Problem with adjusting fees

I’m 2 year president of our HOA and I have a problem with setting fees.

Our docs require that the Board produce and present a budget in November for the following year. When we produce the budget we assume that our operating balance at the end of the current year will be zero.

The docs also require that, based on this budget, we calculate and announce the fees for the following year, and they are due monthly on the first of the month.

The following December, some owners pay for January, some pay quarterly. And some pay the whole year.

The problem is that at the end of the year we don’t have a zero balance; we either have a surplus or a deficit. Our practice has been to reduce or increase the next years fees based on the surplus or deficit.

We try to notify owners in January of the “adjusted fees” but this creates an accounting mess because some owners have already made payments based on the fees announced in November.

Any advice on dealing with this?

Joseph

A budget will never be truly balanced as in net zero. As an example up north snow plowing needed can vary year to year and quite often "upsets" the budget. Are you also budgeting Capital Reserves?

As John said, unless there is a huge surplus I would not be reducing the next years dues. I would leave them as they are and put the surplus in an Emergency Fund and/or Capital Reserves.

Joseph,

As others have posted, you should have a Reserve fund and, perhaps, a contingency line item within those reserve funds. At the end of the year, simply vote to transfer all under-budget monies into the Reserves. This is what we do.

The other option is to do a better job of calculating your expenses for the year. Ideally, you should never have a deficit unless members are not paying.

Please remember that having a zero balance for the budget at the start and end of the year does not equate having a zero balance in the operating fund. Our association has chosen to have a certain amount in the operating funds at the beginning of each year. This amount is approx. equal to one months expenses (although I've heard of other associations having up to 3 months expenses). This provides a cushion if the Board under estimated the expected increases or there were unusually large expenses (like a harsher winter than normal or unexpected storm damage).

Another thing our Association has done is to create a miscellaneous line item within the operating fund. This line item covers small unexpected repairs that are not covered by the Reserves. It also makes up any shortages between when the bills arrive and the assessment payments arrive. If needed, it can also be used to offset any write off of assessments due to bank or tax foreclosures.

Similar to your Association, we start our new budget process in September and have the next years budget ready to announce at our annual meeting in October. Assessment payment books, based on this budget, are mailed in November. When we make the budget, we try to estimate (based on past history or actual contract terms) the increases for the following year. This can vary for each line item.

What I'm trying to say, in more words than necessary, is that the Association should have some sort of buffer in the budget and in the actual checking account to absorb the minor unexpected expenses that come along. If you need to address a major unexpected expense that the proper procedure would be to assess a special assessment vs. adjusting the annual assessment.

Hope this helps,

Tim