Setting Assessment for Budget (IL HOA)

EricB13 (Illinois)
Posts: 29

Posted:

IL HOA - For the past two years, our HOA has had expenses exceed income. However with reserve account transfers into the operating fund, it looks like we are ending with a surplus each year.

My main question is that each year we are budgeting our assessments to about 94% of total expenses, with the rest of the revenue being made up from other income streams like rentals and late fees.

Is that a wise way of budgeting? Our collection rate is also about 97% each year, so we are inherently missing our targets each year if our expense budget is correct.

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By EricB13 on 10/05/2020 8:47 AM
IL HOA - For the past two years, our HOA has had expenses exceed income. However with reserve account transfers into the operating fund, it looks like we are ending with a surplus each year.

My main question is that each year we are budgeting our assessments to about 94% of total expenses, with the rest of the revenue being made up from other income streams like rentals and late fees. Is that a wise way of budgeting?

-- I am not sure whether what you call "total expenses" includes operating expenses and capital asset expenses. Can you clarify?

-- In my experience whether your concerns have merit may depend on where your HOA/condo is in its cycle of replacement of major capital assets.

-- Is this a condominium?

-- I see from your other threads that there is a clubhouse pool. Can you talk a little about other major capital assets (meaning those assets collectively owned by the members and having a life expectancy of more than a year)?

-- When is the last time a Reserve Study was done?

EricB13 (Illinois)
Posts: 29

Posted:

The declaration document clarifies common expenses to be general operating expenses including any reasonable reserve. So the declaration says the budget "shall include a capital contribution establishing a reserve fund in accordance with a capital budget separately prepared."

This is single-family HOA with pool. No clue when a reserve study was done, but the reserve account is pretty healthy.

The main thing I'm concerned with is that when the budget has income (assessment plus other income) to match expenses (operating plus planned reserve contribution), we have been using the reserve fund to supplement the shortage of income.

Obviously 2020 is a different case since most HOAs will probably have more money in their operating accounts than usual, but I just find it a very weird way of budgeting to basically know that your collection rate will never be 100% and you're relying on "other income" to make sure you don't end the year at a deficit.

SheliaH (Indiana)
Posts: 6,964

Posted:

This use of reserves isn't proper, in my opinion. Reserves are supposed to be used for future capitol improvements to the common area, such as roofing in a townhouse community. If you're transferring that money to plug holes in the operating budget because you're spending more than you budgeted, you're heading for big trouble when the time comes for a major report and you find you don't have enough money or no money at all. This is why some communities wind up with special assessments and all hell breaks loose (usually ending with board members getting sacked.)

Budgeting isn't an exact science, only a guide, just like in your household budget. And just like your household budget, you need to look at your expenses every month to see if certain line items are exceeding the budget and find out why. For example, you may have asked a lawn care contractor to do work that wasn't in the contract, meaning someone should have read it before asking that that work be done. Maybe you had a planned project where you found more work was required than anticipated and had to adjust the budget.

You have two years of data, so before you finalize next year's budget, sit down (the ENTIRE BOARD) and take a deep dive into past years and compare to what's gone on this year. Also consider your assessments - a 97% collection rate is great, but is the assessment itself enough to keep up with inflation (something most people forget about in their personal budgets, let alone a HOA budget)? It may be time for an increase - no, people won't like it, but that's when you show them the numbers. If they still don't like it, perhaps it's time for some tough love - if people want certain services, they'll have to pay for it.

Maybe the problem is behavior. For example, my community's budget increased this year in part because we've had a big problem with illegal dumping in our dumpsters. We've hired a security company to set up a camera near the dumpster with the biggest problem, and had to pay more to cover that service. Unfortunately, the problem has continued and I suspect we're in for another increase because we will likely need to place cameras at the rest of our dumpsters.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

AugustinD
Posts: 5,144

Posted:

Quote:

Posted By EricB13 on 10/05/2020 9:47 AM
No clue when a reserve study was done, but the reserve account is pretty healthy.

