Year-End Budgeting Tips and Timeline for HOAs and Condos

As we approach the end of the year, many communities are gearing up for the budget season, especially those with fiscal years aligned with the calendar year. With the new fiscal year starting January 1st, it’s crucial to adjust budgets to ensure that they cover rising expenses, upcoming projects, and reserve funding.

Understanding the Importance of Budgeting

A budget is the single most important tool a community’s board needs to manage and implement the association’s objectives effectively while maintaining fiscal responsibility.  The budget is balanced every year with projected expenses equal to projected revenue.

Budgeting is a fundamental aspect of financial planning for any community and is a critical part of protecting the community’s financial health.  And while understanding and getting through the budget process can seem daunting for board members, as well as association managers, proper documentation, and some basic guidelines, can make it a breeze.

Over the past few years, we’ve seen notable increases in expenses, and it’s essential to account for these changes to maintain financial health. Below are some suggestions before completing the budget.

• Make sure to reach out to your vendors to check for any increases to their contracts and supplies as well. For example, items not covered by their contract – mulch, fertilizer, pool chemicals, etc.
• Check with your insurance agent to find out if there will be any increases for the association.
• Check with your utility companies to see what increases to expect for water/sewer/electricity/cable or any other service for the association.
• Review your current budget to see if you need to add or remove any line items from the budget that need to be funded or removed.
• Make sure you are contributing enough funds to the Reserves to cover those upcoming or scheduled projects.

Take Charge of your Community’s Budget Planning

Let’s distinguish between the two budgets from which an association functions: the operating budget and the reserve budget. Without a clear plan for the issues, an association needs to tackle and the accounts that will pay for them, these budgets can be misused.

Consult your association’s documents to determine what each budget covers. In simple terms, the operating budget is like a checking account, and the reserve budget is your savings account. A board isn’t necessarily restricted from paying for items from the regular operating budget if it determines these don’t need to be paid out of reserves.

The operating budget pays for the services that help carry out the everyday functions in the community, such as landscaping, management costs, security, insurance and taxes, utility expenses, office expenses, and fees for accounting and legal.

The reserve budget is used for larger-scale projects that don’t occur on an annual basis, such as roof replacement on common area buildings, replacement of failing mechanical systems, and repair of roads and sidewalks.

Some items will be listed in the operating budget and some in the reserve study. Which items go where? Generally, the answer depends on how much the item costs to replace and whether the expense occurs annually. High-ticket items usually get placed on the reserve component inventory so they can be financed over time. Small, relatively inexpensive items would be included in the operating budget. If a component is covered in both the operating budget and the component inventory of the reserve budget, place it in the most appropriate area and remove it from the other. Ask a professional adviser (reserve specialist, accountant, manager, or engineer) if it isn’t clear which area is appropriate.

Association boards can take several steps to optimize their operating budget to save money and improve the community.  Review the below steps:

1. Set goals. In reviewing the association’s budget each year, it’s critical that boards plan for long-term goals and challenges to avoid maintenance and financial issues that could cause unreasonable hardship for residents. As well as addressing building components at the end of their useful life, long-term planning is an opportunity to substantially upgrade the community and increase property values, with the added benefit of increasing residents’ quality of life. The community should answer the following questions: • What expenses must the association cover? • What other expenses could it cover to improve the community or satisfy residents? This list will become the line items in the association’s budget. Expenses that must be covered are established line items that remain from year to year. Items to improve the community or satisfy the residents will differ annually, so arrange them in rank order for budgeting purposes.
2. Determine assessments. One of the purposes of drafting an annual budget is to determine what the annual assessment will be. How the assessment is allocated to each unit (ownership basis or equal division) and payment frequency (monthly, quarterly, annually) will be specified in the governing documents. In some communities, the basic equation for determining association assessments is as simple as totaling your total operating expenses and the annual reserve contribution, then dividing by the percentage of ownership. Instead of starting with your income first and then planning for expenses, an association must estimate costs first and then determine their revenue source, ADDING IT UP. To start with income first may create a budget shortfall the next year and, ultimately, require levying a special assessment to cover costs. Once you determine your annual assessment, examine the number. Is it the same or close to the same as what you charged last year? If so, that’s a good sign for your budget. If not, it’s time to make revisions to your assessments or budget.
3. Look for trends in past budgets. In addition to a current year’s budget, boards should examine each line-item cost in their association’s budget within the past five years. Note any trends. This will help anticipate future costs that may impact the operating budget and reserves beyond the current year.
4. Review collections procedures. Closely examine your collections policies. Reducing bad debt, such as delinquencies, can save your community money. However, collection expenses and legal fees to pursue bad debt create a line-item expense in the budget, and that expense is integrally tied to estimating bad debt—that is, the less spent on collections, the more delinquencies the association can expect. Watch for a tipping point where collection costs approach the amount to be recovered.
5. Invest in smart projects. In your community’s long-range plans and goal-setting, you should be thinking about any capital improvements that enhance residents’ lives and boost property values. Capital improvements are typically large, expensive projects, and sometimes members must approve them. Review your state statute regarding reserve contributions and expenditures.
6. Raise assessments or levy a special assessment. Don’t hesitate to raise monthly assessments to set your community on a permanent path to fiscal and physical integrity. Failing to raise assessments to cover actual expenses is a breach of fiduciary duty on the board’s part. It’s also a breach of contract with owners who expect the board to protect their assets. You might consider minimal annual assessment increases, about level with inflation. By increasing assessments 2–5% per year—rather than 10–15% in two to five years—the increases are spread out over the time of ownership. Special assessments should always be a last-resort funding option, not a stopgap for budget shortfalls.

