Identifying Gaps in Your Community Association Budget

As the year draws to a close, your community association board is likely engaged in drafting the budget for the coming year. Even if you're accustomed to the budgeting process, each year brings new challenges, making it easy to miss out on key financial needs.

Overlooking minor expenses might not create major setbacks, as they can be covered by reallocating funds from other areas. However, forgetting significant expenses can lead to the necessity of loans or special assessments, neither of which are positive developments for residents.

Insurance Deductibles

Recent events in states like California, Texas, and Florida serve as reminders of how insurance deductibles can take a toll on budgets following unexpected events such as natural disasters. While it's common to account for insurance premiums, deductibles often remain an afterthought, especially if claims have not been filed in recent memory. It's crucial to set aside funds for at least one potential claim annually, even if multiple claims seem unlikely. If there are indications that more claims may occur, it’s wise to adjust the budget accordingly.

Legal Fees

Inspecting last year's budget can often help predict legal fees for recurring matters or unresolved claims. However, it might not anticipate unexpected litigation, such as lawsuits involving the community association or board members. Many associations prepare inadequately for legal expenses due to a history devoid of significant litigation, but legal issues can arise abruptly. This can lead to the allocation of resources from other essential budgeting areas, causing cash flow issues.

Taxes

It might seem unnecessary to budget for taxes if none have been required in past years. Nonetheless, new revenue-generating activities could alter this scenario significantly. It's prudent to consult with an accountant to determine if an increase in revenue might necessitate a tax expense in the upcoming year.

Reserve Funds/Reserve Study

Allocating funds to reserves is vital for maintaining financial health, yet many associations handle this poorly. As many as 72 percent of associations face underfunded reserves. At times, reserves aren't included in the budget at all, relying instead on potential budget surpluses. However, the maintenance and improvements funded by reserves will be needed regardless of budgeting. This often results in costlier funding alternatives, like special assessments or loans, burdening homeowners. The actual reserve fund needs should be informed by the most up-to-date reserve study, which should be revisited every two to three years.

Delinquencies

Delinquent association fees are another frequently overlooked budget aspect, often due to excessive optimism. An honest assessment of fee payment trends over past years can offer realistic foresight for budgeting. It's beneficial to incorporate the percentage of uncollected fees into the budget, based on historical data.

Weather-related Costs

Expenses related to weather, such as snow removal or hurricane damage, pose budgeting challenges. Past weather data may not suffice, as weather patterns are unpredictable. You need to budget for these potential costs using your best estimates, even if uncertainty remains.

Increased Costs

Many boards hesitate to raise fees, leading to the possibility of substantial increases or special assessments later. Gradual and consistent fee hikes are generally more beneficial, reflecting minor "cost of living" adjustments regularly. This prevents the problematic scenario of under-budgeting to maintain low fees, which can result in future budget deficits. Emotions can run high when board members, who are also homeowners, face fee increases affecting themselves.

To mitigate these issues, explore commonly overlooked aspects in community association budgets that might be excluded. While no budget will be perfect to the cent, building transparency with association members is paramount. Surpluses or deficits should be factored into next year's budget.

If reserve funds aren't required immediately, they can be transferred to cover future needs, provided there's sufficient capital to manage costs for the next few months. Engaging a proficient property management company can significantly benefit your budgeting process. With seasoned experts and specialized professionals, the right company can help you reduce costs and achieve your association's objectives.

Discover more strategies to keep your community association budget on track.