You receive your Association budget at the end of every year, but do you take the time to look over it? Do you ever wonder how it is prepared? Truth be told, many owners don’t take the time to look it over. However, this document should be of great importance to you and should be something you give just 15 minutes of your time to when it comes in the mail.
Keep in mind that this blog post contains general information about budget preparation- your association’s process could be slightly different, but will yield the same result.
What is the HOA budget? It’s a document prepared by the Board that discloses all of the estimated expenses projected for the coming year and how the Board plans to allocate association funds to cover these costs.
There are essentially three parts to the budget:
1. Funds needed for daily operation of the community, such as common electricity and water, grounds maintenance, management, insurance, and general maintenance. These expenses are either contractual or can be reasonably estimated based on experience.
2. Funds needed to maintain the reserves at sufficient levels. Reserve funds provide money for the repair and replacement of the community’s assets—such as the pool, roofs, pavement, etc.
3. Funds for additions or enhancements to the existing property. This is a function of what members of the community want and are willing to pay for.
If I don’t have time to look at everything, what do I really need to see? Ideally you should go over the entire document, but if you only have a minute you’ll need to look at your budget to determine if your dues will stay the same, increase or decrease in the coming year. This is important if you pay your dues each month yourself, or if you are on auto pay with your own bank as they will keep paying the same amount on your account and you could be over paying or under paying and incurring late fees and interest. If you set up automatic payments through Compass Management Group, Inc. your assessment payments will automatically be changed to reflect the new amount due.
It’s also important to see if your Board is considering a special assessment in the next year. Sometimes a special assessment is necessary if the Board anticipates that extra funding is needed for the repair, replacement, or restoration of any major components of the property or to provide adequate supplementation to deficient reserves.
What Goes Into the Preparation Process? A lot of work goes into preparing the budget. It’s a complex activity that has to start early so the budget can be finalized and approved prior to the beginning of the new fiscal year.
1. The Board and manager work together to gather all financial information needed to project expenses for the coming year. This may include a reserve analysis, bids for contracts, projections for utility or service increases, comparisons of past years’ budget trends and many other details.
2. The Board also examines all sources of income—assessments, interest on investments, proceeds from concession or club operation and other types of miscellaneous income.
3. The Board creates a working draft by adjusting the expenses and income until they balance. This may be accomplished by foregoing certain expenses to avoid raising assessments. Or it may be necessary to raise assessments to cover increased expenses, such as rate increases on utilities that the Board cannot control.
4. At the annual meeting a vote is cast to approve the final budget.
5. Once approved, the budget is distributed to the membership.
How does the Board know what future projects need to be done and how much they will cost? Certain expensive common elements must be replaced every 10, 15, or 20 years. Part of preparing the budget includes calculating how much money the association must set aside this year to have the necessary funds when big ticket items need to be replaced. To make sure these estimates are as accurate as possible, Boards work closely with a reserve specialist.
The reserve specialist prepares a study that will provide the Board with guidance on how to keep the association’s physical assets from deteriorating faster than financial assets increase.
The reserve specialist will visit the community to inspect it and prepare a written reserve study for the association. The report includes an inventory of all common area items, recommendations on what needs to be replaced and when, what the replacements will cost, and a plan for paying for them.
The reserve specialist chosen by the Board has the expertise and experience to accurately determine the life cycles of the communities common components and will help the Board estimate the cost to repair or replacement them.
The reserve specialist is also expert at analyzing the financial resources needed to maintain the common elements over time and will advise the Board on how to balance the size of the reserve fund against the deterioration of the common elements.
Armed with this knowledge, the committee will estimate total expenses for the coming year and compare that sum to the association’s potential revenue (assessments, interest on investments, concession income, and so on). If expenses are greater than revenue, the committee will look for ways to lower expenses without compromising service. If that doesn’t balance the budget, the committee may have to make a tough decision—whether to increase assessments or levy a one-time special assessment.
It’s important to look over your budget to see how your assessments are spent, if dues will change in the coming year, and to get information about upcoming projects and future expenses. Take the time this month to look it over.
If your association has approved the electronic transmission of association documents (receiving your budget by email instead of by mail) please sign up! Your association saves money on printing and postage costs and you’re helping to save paper. Sign in to your account on our website for more information.