Board Budgeting Basics Budget Timeline

• JUNE 15: RFPs for new contract bids are mailed to service providers. Schedule: 30 days for contractors to send proposals and 60 days for the board, manager, or committee to evaluate, interview, and make final selections in time for the budget work session in 90 days.
• AUGUST: The board establishes its goals and budget priorities at this meeting. If the reserve study is completed at this time, the board should decide on funding levels that support the association’s goals.
• SEPTEMBER: A budget work session is conducted either as part of the September regular board meeting or a separate work session and a balanced draft budget is developed. The reserve study must be completed and integrated with the budget at this time. Schedule: 30 days for the board, manager, or committee to prepare the draft.
• OCTOBER: Draft budget with annotations mailed to members for review. Schedule: 14–30 days for members to review data.
• NOVEMBER: At the regular board meeting two months before the new fiscal year begins, allow additional time for members to comment on the proposed budget. Schedule: 14 days for the board, manager, or committee to make adjustments based on member comments.
• MID-NOVEMBER: The board approves the final budget and sends it to the association members. Schedule: When the final budget is sent to association members depends on state statutes and governing documents, but 30–45 days prior to year-end seems to be common. This gives members approximately six weeks’ notice of the budget and assessment amount before the beginning of the new fiscal year. If assessments are going up significantly, owners will appreciate as much advance notice as possible.
• 1: The new fiscal year begins. The budget goes into effect.

Community Financials – Board Budget Process Timeline/Schedule

• September 1: The board will receive the Budget Worksheets or Draft Budgets via email from Community Financials.
• October 1st and November 1st: Community Financials will send a reminder and request the Association’s Approved Budget.  Once the association’s budget is approved, please send Community Financials a copy of the approved budget along with the meeting minutes.
• November 15: Approved Budgets Due to Community Financials.
• 1^st week in December: Community Financials will upload new charges to owners’ ledgers in the accounting software.
• 2^nd Week in December: Community Financials will initiate sending out mailed statements or coupons to owners that prefer paper or don’t have an email on file.  Please remember we want to get these out ASAP due to the holidays and holiday season mailing delays.
• Last week in December: Community Financials will send out emailed statements to homeowners.
• January 1: The new Fiscal year begins, and the Association budget goes into effect.  Owners will have to update any auto-pays to match the new budget.

Note: If your fiscal year is different than a calendar year you would adjust these dates accordingly.

Community Financials: Your Partner in Budgeting

At Community Financials, we offer comprehensive support to simplify the budgeting process. From providing budgeting worksheets that highlight income and expense trends to drafting and refining budgets on your behalf, we’re here to help your board navigate the complexities of financial planning with ease.

Ready to streamline your budgeting process? Don’t let the end-of-year rush catch you off guard. Partner with Community Financials to ensure your budget is comprehensive and accurate. Contact us today to learn more about how our expert services can support your community’s financial health and set you up for a successful year ahead.

Fill out our confidential online request for a quote form and let’s get started on creating a budget that works for you!