Community Insurance ............................................... $$$ Management Fees .................................................... $$$
t is March 23rd and government officials at all levels— federal, state and local municipalities, have instructed all employers to send their employees home and shut down their businesses. Everyone is home bracing for the worst, asking themselves questions like, “Will I still have a job? Do I have enough savings for my mortgage and association responsibility? Will I be able to meet my family's needs?” If you are a member of the Board of Directors, you may be thinking that the community's financial needs will be dramatically affected amidst this pandemic and economic recession. The potential for more members to become delinquent can and will affect cash flow. You may be wondering whether the community has budgeted with at least the basic budgeting fundamentals in mind. Has the Board budgeted properly for day-to-day, future needs and unexpected catastrophic events? Whether you did or did not, this article will assist your community with formulating and developing a yearly budget that will put the membership in a position of strength to recover from a potential recession, global pandemic or an isolated catastrophic event. This article will help you navigate a budget for one of the most tumultuous times in the last hundred years with a formula that can be used yearly. So, grab your most recent financials, your current reserve study, three sharp pencils with new erasers, a calculator, and your Budget & Finance Committee. This will be a group effort. If 2020 has taught us nothing else, it has taught us to prepare for the unexpected. While there may have been signs of an economic recession occurring this year, there was no forewarning that we would be battling a global pandemic, thus closing a multitude of businesses, and leaving many without jobs. When drafting a budget for your association, it is essential that you budget with emergency situations in mind. So now it’s time to begin our draft budget. First, we will need to establish income for the association. We can determine income by establishing the association’s obligations or what income is mandatory from the membership. Mandatory income is the assessment that each member is required to pay by law. This would include any monthly, quarterly, or yearly assessments and capital improvement contributions, if required in the governing documents. Ancillary income generally consists of additional allowable income within the community’s governing documents. These fees are educated estimates based on historical data and may include late fees, interest from investments, resale income, and parking or pool passes, just to name a few of the most common ancillary income types.
10
Once the Board has determined the income, the goal will be to identify the mandatory expenses. These expenses should not exceed anticipated income. If mandatory expenses do exceed anticipated income, income will need to be increased, either through assessment increases or realistic ancillary income increases. Do remember to also check your governing documents for any possible increase limits that may apply. Mandatory expenses are an obligation while discretionary expenses are a desire of the Board/Committee. Common mandatory expense line items include: • Community Insurance (Fidelity, D&O, Liability, Umbrella, etc.) • Estimated Taxes (if applicable) • Audit/Tax Prep expense • Landscaping Needs (confirm areas to maintain in governing documents) • Snow Removal (if applicable) • Common Amenities expenses (if applicable, including maintenance & repairs) • Common Utilities • Trash and Recycling expense (if applicable) • Management Fees • Legal Costs (collections and general representation) • Replacement Reserve Contributions (review your reserve study) • Operating Reserve Contribution (25% or 3 months of the annual expense budget) • Payroll expenses (if applicable) Each of these mandatory expenses should be revisited due to the current state of the economy. There may be savings for the community or extended payment options. Now that the Board/Committee has determined what income they can expect and what expenses will need to be paid, the Board can determine if there are funds remaining for discretionary/desired projects. The Board should be aware that the goal with every budget is to balance to zero if possible. This is called a “zero-based” budget. The current pandemic shows us exactly why it is important to allow a small amount of “wiggle room” in your budget to cover unexpected loss of income or increase in expenses. That “wiggle room” can be done by budgeting for operating reserves. For example, many communities are