Without a reserve study, I do not see how one can judge the health of the reserve account.

A reserve study will look at estimated operating expenses along with capital asset expenses and tell the Association whether the members' yearly/monthly assessment is reasonably in the ball park.

GenoS (Florida)
Posts: 4,276

Posted:

Quote:

Posted By EricB13 on 10/05/2020 9:47 AM
This is single-family HOA with pool. No clue when a reserve study was done, but the reserve account is pretty healthy.

How do you know? When we bought into our HOA people were only too happy to tell us we had "a lot of money" in the reserves. One look at 7 years' worth of Annual Financial Reports was enough to show in black and white that the reserve contributions for those 7 consecutive years was "underfunded" (CPA's words).

People didn't want to hear it. Don't believe everything you hear.

TimB4 (Tennessee)
Posts: 21,062

Posted:

Our Association has averaged 6 home sales a year in the development.
We incorporate the disclosure package fees as income in our budget.
Some years we are correct, some years less sales and some years more sales.

Keep in mind that a budget is an educated guess/guideline - not an exact science.

As for reserve funds being transferred into the operating account, we pay all bills from the operating account. Therefore, when a reserve item is repaired/replaced, those funds are transferred from the reserve account into the operating account for payment.

The OP was unclear if the reserve funds were being used to cover shortages or to cover reserve items.

If the reserve funds were being used to cover shortages, then the assessments are not high enough or there are a lot of delinquencies and money is being borrowed from the reserves to be paid back when the delinquent accounts are brought current.

Without seeing the actual budget along with a reserve study and to date amounts, it's really not possible to provide a better answer then simple speculation of possible reasons.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

As Tim said. While not an accountant, if the "shortage/expense" was covered by a payment from the Reserves, it might be all well and fine.

To clarify. Lets us say the Reserves had a Pool Liner included and in 2019 we had the reline the pool. It would show up as an expenses as we had to pay whoever relined the pool and without the "transfer" form the Reserves to cover the bill, we would be negative. With the transfer from the Reserves to pay for the pool liner, we could be even or show a profit. All well and good.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Did anyone else not notice the OP mentioning their other way of gathering income? Need more clarification on that. A HOA isn't to be making an "income" other than from it's dues. So what do you mean by "Rental". Let's say your HOA has a clubhouse. You can charge a rental fee for it but it's not to be "profitable". It's basically to cover the utilities/water/supplies/use while being rented. Plus we charge a damage deposit to cover any damages. That gets returned after the rental if everything is okay. It isn't "income" to the HOA.

A HOA is typically a non-profit but NOT a charitable one. You can't make a tax write off for donating to your HOA. So your HOA budget should be set to cover it's expenses plus reserve contributions by it's dues collections. Those dues are to be divided evenly amongst it's membership. So the amount you collect should be a fixed and known amount even if you have non-payers. You always have to factor in a percentage on non-payers. You can't plan a budget on 100% contribution.

I also agree the reserves transfer was not done properly. It is NOT there to cover your shortages in your operational expenses. It is there for long term expenses that will require a capital improvement. You can have a separate savings account that isn't reserve. That would work more for a padding.

You set your budget for your known expenses and known collection rate. Everything else fluctuates.

Former HOA President

KerryL1 (California)
Posts: 14,550

Posted:

So, I too need clarification. Are the funds from reserves that are transferred to the operating budget used to pay for said reserve components? If so, OK.

If reserves are transferred to the operating budget because of shortfalls in the operating budget, in CA it would not be legal. In Ca, we may borrow from reserves for that purpose, but it must be paid back in a year and complete notification to owners about the process must occur.

So....what's OK in IL?

KellyM3 (North Carolina)
Posts: 2,239

Posted:

Quote:

Posted By EricB13 on 10/05/2020 8:47 AM
IL HOA - For the past two years, our HOA has had expenses exceed income. However with reserve account transfers into the operating fund, it looks like we are ending with a surplus each year.

