What's Missing from Your Community Association's Budget

Each year around the same time, your community association board dives into the process of crafting the budget for the upcoming year. Even when seasoned in budget creation, shifting factors can lead you to miss vital components.

Overlooking a small expense might not be a big deal since you can often cover it by reallocating funds within the budget. However, omitting a significant expenditure could result in the need for a loan or a special assessment, which would be unwelcome news for residents.

Insurance Deductibles

Communities in regions like California, Texas, and Florida have learned the hard way that insurance deductibles can heavily impact their budgets, especially following natural disasters. While most won't forget to budget for insurance premiums, deductibles often slip the mind—particularly if there hasn’t been a claim in recent memory.

A single event should be accounted for in the budget, even if claims are rare. If there's a likelihood of multiple claims, planning should reflect that potential.

Legal Fees

An examination of your previous year's budget might help predict legal fees for ongoing services or unresolved claims. But it won't factor in legal costs arising from unexpected claims, such as lawsuits against the community association or its board members.

Associations often neglect to set aside funds for legal fees, mistakenly believing they won't face litigation. When such issues arise without allocated funds, it can deplete other essential budget lines.

Taxes

Past exemption from taxes doesn’t guarantee the same for the upcoming year. New revenue-generating endeavors can change this. Consulting with an accountant is advisable to ensure you're prepared for any tax obligations if revenue significantly increases.

Reserve Funds/Reserve Study

Reserves are vital for the fiscal stability of your association, yet underfunding them is a common issue. A significant number of associations fail to budget adequately for reserves, relying instead on a budget surplus, if it exists.

Ignoring appropriate contributions to reserve funds can result in the need for costly funding alternatives, like special assessments or loans, which can burden homeowners.

State laws might mandate specific reserve fund contributions, but these should not replace calculations based on an up-to-date reserve study. Regular updates to the study are essential, warranting funds in the budget for these evaluations.

Delinquencies

A common oversight in budgeting involves delinquent association fees. Boards sometimes adopt an overly optimistic outlook, expecting full payment collection without considering historical shortfalls.

Reviewing historical data on fee collections to include expected shortfalls in the budget is recommended. Assess trends to adjust the budget to realistically reflect expected collections.

Weather-related Costs

Expenses such as snow removal, cleanup after storms, and other weather-related costs are unpredictable yet necessary budget items. Historical data is insufficient for estimation. It's crucial to budget for these potentially high expenses based on informed estimates.

Increased Costs

Avoiding fee increases often leads to significant hikes or special assessments later on. A more sustainable approach involves incremental, consistent fee adjustments, akin to cost-of-living increases.

Boards often under-budget to maintain low fees, but this usually leads to deficits. It's important to approach budgeting pragmatically, acknowledging fee increases as part of the process.

Your budget will rarely align perfectly, often resulting in surpluses and deficits. It's crucial to address these with transparency and plan for the next budget cycle accordingly. Excess funds can be reallocated to reserve funds while maintaining sufficient working capital for operational needs.

A reputable property management firm can be instrumental in budget development. With an experienced team, they can guide you using best practices and help discover savings opportunities. Seek professional assistance for crafting a budget that will support the financial health of your community association.