Budget Review Process

Started by WilliamS1 • 8 replies • 1523 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

WilliamS1 (South Carolina)
Posts: 113

Posted:

I am a fairly new hoa board president and soon we will be talking over next years budget. In talking with the treasurer, she mentioned to me that typically she takes an average of what we spent this year and last, jumps it for inflation and thats it.

Is this typical? Likely but very simplistic.

The problem, some home owners have told me they would like to see the pools and patio spuced up more, others want the club house updated, others would like to see the landscape in better shape, others would like to see more fences reworked or mailboxes upgraded. How can we approach this as a board.

Does anyone have any other succesful process that they have followed that we could reference?

Thanks

BradP (Kansas)
Posts: 2,640

Posted:

William:

It will depend on what your expected income is, obviously your expenses will need to match that unless you are going to dip into your reserve fund. WE line up our expected income and then itemize out and estimate all the expenses you know you will have.

We have some fluff every year that I put into capital improvements and landscaping and sprinkler maintenance. I usually put off most of our unnecessary projects until the fall so I know how much I have spent on sprinklers or other emergencies.

A budget is simply a guideline, you will have unexpected expenses, when you do the money will have to come from somewhere else. It may mean waiting until next year to redo the landscaping. For us we have had spent triple on sprinkler maintenance this year, it will mean holding off on adding an additional sign to our subdivision or redoing the landscaping around it.

Of course you can always dip into reserves, but I Would save that for real emergencies, or you can always increase dues, but that can be treacherous as well.

SwanB (Washington)
Posts: 199

Posted:

Our Budget review process is twofold. Previous Boards left this to the Accountant and it was done much as your Treasurer described.
Our governing documents require a review and ratification of our annual budget and Five Year Capital budget at our annual general meeting by our members.
For the past two years I have served on the Board, I have been involved with the budget review process. I have also done this on other organizations. The method I find most helpful is to review previous year Budget statements to actual for comparison. It is nice to go back two to three years to get a scope of expenditure dips and waves.
I also have onhand the line item listing for each income and expense account for the previous year.
It sounds like alot of paperwork and is easiest to do on a computer but is an invaluable resource for answering questions and getting the stats you need to build your budget, line by line without a dart board.

RogerB (Colorado)
Posts: 5,067

Posted:

Yes William, this is a very simplistic approach which I hope is not typical. My budget process includes two budgets. I begin with a 20 year reserve plan to determine funds needed for the reserve fund budget. Then I determine the annual operating budget. I first study historical data, actual vs. budgeted; then carefully evaluate each line item of expenses - there are often major adjustments (+ or -) needed as per your examples. The total operating expenses plus reserve funds needed determines the income needed. This establishes whether the assessment can stay the same or needs to be increased.

RogerB (Colorado)
Posts: 5,067

Posted:

Adding to my last comment on assessments, I should have added that we recommend keeping assessment amount stable. For the HOA's we manage many wanted to reduce the assessment after we became their MC and their net income increased. We do not recommend this. Owners like to have their assessment lowered but do not like to have it raised. It is better to keep the same assessment for several years.

GeraldT1 (<Not Specified>)
Posts: 519

Posted:

WilliamS1,

A simplistic response to the treasurer's approach is that it may not only be simplistic but may be inadequate.

To budget and fund reserves you will have to develop funding goals and methodologies to accomplish the funding goals. Depending on the age of your association, there may be historical data in the form of a Capital Reserve Analysis from a transition engineering firm that.

If your association was new, had not begun transition, and or the developer hads seats on the board with owners slowly occupying the seats, there's not a whole heck of a lot the owner board members can do to increase maintenance or re-allocate funding to cover reserves, or budget items. Unless the developer is aggreable of course. However, developer's historically underestimate the budgets and reserve analysis in public offerring statements, or they are forecasted years ago and become outdated once construction is complete and the transition process begins. Because your treasurer is increasing maintenance, it sounds like the developer is not involved as a member of the board. Is this the case? If so, you MUST adequately fund your reserve accounts, and probably by more than the annual cost of living increases (3.4% on average). The cost of living increase concept can work with most everything, but is not an adequate funding goal or methodology for reserves.

You should utilize the treasurer to provide you the numbers (what is currently in reserve, working capital, and deferred maintenance accounts). Find out how much is allocated to these accounts on a monthly basis. Then get a current figure on what it will cost to replace each of your common and limited elements and what the lifespan is. Then you can begin some projections on where you are at in the depreciation of the lifespan of your elements and what you will need to replace them in 20 or 30 years.

If your association is new, doing these projections now amnongst the owner board members and getting a Transition Engineering Firm, independent CPA, and attorney will help you prepare when owners take control of the Board. If you are already an owner controlled board, then the Transition process should be already begun, or ended. There should be information for you to base your funding goals and methodologies on.

NormanG (Arizona)
Posts: 38

Posted:

Does this mean, then, that the HOA should plan(if it is a new one) to expend a certain amount of money to develop (to have developed) a RDA(Reserve Data Analysis) for say... a five year period? I do not know how much this cost would be but it seems sensible that it would be crucial

RogerB (Colorado)
Posts: 5,067

Posted:

Norman, yes; but 5 years is too short. I suggest a 20 year reserve plan. The cost will depend on the amount of capital improvements which will be needed in the future.

DaneC (California)
Posts: 210

Posted:

You are really doing 2 budgets. The first will cover the monthly recurring expenditure - utilities, landscaping MC fees, etc. You can get a good idea of exactly what they are by reviewing your paid checks for the past couple of years, as well as to whatever contracts the Board has in existence. The second will cover the maintenance or replacement of common elements that are in your Reserve study. It is prudent to have a study done every 3 to 5 years (depending on the type of common elements, and your State requirements), and reviewed on an annual basis.
Having a Reserve study done by a professional(s), gives you a clear blueprint of what amounts are needed to be funded in your Reserve account. It may be, that the work that is being mentioned may not previously have been included in a study, and you may then need to impose a one-time special assessment to have it done.

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here