My main question is that each year we are budgeting our assessments to about 94% of total expenses, with the rest of the revenue being made up from other income streams like rentals and late fees.

Is that a wise way of budgeting? Our collection rate is also about 97% each year, so we are inherently missing our targets each year if our expense budget is correct.

If you're using accrual accounting, your 97% collections will smooth out in the budget year and you should be fine. The 3% under-collections is mostly people who are late payers but will pay up eventually - usually in the new budget year. If you're routinely writing off 3% of your dues as permanently lost, you have a big problem.

Your problem is that you need to cut operational spending so that you're not pulling money from Reserves to balance your budget OR lower your Reserve savings and give more cash to the monthly operational budget.....operations money, if any is left over at year-end can be rolled into your Reserve Fund.

Above all, if your community is happy with property conditions, you need to raise dues for the express purpose of increases Reserve Fund deposits. It's all money-shifting but your board needs to be transparent about its spending.

CathyA3 (Ohio)
Posts: 6,299

Posted:

Quote:

Posted By KellyM3 on 10/06/2020 7:19 PM
... snip ...

If you're using accrual accounting, your 97% collections will smooth out in the budget year and you should be fine. The 3% under-collections is mostly people who are late payers but will pay up eventually - usually in the new budget year. If you're routinely writing off 3% of your dues as permanently lost, you have a big problem.

Your problem is that you need to cut operational spending so that you're not pulling money from Reserves to balance your budget OR lower your Reserve savings and give more cash to the monthly operational budget.....operations money, if any is left over at year-end can be rolled into your Reserve Fund.

Above all, if your community is happy with property conditions, you need to raise dues for the express purpose of increases Reserve Fund deposits. It's all money-shifting but your board needs to be transparent about its spending.

A couple additions to Kelly's comments:

In my condo community, we must fund our reserves at the level indicated in the most recent reserve study *unless* the owners vote to allow a lower contribution. The vote must be held annually, and it must be unanimous (I think). State law makers got tired of the tales of woe from associations that got themselves into significant financial trouble due to underfunded reserves - so they passed a law that essentially makes homeowners acknowledge that they're being short-sighted and will come to regret it.

The OP's board should make sure that IL doesn't have similar laws.

When HOAs aren't spending within their means, they have two options: reducing their spending or increasing their means (ie. assessments). There is no other option, and endless shuffling of dollars won't make new dollars appear.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

Quote:

Posted By KellyM3 on 10/06/2020 7:19 PM

Posted By EricB13 on 10/05/2020 8:47 AM
IL HOA - For the past two years, our HOA has had expenses exceed income. However with reserve account transfers into the operating fund, it looks like we are ending with a surplus each year.

My main question is that each year we are budgeting our assessments to about 94% of total expenses, with the rest of the revenue being made up from other income streams like rentals and late fees.

Is that a wise way of budgeting? Our collection rate is also about 97% each year, so we are inherently missing our targets each year if our expense budget is correct.

If you're using accrual accounting, your 97% collections will smooth out in the budget year and you should be fine. The 3% under-collections is mostly people who are late payers but will pay up eventually - usually in the new budget year. If you're routinely writing off 3% of your dues as permanently lost, you have a big problem.

Your problem is that you need to cut operational spending so that you're not pulling money from Reserves to balance your budget OR lower your Reserve savings and give more cash to the monthly operational budget.....operations money, if any is left over at year-end can be rolled into your Reserve Fund.

Above all, if your community is happy with property conditions, you need to raise dues for the express purpose of increases Reserve Fund deposits. It's all money-shifting but your board needs to be transparent about its spending.

I once read that on average 5-7% of owners are, at any one time, behind on their dues. Out of 112 owners we have two that are over 2 years behind and we are pursuing legal action against them.

GeorgeS21 (Florida)
Posts: 3,808

Posted:

In my rental community I just moved from, we just turned seven of 314 over to attorney for collection - and, authorized foreclosure against another.