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Budgeting Best Practices

08/01/2018 10:37 AM | CAI Rocky Mountain Chapter (Administrator)

By Janet Watts, Association and Community Management

I have had the pleasure of participating in CAI designation courses, continuous education classes, and have 10 plus years of experience as a community association manager (CAM). I introduce myself this way to give you a little of my background when working with Boards of Directors in homeowners’ associations. With that said, I have witnessed many strategies upon entering budget season. 

In my opinion, there are two primary types of Boards.  There are Boards that are intimately involved with every step of the budget planning process and there are Boards that rely on their community manager to draft a proposed budget.  Let’s dive a little deeper:

Boards that are intimately involved:

The Board will review proposals/bids for budget planning next year’s “wish list” projects, analyze the current year financials, review service contracts, research utility rate increases, possibly survey the community for input, and review the governing documents, primarily to confirm any increase “caps” that may be imposed. 

Boards that rely on management to draft a proposed budget:

The Board will request a proposed drafted budget from the manager, review the line items, review the service contracts, discuss what goals they may have the community for the coming year, vote to make minor adjustments, elect to raise the dues or not, and approve the budget.

From a community association manager’s (CAM) perspective, I have found that the best practice is to help guide the Boards in planning future budgets using a variety of tasks and action items. There are so many tools for a CAM to rely upon such as the HOA’s monthly expense reports, reserve studies, reserve fund balances, and investments.  We also rely upon any upcoming laws that may affect future expenditures.  Industry professionals and contractors are also resources as they provide information about any increases in costs (i.e. insurance policy premiums, green roof requirements, bench marking, etc.)

Monthly Expenses:  Monitoring the monthly expenses is a fantastic way to begin the annual forecast for year end expenditures and what to expect for the upcoming year. This also gives you the ability to ensure service contract costs are within line and discuss present trends and future needs for the community with the contractors.  This also insures that the costs the HOA is paying is in line with the agreed amounts in the service contracts.

Reserve Studies: When discussing budget planning with your Boards, it is important to review the HOA’s reserve study. The study is such a great tool to use in guiding Boards for the purposes of reviewing and assessing the needs of needed major capital repairs, preventative maintenance, and improvements. The reserve study also gives the Board an opportunity to plan goals one, three, and/or five years out when considering major repairs, replacements, and preventative maintenance (i.e. roof replacements, painting, balcony upgrades.)

Reserve Fund Balances and Investments: Whether you are managing an aging community or a community that is freshly turned over from the developer, a CAM should ensure the Board is budgeting to contribute to the reserve funds annually.  The Board and CAM should work together in vetting the best investment options to help the reserve funds increase.  If an HOA has a 60% - 100% funded reserve balance, it is much easier to fund for planned preventative maintenance, repairs, and planned improvements.

Industry Professionals, Contractors, and Utility Service Providers:  CAMs and members of the Board should solicit advice from industry professionals on: anticipated service contract rate increases (if applicable), annual consumer price index (CPI), insurance policy premiums, utility rates, etc.

While CAMs do not have a crystal ball that can see into the future, utilizing the tools and resources mentioned above will help a CAM guide and direct their Boards with confidence.  Remember, a budget is a guide and a tool.  Educate your Boards in anticipating unexpected expenses and plan accordingly.  Evaluating past and current performances, as well as identifying successful spending will set a successful budgeting strategy with your associations.

Janet Watts, CMCA, CAM

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