By Sherri Hall
Depending on whether your association runs on a calendar or fiscal year schedule, you may be in the midst of working on your budget, just about to start or several months away from beginning the process. Either way, it’s important to ensure that you’re taking the steps necessary to complete the task timely and effectively. We spoke to Michael Pesce, President of Associa Community Management Corp, to obtain some tips for creating an association budget.
According to Pesce, the first step in creating the budget is typically to capture the income and expenses through the current point in the year in order to project the amount of income and expenses for the remainder of the year. These numbers can then be used to make predictions for the upcoming year.
However, Pesce noted that prior to looking at the numbers, some boards will reach out to the unit owners to get a sense of things they may want that might impact the budget. The board can do this either through an in-person meeting or through written communication.
For example, association members may request increasing the level of certain services such as landscaping or may suggest that the date the pool closes be extended.
“I think getting input from the residents is helpful to guide the board and management in putting together a budget,” said Pesce. “The numbers are the numbers, but in terms of wants and expectations of the owners, you don’t really know until you ask them.”
In the majority of cases, the management company initiates the process of creating the budget. Once management has put a draft budget together, the document is shared with the board or the finance committee, if the association has such a committee.
“Management is closest to the historical numbers needed to initiate the process and give the best recommendation as to what next year’s budget ought to look like,” Pesce said.
He added that the association’s accountant is responsible for the year end audit but does not create the budget itself.
When creating the budget, Pesce noted some pitfalls to watch out for. One is to ensure that the current fiscal year-to-date numbers are correct. He suggested checking each bill’s history against the general ledger to see if the numbers match. Pesce said this is especially important because those numbers are going to be used to make the twelve-month projection, so they need to be accurate.
“It’s critical for the purposes of projecting to the current annual number that we know exactly what we’re looking at,” he said.
Another pitfall to look out for when creating the budget is dealing with seasonal expenses, noted Pesce. If a budget item doesn’t happen equally over 12 months, such as snow removal, that needs to be taken into account, he said.
“The biggest risk that a manager runs is to try to make the initial draft budget come out with a pre-ordained result,” said Pesce.
He explained that sometimes boards might say to make sure there is not an increase in the budget. However, Pesce recommends that management puts together what they believe is a responsible budget, whether there is an increase or not. He explained that the budget creator’s job is to calculate the numbers. “And where they lead, they lead,” he said.
The board can choose to make judgment calls regarding reducing budget items, but that is not management’s decision, Pesce added.
When creating the new budget, a shortfall in the current budget may be discovered. However, if that happens, it won’t always result in a fee increase or special assessment, explained Pesce.
Even if an association is running at a deficit eight or nine months into the fiscal year, they may not end up with a deficit once the year is over, he noted. For example, if an association is running on a calendar year and budgets $50,000 for snow removal and it doesn’t snow at all in November or December, the deficit they noticed in September is now gone because the money was not needed in the end.
Therefore, it’s important to take into account at what point in the year the shortfall is being measured and whether there are seasonal items in the budget that could change.
Pesce said that the most accurate way to measure a shortfall is when those shortfalls are the result of audited results from the previous year. However, doing so is not necessarily practical because it automatically results in a delay. For example, if an association ran at a $50,000 deficit in 2018 and isn’t going to react to that deficit until creating the budget of 2020, it can lead to serious cash flow problems.
This is especially true for associations that don’t have a lot of excess cash to fall back on, said Pesce. In that case, such associations might need to react to a deficit eight or nine months into the year by way of a special assessment or an increase in the monthly maintenance fees in the coming year.
Of course, as previously mentioned, the fact that an association is running at a deficit doesn’t automatically mean that there has to be a special assessment or increase in maintenance fees. Some associations may have accumulated working capital cash over time such as through contributions from every new closing or may have generated a surplus from over-budgeting for snow removal. In turn, if cash is available at the end of the year from one of those two sources, a special assessment or fee increase may be avoided, explained Pesce.
“Although it’s dangerous to manage a deficit when the year’s not over, it’s even more dangerous to deal with a surplus before the year is over because you don’t know what’s going to happen in the months that are left,” added Pesce.
He noted that from an accounting standpoint, a budget surplus must either be given back to the unit owners, placed in the association’s working capital account as a buffer to fall back on in the future or used for an improvement to the property that would have otherwise not been able to be made. Pesce said he does not recommend giving the surplus back to the owners unless an association is running on repeated surpluses year after year. “Once you give it back, you can’t get it back,” he said.
For example, if an association reduces the monthly maintenance fees in the new year due to the prior year’s surplus, when it comes time for the budget for the year after that, the fees have to be raised the amount they were lowered in addition to any other increases there might be.
Typically, associations should start working on their budgets after they have eight or nine months of numbers for the current fiscal year, said Pesce. “If you start working on it earlier than that, you don’t have enough historical numbers to make it make sense,” he explained.
With that being said, however, associations can start the process of obtaining unit owner input prior to that timeframe, he added.
The total time spent on the budget will vary greatly from association to association, Pesce pointed out. In addition to number crunching, the creator of the budget also has to research any increases in rates for services such as water, landscaping, etc.
Once the budget draft has been completed, some associations will adopt it more quickly than others. “It depends on the community and the level of involvement of the residents in the process,” Pesce noted.
“Most importantly,” he said, “our job as managers is to produce a responsible budget no matter what the result looks like.”