Your association’s budget impacts the financial and physical health of the community and residents’ property values. The budget is the first, crucial step to restoring aged, once-beautiful communities to their former glory, and it determines the enjoyment residents will derive from their community.
Association boards can take several steps to optimize their operating budget to save money and improve the community. Get started with these 10 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 prevention, 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—utilities, taxes, maintenance— 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, most of which is made up of assessments. 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.
Ideally, your delinquency rate should not exceed 5%. If it does, be sure late fees are being charged consistently, and consider tightening your collections policies.
5. Don’t defer maintenance
Attaining top market values and ensuring residents’ quality of life requires that the community be well-maintained and aesthetically pleasing. Allocate a portion of the operating budget for regular housekeeping items, such as:
▮Rotating exterior painting to keep the exterior fresh and vibrant
▮Replace dilapidated or broken gates, fencing, and retainer walls
▮Repair damaged stucco or wood throughout the exterior
▮Replace faded, torn, or stained poolside cushions
▮Consistently enforce resident violations that degrade common area and exterior aesthetics of the property
6. Spend money to save money
Many cost-saving measures require an investment in newer or improved systems or materials. Long-term planning becomes important, especially if the investment is to be spread over several budget cycles.
Always keep residents informed about the decisions behind cost cutting, and cut wisely.
Your community might consider conducting an energy audit to identify inefficiencies and implement energy-saving practices. Many communities, for example, have been converting common-area lighting from incandescent and fluorescent bulbs to LEDs.
A few other ideas include:
Water and landscaping. Gradually change out water-intensive vegetation in favor of water-wise landscapes. These will not only require less water but also require less maintenance, which can significantly reduce landscape maintenance costs.
Smart pool systems. If your community has a pool and spa, consider converting to a smart system to operate systems automatically to reduce cost and manual management time and expense.
Solar. Installing solar panels can reduce the cost of lighting and electrical features, as well as pool and spa operations.
Bundle services. Internet, cable, and waste removal vendors often offer reduced pricing at community bulk rates.
7. 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. Reserve funds cannot be used to pay for a capital improvement unless a reserve fund was established specifically for the project.
Many communities, for example, are installing electric vehicle charging stations. As electric vehicles become more popular, associations will need to accommodate the trend—whether due to owner demand or legislative requirements. Some states and companies offer rebate programs for charging stations. Do your research.
8. Keep an eye on your funds
Strive to maintain three months of budgeted operating expenses. This should include housekeeping tasks like painting, repair, and landscape and lighting conversions. There is no need to allocate reserves for these when they can be addressed in the operating budget.
9. 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.
10. Consult the experts
Your community manager, accountant, reserves specialist, attorney, and other business partners can help boards develop and fine tune their budgets. They can help you set affordable goals for the property, bolstered by realistic, comprehensive fiscal and maintenance schedules.
Ultimately, however, the board needs to understand what they’re doing, how, and why. The board has the responsibility for the association’s finances. It has a fiduciary duty to review, monitor, and follow the budget.
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