Creating and maintaining an association budget is part of a board’s fiduciary responsibility. In order to keep your community economically stable, good financial practices are needed to prosper both today and into the future. As fall nears, many associations shift their focus to the upcoming year and begin working on the annual budget process.
October is a good time to have a solid first draft completed, but according to Ed Wilkin, CPA, of Wilkin & Guttenplan, PC, in East Brunswick, NJ, budgeting is really an ongoing process. If you wait too long to create next year’s spending plan, there will be little time to handle issues and consider alternatives.
“The real process should start about in early summer for a calendar year budget,” said Wilkin, a shareholder with Wilkin & Guttenplan a New York and New Jersey based certified public accounting and consulting firm.. However, in reality, budget planning must occur year round. “You’re always comparing the current year’s activity to the budget,” Wilkin said. “So, when an event takes place that will affect the next year’s spending plan, it needs to be addressed immediately.”
For example, he said if you are negotiating a contract in June that is for the following year, it will have a direct impact on the future budget. “If it’s a new contract or an existing one that’s increased significantly, it will likely affect next year’s maintenance fees,” Wilkin said. “Boards need to consider the impact when they are signing the contract and, not wait until they actually sit down to begin the formal budget process in August.”
The same holds true for unforeseen and unpredictable costs, he said. Even the best-laid plans can be rocked by expenditures that seemingly come out of the blue, and these unanticipated items can cause an association to go over budget. “Snow is the most typical one,” said Wilkin. “Another is insurance, which can fluctuate wildly.”
Wilkin cautioned that, as evidenced by natural disasters and large scale, weather-related emergencies, an event does not need to take place in your own backyard to impact insurance rates. Premiums skyrocketed nationwide after Hurricane Katrina hit New Orleans in 2005 and again, most recently, following Hurricane Sandy, which wreaked havoc along the eastern seaboard. “Boards have certainly learned a lot more about flood insurance now as a result of Super Storm Sandy,” Wilkin said. “Doing your homework on insurance is extremely important.”
Other “pop-up” problems include leaking roofs, municipalities suddenly passing large utility increases, and even situations where a community’s lawn gets riddled with disease or fungus, requiring the association to spend large sums of money to renovate it. Unanticipated capital replacement projects, can be addressed using the association’s reserve fund, Wilkin said, which is why it is important to maintain adequate reserve funds. Budget time is a good time to consider updating the association’s reserve studies conducted by professional engineers. “They review the physical common areas, such as the roof, the sidewalks, and the pavement,” he said.
An engineer provides the association with a schedule detailing the funding that needs to be set aside annually to make the replacements as they are needed, he said. “It’s not always precise,” said Wilkin, “but it’s a very important part of the budget process.” He recommended that a study be performed every three to five years.
In the event of a budget shortfall during the year, especially a large one, Wilkin said that associations need to look quickly and carefully at levying emergency assessments to make up for the shortfall in revenue. “It’s important to get the assessment done and to get that part of the budget back to zero so you’re not facing a deficit going into the next fiscal year,” he said. “If it’s snow, you want to do the assessment while it’s still cold because in the middle of summer, no one remembers the snow.”
“With all budgets, some of it is fixed and some of it is adjustable,” said Wilkin. “For instance, you have to cut the grass, but you can adjust the level of services regarding how you cut the grass.” The hardest part of budgeting for any board is judging the level of services residents expect. “The board has to read the community to know what the people living there want,” he said. “If there is an increase, you never want to just spring it on the residents. That’s why ongoing communication throughout the year is so important.”
Wilkin also said that he is a firm believer in annual increases. “There should be an increase every year,” he said. “Boards that put off minor increases are eventually going to be faced with something big hitting unexpectedly. They then will have to deal with the challenge of selling their residents on a fifteen or twenty percent sudden increase. You’re better off in the long run having everything up one, two, or three percent annually.” Capital and reserve funds suffer from delayed increases as well, according to Wilkin. They do not keep up with inflation and aging infrastructure. So, putting a little aside for operating contingency is one of the best budget moves a board can make.
To make sure a budget is adequate; Wilkin strongly suggested that a board not work backwards when formulating it. “You don’t want to start with the desired maintenance fee, and work back from there,” he said. “Always work from the expense side. First, anticipate what you’re going to need, to determine the maintenance fee. From there, look at what level of services can be adjusted.” An association that had a cleaning crew in nightly might need to scale back to twice a week to balance its budget, Wilkin said. Working with the service levels to reduce the budget is a smarter approach than going through the revenue side and making expenses fit, he said.
Wilkin also recommended that associations utilize a professional management company to formulate the budget. Wilkin said that they should be responsible for formulating the budget, but board assistance is needed and community input is always welcomed. “A professional management company will project out the current fiscal year,” he said. “If there is a surplus, they will know how it can be used the following year. If there is a deficit, they will help suggest ways to make it up.” Management companies put budgets together line by line and contract by contract, Wilkin said, and are a powerful asset for boards and their finance committees looking to get a spending plan correct. Additionally, since budgets are usually board-approved rather than requiring to be voted on by residents, professional plans often ease unit owners’ concerns about their money being spent wisely.