Budget Process
Q. I have just been appointed the chairman of my community association's finance committee. Can you give me some guidelines on putting together my association's annual operating budget? I read your column about reserves - how does that get included in the budget?
A. Assuming your association's budget runs with the fiscal year, you are probably starting later than we would recommend, but there is no reason you can't catch up and still have a well prepared budget. Unless you are dealing with older documents that require you to limit the amount of the assessment increase or obtain the owners approval of the budget, the process is very straightforward and logical.
With respect to the finance committee, the first step in putting together a budget is receiving a request from the community association's president. The request should, among other things, say when the committee should report back to the association's Board of Directors.
The finance committee should check the community's declaration and bylaws to make sure all the notice requirements and other restrictions are met, such as limits on assessment increases or a vote by the owners.
The second step is to establish a schedule for the committee's work and ultimate budget approval. A typical budgeting schedule for an association with a fiscal year beginning January 1 looks like this:
• August 1: President's request to the budget committee.
• September 15: First draft of the budget completed.
• October 1: Budget reported to the Board.
• October 15: Board meeting with owners' forum -
budget comments received from owners
• November 15: Board adopts budget. Owners are notified.
• Jananuary 1: New budget and assessment take effect.
These dates can be adjusted to reflect the late start you are getting. Most of the time can be made up trimming a week or two between each step.
The next step is for the committee to get budget requests from other committees in the association. These should include recreation, buildings/grounds and other standing committees. With this information, the finance committee should determine what service level is appropriate for the community. Should the grass, for example, be cut once a week or every other week? Also, how many social events should take place during the year? Once the committee has defined the various service levels, it should begin pricing. It should do so without regard to the impact these costs will have on the assessment amount. Right now, it's more important to know what things will cost than to achieve an artificial dollar amount to fit a predetermined assessment. The committee should also look at the expenses in the various categories in the previous years compared to the new quotes for services. It should also consider potential utility rate increases or automatic cost of living increases in existing contracts which are in place.
Service levels are the most difficult portions of the process because they must reflect the judgment of the persons preparing the budget regarding the wants and requirements of the community. This often results in differences of opinion and concerns over the amount of the assessment.
Once the pricing has been done, the association's reserves need to be calculated. By using an experienced professional to do a reserve study every three years, the association can keep track of these costs. Remember, reserves are for future repairs and replacements; therefore, the committee will have to allow for inflation and interest on savings to get a reasonably accurate number. The reserve schedule included with the reserve study should give you the figures you need to plug in to your budget.
With the various estimates of cost, the committee should assemble the new budget without regard to any considerations other than how much it will cost to operate the programs at the prescribed service level. The Board must remember that its primary duty is to protect and enhance the property values of the community. Failure to adequately maintain the property may result in decreasing property values. This concept means that you may have to bite the bullet and approve an increase larger than you would like; however, it is usually cheaper in the long run to maintain the property at the appropriate level than it is to correct the problems at a later date.
With all the numbers now on paper, the committee should total them up. If the total is within an acceptable range, the group can simply type up the budget and submit it to the Board for consideration. Unfortunately, this does not happen often.
If the total is unacceptable, the committee must go back over the choices made at each service level and scale down certain levels to lower the cost, or consider fewer social events during the year. By careful trimming, the group should be able to produce an acceptable budget. Again, don't be focused on keeping the assessment from rising. It is the board's duty to assess residents at a level sufficient to maintain and enhance the community's property. One area that should never be trimmed from the budget is reserves, since the Board of Directors has a fiduciary duty to maintain adequate reserves.
The committee should then provide a proposed budget to the board for its consideration. The board members should look at the budget very carefully, including all supporting data. The board is ultimately responsible for the budget and meeting the reserve requirements of the State law. The board must review the reserve account status and insure that reserves are being funded by the assessments at the level required by the most recent reserve study.
Once the committee presents the budget to the Board, all owners should be notified. The notice should include the actual budget and a narrative explaining various items. At the next board meeting, an agenda item should be an owners' forum specifically on the budget and this should be included in the posted notice of the board meeting so all owners are aware of the budget discussion. This will allow all owners a chance to comment. Once the discussion is completed and the final adjustments made, the Board should adopt the budget and set the assessment for the coming year. Notice of the new assessment is then sent to all owners along with a copy of the final approved budget.
Few rigid rules apply to the budget format; however, the budget should be detailed enough to cover all areas of operation for the association. Also, once the Board adopts the budget it should not be changed during the year. Next year, the old budget will show the committee any areas in which they "missed the mark", either being too high or too low; appropriate adjustments can then be made for the ensuing year.
Dear Sir or Madame:
I have recently been elected to our Condo Association Board of Directors. I have been told by both the company hired to manage our development and by the chairman of the board that Virginia law prohibits us from meeting without providing the community 14 days notice. The board only meets every other month and it is my opinion that limited scheduled meetings plus a requirement to give our property owners 14 days notice for a special called meeting limits our ability to oversee the company that manages our association. Is there a provision for calling special meetings without providing 14 days notice to the community? Your assistance will be appreciated.
Cordially,
George Little
RESPONSE: George, The Virginia Condominium Act (Sec 55-79.75) governs association meetings. So do your association's bylaws.
First check your bylaws for notice requirements for board of director's meetings. The Condo Act doesn't specify a number of days for board meetings, but does have some other requirements concerning notice to the owners. Usually your bylaws will have a number of days and it is usually somewhere between three and seven. Member meetings have a minimum of 21 days notice. When someone quotes the law to you it is a good idea to ask them to give you a copy of it or at least a citation to the code section so you can read it for yourself, or, as you have done here, ask a lawyer who practices in the field.
Good luck
One of your budget related articles states, "Unless you are dealing with older documents that require you to limit the amount of the assessment increase or obtain the owners approval of the budget, the process is very straightforward and logical." The first line has me wondering if there are now laws prohibiting such requirements (limits on increases or owners approval) from being included in POA bylaws.
Thank you,
Roxanne
RESPONSE: Roxanne, No, there are no prohibitions in the law....it is just that the more contemporary approach is to allow the board more flexibility since they are more in touch with the needs of the association and are charged with fiscal management. Often unit owners are not in touch with the economic and maintenance realities and vote based on emotion and a desire not to pay more dues regardless of the impact on the maintenance of the community.