Benchmarks for Financial Rarios

James,

In 2005 our auditor recommended that we develop, through the budget process, an operating contingency equal to 20% of annual assessments. It took us a few years to get the operating contingency up to that level and then the winter of 2009/2010 featured two snowfalls of over 20". We were able to cover those large snow removal costs without a special assessment or raising dues by tapping the operating contingency. In subsequent years we have been able to rebuild the operating contingency up to the recommended 20% level.

If your association does not have an operating contingency you should try to carve out an explicit contribution to one in each year's operating budget.

James,

Because every Association has different amenities, have different climate conditions and have different rates of delinquent accounts, it's difficult to have any specific formula. This is what I've found:

First there should be a Reserve Study and the Reserve Funds should be fully funded based on the study.

Second, it makes sense to have an operating contingency. The amount you need will depend on the number of delinquencies that the Association carries and what is covered in the operating budget vs. being part of the reserves (like tree trimming, minor repairs, etc.). The contingency fund is use to make up budget shortfalls (like the snow removal expenses for an unusually heavy winter David talked about) and to help pay the bills while waiting for the assessments to be collected. I've heard that a good minimum for an operating contingency is 1/12 of the annual assessments.

Third, the number of delinquent accounts should be minimal. Unfortunately, defining minimal for one Association compared to another can be difficult. Obviously, the goal is zero. However the reality is it depends on a lot of factors that are outside of the Associations control. Therefore, each Association has to define minimal on their own. Therefore, look at the policy concerning delinquent accounts, is one in place, is it followed, is there room for common sense in making payment arrangements, etc.

That, in my mind would be the minimum. Depending on the Association the following might also be applicable:

You may or may not want to also consider a contingency fund for the Reserves. If you have things like Roads, a clubhouse or a pool, this type of a contingency can help make up the difference if covered items need replaced earlier than expected.

Although for my Association I think it's an overkill so we don't do it, I've heard of some Associations who live in areas that can get hit with major storms to have a fund to pay insurance deductibles.

That's my opinion on the issue.

Here is a link to an article on the Associa Living website on that subject (hope this works!) I found it very helpful when wading through our community's financial report.

http://associationtimes.associaliving.com/2011/11/know-your-community%e2%80%99s-financial-position/

For example, you wondered if you had too much operating cash - this article says 2-3 months of budgeted expenses is a nice benchmark for the operating fund because you're able to pay bills and have a little extra in case of emergencies.

Regarding your assessment, it may be easier to hold the assessment at the current rate for another year if you're in a decent financial position - this way, you won't be surprised over major increases over the next year and then have to raise fees higher than anticipated. You could also put some money into a contingency reserve to take care of the unexpected, such as insurance deductibles - talk to your association accountant about tax implications