The Budget Process
Q. As the new President of my Association, I need to start the budget process. Who should prepare the budget? Can you give me some guidelines on making a budget and any pitfalls we need to be aware of?
A. The development of a budget is essential to the operation of a healthy association. It is the Board of Directors’ responsibility to establish the budget; however, a Finance or Budget Committee can be used to come up with a proposed budget for the Board to review. In a few older associations the budget must be approved by the owners. Without an accurate budget, the association will soon find itself in financial hot water. The Board of Directors, based on the budget, is responsible for establishing the level of the assessment.
A few important terms to know:
“Budget” - The document that projects the anticipated expenses and income for the association.
“Operating Budget” - The portion of the budget that deals with day to day expenses of the association. These include utilities, recreational programs, general maintenance, management, insurance and other expenses of an annual nature.
“Reserve Budget” - The portion of the budget that details the long term expenses of the association for the replacement or repair of major physical components of the association. These include items such as roofs, building exteriors, parking lots and recreational facilities such as a pool.
“Special Assessment” - An assessment made in addition to the regular assessment caused by an unforeseen expense that must be funded during the current fiscal year. Special assessments can usually be made by the Board of Directors but some documents require homeowner approval. Also, some documents and statutes restrict the purpose for which a special assessment can be made
The first step for the finance committee in putting together a budget is to receive 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 next step is for the committee to get budget requests from other committees in the association. These should include recreation, buildings, grounds and management. 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 once a month? 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. It's more important to know actual costs rather than seeking to achieve an artificial dollar amount to fit a predetermined annual assessment.
Once the pricing has been done, the association's reserves need to be calculated. By using a professional engineer or architect to do a reserve study every three to five years, the association can keep track of these costs. Remember, reserves are for future repairs and replacements. Thus, the committee will have to allow for inflation on the cost and interest on the savings to get a reasonably accurate number.
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 doesn’t always happen.
When 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. By careful trimming, the group should be able to produce an acceptable budget. Again, don't be concerned about keeping the assessment from rising. It is the board's duty to assess residents at a level sufficient to provide needed services and to maintain and enhance the community's property and thereby preserve its value.
If the committee recommends too low an assessment, the Board could reject it. If accepted, the Board members risk having to pass a Special Assessment when the budget falls short of expenses.
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 any unusual items or dramatic changes. An owners’ forum should be held to allow all owners a chance to comment. Once the forum is completed and the final adjustments made, the Board will adopt the budget and set the assessment for the coming year. The adopted budget must then be sent to all owners. The budget committee should check the community's declaration and bylaws to make sure all the notice requirements and other restrictions are met. Some associations may have limits on assessment increases or may require a vote by the owners.
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: Public hearing held.
· November 15: Board adopts budget. Owners are notified.
· January 1: New budget and assessment take effect.
Few rigid rules apply to the budget. Still, the budget should be detailed enough to cover all areas of operation for the association. Once the Board adopts the budget it should not be changed during the year. Next year, the old budget will show the committee how well it did its planning.
I belong to Greenwood Farm Community Association (GFCA) in Dale City. Our annual meeting was in October 2006 and we still haven't received our annual budget. Our assessments went up 5% in January. When I was President of GFCA from 1990-92, I was never late with the budget. I have reminded the property manager and the current board of directors that they are derilict in their duties in regards to the budget. Is there a state agency I can complain to about the board and the property manager?
Thanks.
RESPONSE:
In Virginia there is no agency of the state which regulates managers or boards of directors. A couple of years ago a Virginia state commission held several hearings around the state to see if there was a need for regulation and essentially determined that there is no significant need. It is our observation that, upon being elected, board members need to commit to getting educated about association operations and fiduciary duty. Most of the complaints brought to our attention are about board actions, or lack thereof. There are plenty of resources for education through the local chapters of the Community Associations Institute.
Michael Inman