Managers Perspective: Keeping your Association’s Budget on Track

This time of year, many association managers are getting ready to present their budget drafts to their communities’ boards of directors. That is, if the association’s fiscal year is the same as a calendar year. However, no matter what the fiscal year schedule is, it’s important that mangers take certain steps to keep the budget process on the right track all year long.

According to Homestead Management Services Senior Vice President Denise Becker, one of the community manager’s roles in developing the budget is to examine history and trends. She said the manager should watch the financials throughout the year and compare them to the current year’s budget. This helps identify budget line items that might be trending higher than anticipated or those that aren’t being used which can be incorporated into other line items, said Becker. “Then, we start developing the budget by forecasting where we think certain line items will be at the end of the fiscal year,” she said.

Another responsibility the manager has is to monitor contract renewals. As they are beginning to develop their budgets, managers should also start the bidding process for any contracts that are due for renewal or are expiring, Becker explained. “Once we have collected all of the information, we can start filling in the blanks,” she said.

Becker noted that it’s important for a manager to create a “real-life” budget, which includes the annual capital contribution recommendation from the engineer’s reserve study, in addition to all of the contract amounts. One item Becker did suggest might have some leeway is the line for snow clearing. “If you ran over the budget on snow [clearing] in the previous year, you can keep the snow clearing line at a constant number and special assess for the difference instead of raising that number and artificially increasing the end result,” she noted, explaining there may be some years that do not elicit a great deal of snowfall.

It’s also imperative for a manager to check the association’s governing documents for specific language regarding the budget process. “For example, there may be some governing documents that say you can’t increase the budget more than a certain percentage without homeowner approval,” said Becker. 

Once a manager feels he or she has a “a real-life budget” he or she should then go back and take a look at the line items where there might be an opportunity to bring down some of the monthly costs, Becker suggested. For example, there may be some items that could be lowered by going out to bid for a contract price, she explained. “If you have a systemic maintenance problem and can incorporate the repairs into a deferred project instead of paying for work order after work order, you could end up saving maintenance dollars,” Becker noted.

At the same time, Becker recommended that a manager doesn’t try to have the budget back into a monthly per unit per month number that isn’t feasible just because it’s not “popular” to increase the budget. “You have to do what’s right for your association. It’s the board’s fiduciary responsibility to ensure their operating and future needs are met, and in order to do that, they have to collect the right amount of money,” Becker said. 

A manager should recommend a budget to the board that’s comfortable but doesn’t fall short in any areas, as it’s hard to catch up later, said Becker. “You want to make sure your bills are paid on time and that you have enough money to pay them,” she noted. However, it’s essential to take into consideration that unfortunately, there are going to be unit owners who don’t pay their assessments and allow for this in the budget, perhaps under “bad debt.”

Becker suggested starting the budget process 120 days before the budget has to be approved. She noted that the longest part of the process is waiting for proposals to come in for review. Therefore, if an association’s fiscal year ends on December 31, she recommends starting the process in August. “This gives the association enough time to go out to bid,” she said.

Becker also recommended that the manager schedule a budget workshop meeting with the board to go line by line together over the draft as well as review financials and any contracts coming due for renewal. This gives the manager the opportunity to go back and revise any misstated numbers or make any other adjustments.

Typically, Becker noted, the budget should be approved and the homeowners should be notified of the budget and any resulting increases thirty days prior to the first payment unless the association’s governing documents state otherwise. In the case of a December fiscal year-end, homeowners should be notified by December 1. Likewise, in the case of a September fiscal year-end, notification should be made by September 1 or with a June fiscal year-end, it should be done by June 1.

Homeowners should be notified in writing of the new budget, with a letter explaining any increases in line items accompanied by a copy of the budget, said Becker. The budget, she added, must be approved by the board during a board meeting where homeowners are present. Unless the governing documents state otherwise, the budget does not have to be approved by the homeowners. “Generally, the rule is that the board passes the budget because it is the governing body,” Becker said, adding that homeowners who have ideas for the budget should run for a board position or join the finance committee (if the association has one) so that they can become part of the process and perhaps make a difference in their community.

In addition to starting the budget process early, Becker said the most important tip for successful budgeting is to be honest. “We know costs increase, so increase your budget accordingly. If an item goes up, such as insurance, you have to accommodate for that,” said Becker. “You should never decrease the amount for a line item unless something was grossly misstated in your budget.”