Budgeting Best Practices for HOAs
A well-planned budget is essential for every successful Association. Here are some of the budgeting best practices.
Begin with the end in mind. Start by identifying when the budget needs to be completed and back into a timeline that allows ample opportunity for research, review, revisions, and approvals. September and October are common times for Association budget planning.
Assess the current and previous years’ income and expenses. Compare actuals to the budget and identify any outstanding financial obligations. This tells you what’s working and what needs to change.
Determine the parameters for increasing assessments. Are there any limits on how much the board can raise assessments without membership approval? Check your governing documents.
Identify fixed and variable expenses. Fixed expenses remain constant monthly (i.e., installment payments for contracts and utility bills). Variable expenses fluctuate based on usage and include maintenance, repairs, landscaping, and amenity-related costs.
Consider the potential impacts of continued inflation. Inflation obviously won’t be a surprise to you. The most common areas for increases: insurance premiums, landscape services, maintenance services, management fees, reserve funding, and staffing. That’s right, pretty much everything.
Allocate funds for reserves. Many loan requests could be avoided with a more intentional approach to reserve funding. A common budget mistake is cutting reserve fund contributions to limit assessment increases. This leads to a slow, steady progression of underfunding reserves.
How does an Association know if it has adequate reserve funds? Here are three key actions:
· Obtain an updated reserve study from a qualified, experienced reserve provider. I can make some recommendations for you of reserve providers. Remember, there are no reserve providers in Omaha. I don’t think there are any in Nebraska. But there are many preserve providers that will work on Omaha projects. Just ask. Reserve studies should be completed at least every 3 years.
· Study the report to understand the calculations and prioritize needs (i.e., life safety). Ask questions of the firm that performed the study if anything’s unclear.
· Develop a plan to fund reserves to the recommended level, focusing on the most critical items.
You don’t have to fix the issue in the first year, but taking action is important. Bolstering reserve funding may entail a significant increase in regular assessments, a special assessment, or a combination of the two.
Involve the community. Solicit feedback and ideas, and host meetings to discuss the budget. The budget should be transparent and reflect the needs and priorities of the Association. Make sure members have easy access to the Association’s financial reports and reserve study. Include itemized income and expenses and the impact on reserves if funding recommendations are not met.
Monitor the budget. Budgets are forecasts and actuals will always vary. Once the budget is set, track income and expenses monthly or quarterly. This will put you one step ahead for next year’s budget process.
Related Attorneys
