By Ryan Clifton, CMCA / Published August 2023
As the 2024 budget season approaches, the concerns continue to grow regarding budgeting and financial issues. Unresolved budgeting and financial issues can become a catastrophic problem for the association’s cash flow. With that said, this article is an effort to help provide guidance and some remedies to your association’s potential budget and/or financial issues. Hopefully this article helps resolve such issues before they become a problem.
The focus of concern in the 2024 budget year is how high your association assessment will increase. The primary factors that drive an increase are the insurance market premium spikes and an inflationary period that has no light at the end of the tunnel. The board of directors and management have a major task this budget season. The task is to produce a budget that is cash-flow sufficient for the 2024 budget year while not breaking the homeowner’s personal budget. Let us not lose sight of the primary purpose of the association’s existence, which is to maintain the association’s shared areas while enhancing owner property values. You cannot properly maintain a community without adequate funds available. You cannot have adequate funds available without properly budgeting and managing your financials.
Proper budgeting includes correctly identifying and assessing the costs for all the association expenses. Insurance is going up; there is no escaping this expense. Materials, supplies, and labor are all increasing as well. This will almost guarantee vendor contract renewal increases and project cost increases, as well as surges in reserve component costs.
Insurance will increase your assessment rate, period. Property, general liability, and umbrella insurance policy premiums will be definitively increasing in 2023 and in 2024. Per the top insurance agents in Florida, expect 35–65 percent increases for standard insurance and 65–100 percent for townhome/condominium building master insurance policies. Associations do not have control over the impact insurance premiums will have on their budget. If you are paying the full lump sum, your association will have to reduce other expenses to minimize this impact. Perhaps you have a prior year operating surplus that can offset a portion of the 2024 insurance premium renewals. If you can finance the insurance policies, you can manage your association’s cash flow better. Further, you can prorate the premium renewal increase in 2024 by factoring the number of paid installments from the 2023 premium agreement and the number of installments from the 2024 renewal premium finance agreement. You can reduce your budget by thousands of dollars by utilizing the proration method. Yes, you will be adding an approximate five percent increase to your total premium to cover the financing costs; however, you will also enable your association to prorate the payment of installments and manage your cash flow to pay smaller monthly increments as opposed to one large lump sum.
Due to the seemingly never-ending inflationary period, it is crucial we discuss reserves. Reserves are typically the most expensive items your association is responsible to maintain. Fully funding reserves in each budget to ensure the association has adequate funds for the capital expenditure/deferred maintenance projects by the end of the estimated useful life of each reserve component is essential. It should be a mindset that it is mandatory—your association is on schedule to fully fund the reserves. This most certainly requires updated costs and conditions of each of your reserve components. The best practice to accomplish this is by obtaining an updated reserve study. The main purpose for reserves is to ensure adequate funds to cover your reserve projects while avoiding unplanned special assessments or significantly high spikes in assessment rates. My recommendation is to obtain an on-site reserve study every three years. This will ensure your association is fully funding reserves with the appropriate costs and life span while providing transparency to the owners regarding the reserve schedule and annual contributions.
Vendor contracts will be increasing as well. Review your vendor contracts’ scope of services. Are there any services you can remove? Are there any services you can add as a cost-savings investment? Preventive maintenance programs for pool/fountain equipment or entry gates are proven to save thousands of dollars by discovering and fixing issues, thereby preventing very expensive equipment replacements.
Projects will be another big discussion. Make a project list and prioritize it in order of “project needs” at the top and “project wants” at the bottom. Appropriately, add the projects to the budget every year while being mindful of the impact on the assessment rate. The projects that do not make the 2024 budget can simply be added to the 2025 budget, or they may be completed by additional revenue collected or unused budget accounts. Further, you now have a list of projects to manage and plan accordingly to complete.
For those of you who experienced 2023 landscaping or other storm damage, this section is for you. Create an emergency restoration fund budget line item in the 2024 budget. For example, you may add $10,000 to the 2024 budget. The association either uses these funds for emergencies during 2024 or does not. All unused funds for this budget can be transferred to a limited voluntary deferred maintenance account. You can use other sources of income and/or unused budgeted line items as well when reviewing the year-end financials. The last thing you want to do is deal with an emergency and worry about how you are going to pay for this and how much you have available. This option tracks your available emergency restoration funds.
While the budget is important, it is equally important to monitor your financials. On a monthly basis monitor your cash balances to ensure you are within FDIC limits for protection, per your bank. Monitor your expense report to ensure you are not going over budget for any budget line item. If you are going over budget, understand where these unbudgeted funds are coming from. Also, monitor the delinquency report. Do not focus on the bottom-line number of the report. Focus on the number of non-paying owners. A good rule of thumb is any owner who has a delinquent balance of 90 days or greater is considered a nonpaying owner. This is important to monitor for both short-term and long-term cash flow. It is also important in case a loan is needed. Most financial institutions will not provide an association a loan if 10 percent of their owners are “nonpaying owners.” Be mindful of the owners’ limitations to pay increased assessments from their personal budget, perhaps by adding reprieve options such as a waiver policy and/or a payment plan policy for financial hardship assistance.
Communication is also crucial. Communicate what is going on to the owners. If you can provide future year projections, that will assist the owners in better managing their personal budgets.
The 2024 budget season will be challenging, but all board members and association managers have a fiduciary duty to provide a budget that provides adequate funds for the association during the budget year. Hope is on the horizon in 2024 with the insurance market and the inflationary period peaking out. Stay focused and best of luck!
Ryan Clifton, CMCA
Vice President Of Developer Operations
Ryan has been a licensed Florida community association manager for over 10 years and joined the Leland team in November 2008. Ryan is certified by the State of Florida to facilitate manager education for licensed managers as well as board of director training throughout the state, covering topics such as accounting, budgeting, and developer operations. Ryan holds the CMCA designation through CAI. At Leland Management, Ryan works specifically with developer associations to help properly develop the association, while at the same time assisting with the development of each community’s culture. For more information, call 407-781-1187, email email@example.com, or visit www.lelandmanagement.com.