Every community association should have a financial plan that sets forth the proposed expenditure of funds for the maintenance of the common areas/elements under the association’s control and for the management and operation of the association itself. The financial plan, or budget, is the foundation document for the association’s financial operation and stability. It provides a preview of the coming year’s expenses, and provides a benchmark by which the current year’s expenditures can be judged and evaluated.
The board and its professional advisors should prepare the budget annually for a twelve-month period. Upon adoption of the budget, the required annual contribution of each property owner in the community is simultaneously set.
The budget of the homeowners association should provide a detailed listing of all the expenses that the community reasonably believes will be incurred and planned for during the coming fiscal year. The main categories or components of the budget will govern the regular and ongoing operations of the association. These operations categories will deal with the everyday, recurring expenditures of the association and they should identify each proposed form of expense separately, from administration to management and from taxes to insurance.
The expenses for general operations should be listed by account and classification, and formatted to show the total estimated monthly and annual expenditures for each classification.
A portion of the budget should be set aside for capital expenditures and deferred maintenance. These “reserve” categories of the budget are for expenses that do not occur on a regular basis. These accounts establish the funds necessary for the long-term needs of the community association that involve major capital repairs or replacements of the community association’s property.
Several states now require community associations to have a reserve study performed by a qualified professional or Reserve Specialist, with updates performed every three – five years. Even if your state does not mandate reserve studies, boards of directors fulfill their fiduciary obligation by having one performed and timely updated. Reserve studies calculate the remaining useful life of each physical asset of the community and the amount of money that will be required to replace that component. Reserve funds should be placed in a separate, interest-bearing account until funds are necessary.
The budget is the community association’s financial plan. The development of the proposed budget may be by the association’s treasurer, a financial committee, the community association’s manager or by the board of directors itself. Community association budgets should be reconciled, with revenues equaling expenditures and no line item for Profit and/or Loss.
The board should bring as much expertise as possible to the development of the proposed budget. The preparation of account classifications for the proposed budget should be based on the association’s financial history and the previous year’s expenditures, together with knowledge of specific work and services needed for the coming year. Anticipated expenses can be estimated from comparisons in the marketplace, from the experience of other community associations, or from obtaining ballpark proposals for needed repairs. Each classification should be based upon realistic estimates and should be set forth in sufficient detail so that it can be understood and evaluated easily by the members of the association and by the board of directors.
To fund the budget, the association’s governing documents typically authorize the board of directors to assess every property owners their share of the community’s funding requirements. Before determining the annual assessment for each owner, the board should first deduct from total revenue needed the sums, if applicable, that will be generated from other revenue sources such as interest and use fees for the common property.
The timely remittance of assessments and assessment installments from each member is essential for the smooth functioning of the community association and the proper maintenance of the community’s property. Even if one assessment goes unpaid or short-paid, anticipated projects cannot be carried out. The board may find itself having to “borrow” cash from the reserve account to make up for the loss in revenue. Therefore, the board of directors may have to budget for bad debt and plan for uncollected assessments.
Courtesy hoamanagement.com
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