To Budget or Not to Budget

from Community Contact | Fall 2021

Winterizing and Emergency Preparedness

ASSOCIATION BUDGETING

TO BUDGET OR NOT TO

Tracy Wolin, CMCA, AMS, PCAM

Getting an early start on your budget is essential for any HOA Manager. One never knows what emergency might occur, so if you begin thinking about your budget early, you will be that much more prepared when the time comes to enter actual numbers.

I begin preparing for budget season four months in advance, reviewing past budgets/history, verifying when the last budget increase was and amount of the increase, and creating my budgeting template. Some Boards believe in increasing the budget yearly which makes a Manager’s job so much simpler, but these Boards are rare. In my experience, those types of Boards will provide directive at the beginning of budget season by proactively divulging the increased amount for the upcoming fiscal year. Then there are those Boards who will not increase a budget so as Managers we start shifting money from line item to line item hopeful that there will be no large unforeseen expenses on the horizon.

When preparing a budget with no instructions, I create three columns for different increase amounts, typically 2%, 4% and 6%, using a calculation to average the expenses for the remainder of the year for each line item. Budget increase amounts are typically stated in the governing documents of each Association. This language will let you know if the Board has the authority to raise dues without a vote of the membership or if there is a cap on any increase amounts.

Firstly, figure out the financial objectives of the Association for the next budget year. The reoccurring expenses are the easiest to get started on, utilities, management fees, insurance premiums, landscaping, annual audit, security, and contracts. When was the last time the vendor received an increase and how much of an increase? This could be a perfect opportunity to negotiate with the vendor or even go out to bid to confirm your vendor is competitive in their pricing. I have been able to negotiate some contract reductions at budget time so this could be a great opportunity for you to decrease a line item or two or three.

There are many approaches to preparing a budget but you must find your own style. A Management Company typically uses a custom template and provides a timeline to complete the pro forma budget. With self-managed Associations, there may be a template already in existence or perhaps you may have your own worksheet. The narrative should be embedded in your data on how you arrived at the figure in any line item.

What will vary this year and make budgeting problematic are material delays, costs and COVID supplies. I am sure many of us have signed contracts and now months later, the vendor wants to add an addendum to the contract as compensation for the unforeseen increase in materials. Problems such as being able to schedule a project and have it come to completion, but budgeting for COVID materials such as hand sanitizer, disinfectant, masks. Another issue is employees, not only finding them but at what cost? With the pandemic making supplies scarce as manufacturers cut production on top of the cost of lumber, copper, steel, glass, etc., plus inflation, how can we make the budget balance? There will certainly be a major

challenge ahead. If we know there is work to be done and we put projects off until material prices fall, are we negligent in our duties by not planning projects to try to keep owner assessments lower or are we smart to wait and see if material prices fall? This is something that can only be answered by your Board and you, the Manager. If a project can wait and there is no risk of liability to make a repair then you have something to consider. If you are looking into a capital improvement project, perhaps you can wait to build that new playground area but consider the homeowner who pays dues one time and wants to see progress for the money.

For those readers new to the industry, I want to share my first year of creating a budget for a high-rise Association in Los Angeles. In my mind, I did not see any issues and using past history to prepare the budget did not seem like a big deal. I prepared letters to the contract vendors inquiring if there would be a proposed increase. These letters also included questions as to when the last increase was and amount for the vendor to populate along with a statement declaring there would be no increase forthcoming without discussion. I recall a lot of budget discussions with other Managers and listening to these conversations I began to panic wondering why I was not more concerned with preparing the Association’s budget.

I gathered from these conversations that budgeting was a bigger task than I originally thought. After contemplation and being unable to wrap my mind around all the different emails, I called the Manager in the high-rise building next door, a manager with 30 years in the industry, to discuss my concerns and my methods for developing the budget. Long story short, she advised me to stop reading the budget emails and to continue on the course I had established and I would be okay. I am happy to report, she was right and the Board approved the budget as presented although there was quite a bit of discussion, with one little tweak, I misspelled the word maintenance.

My method of preparing a budget is to work on the expense side first. After finishing the first few drafts, I take another look, but not as a Manager, but as a Board member, in an attempt to view the budget through the Board’s eyes. Now I am ready to add income figures into the budget, adding assessment income as the final piece. Comparing the expense and income numbers, I have to review the entire budget again, tweaking expense line items so I have a zero based budget to present for all scenarios, up to a 6% increase.

Capital Projects and the Reserves are next on the list. After completing the Operating budget, I am able to anticipate the monthly/yearly reserve transfer. I try to hold a workshop with the Board to solicit their input on any capital improvement projects they want to accomplish in the next budget cycle and bring in vendors to discuss the bigger projects I know are already on the radar. I prepare a list of possible projects and with Board input, we amass the list. The Board will number these possible projects in order of importance so we can tally the results and find some commonality to finalize the project list for the upcoming fiscal year.

I believe in the importance of gathering bids for possible projects to add to my files whenever any vendor is onsite. These bids are then entered into a spreadsheet to be used for budgetary numbers in the future for planning. I bring my spreadsheet along to the Board workshop so once a project is considered that may not be on my list, I take out my spreadsheet and instantly I have some budgetary numbers to share with the Board. If the proposed project becomes a possible project, using the bid, I can create an RFP, validate the bid and pricing with the original vendor and then proceed with the bid process.

I now should have the pro forma budgets for the operating and reserve accounts along with notes completed and ready to be sent on to the next reviewer whether it is the Management Company, Board Treasurer, or Budget Committee. Once I get to this phase of the budget development, I know it is just a matter of a few weeks until the Board approves these budgets so I can prepare them for distribution to the membership.

And so another year of the budget season comes to a close and I am left with a feeling of hope that income will exceed expenses and there will be no more unforeseen catastrophes to wreak havoc with the approved budget. Once again, it is up to you and your Board to figure out the priorities for the upcoming budget. The final step of this process is planning to take a couple of days off after a job well done.

RMWBH

Attorneys and Counselors at Law

LEAH K. BURTON

Get to know your DFW area attorney.

5 FACTS ABOUT LEAH K. BURTON

1. Leah represents POAs of all sizes from small condominium complexs to large multi-thousand lot master-planned communities.

2. Leah has practiced POA law in both Texas and Florida and understands the complexities that associations face around the U.S.

3. Leah was raised in Anchorage, Alaska and is no stranger to the cold winters that sometimes visit Texas, but she enjoys the Texas summers more.

4. Leah’s experience practicing civil litigation in California prepared her to better advise her POA clients on the risks they may face from litigation.

5. Leah has been recognized for her continued work to increase diversity within our communities. Her work on the topic has been featured by CAI on an international scale and formed the basis of CAI’s renowned Diversity and Inclusion Guide.