you can work on projecting the non-assessment income. This would include laundry income, application fees, clubhouse rental, dock rental and any other items for which your Association collects fees based on something other than assessment of owners for maintenance.

The required maintenance assessments are simply the total projected expenses less the total projected non-assessment income. This number is then merely allocated by the formula show in your Association documents. (This number is sometimes based on the number of units, sometimes based on square footage, and sometimes based on some other method but you must use whatever method is spelled out in your Association’s documents).

Some points to remember:

  • Your budget must also include a reserve budget as part of the annual budget; the budget for reserves is required even if the owners in your Association vote not to fund reserves. More on reserves and reserve budgeting next month.
  • You can’t just reduce the amount of owner maintenance assessments without reducing expenses — and just taking them out of the budget is the easy part. You also have to reduce the actual cost of the service or eliminate it or the reduction will simply result in a special assessment to make up the short fall.
  • Budget meetings are official Association business meetings and you must post proper notice, allow owners to attend, and keep minutes, but preliminary work can be done with a meeting between your treasure and management or accountant and the results of this preliminary work sent to the board so that they can review and be ready to discuss it at a properly noticed meeting.
  • The final approval by the board must be done at a properly noticed budget meeting and a notice of this meeting, along with a copy of the proposed budget, must be sent to all owners at least 14 days prior to the meeting. (Changes can be made by the board at this meeting if so desired but remember the caveats above.)

Don’t hesitate to get help for your management and or accountant if necessary and remember the only thing owners hate more than a fee increase is a special assessment because the budget does not cover the ongoing Association operating and maintenance costs.

My best advice, is start early ask questions, and do your homework.

Written by FCAP Member Steven J Weil, PhD, EA, CAM
Doctor Weil, is a President and founder of Royale Management Service, Inc. and a principal in RMS Accounting where he serves as firm President. His firm provides continuing educational programs for board members, officers, and owners on topics such as “Building a Budget that Works for Your Association”, “Association Financial Information What You Need and How to Use It!”, and monthly “Board Certification Classes”. The firm manages Condominium Associations, HOAs and Coops in Broward, Palm Beach and Miami Dade Counties.