6 Budgeting Tips for New HOA Board Members

6 Budgeting Tips for New HOA Board Members on vendorsmart.com

HOA boards that shortchange the budgeting process risk saddling fellow residents with unexpected expenses that can trigger a downward spiral of mistrust, litigation and financial ruin.

The act of juggling income, expenses, and reserves on a spreadsheet isn’t most people’s idea of fun. Even if you enjoy crunching numbers and playing with spreadsheets, however, you may not enjoy the many other tasks involved in creating and managing a budget for an HOA. Those include ensuring compliance with both HOA bylaws and state laws governing everything from what financial statements HOAs must prepare how they disclose financial information to their members.

With that in mind, here are a few pointers for budget newbies.

Gathering information: The nonprofit organization Educational Community for Homeowners (ECHO), which serves HOAs in California, recommends kicking off the annual budget planning process five months before the end of the fiscal year to give HOA boards enough time to gather and analyze information. Key documents include the most current reserve study, financial statements and prior year financial statements. Once those are in hand, boards can begin to estimate income operating income and expenses for the coming fiscal year.

Focus on significant, variable expenses. Utilities and insurance are two major costs that can vary widely from year to year. A drought could prompt a water utility to add surcharges to promote conservation, while conflict overseas could disrupt oil supplies and prompt electric utilities to raise fuel surcharges. Premiums and deductibles for property and casualty insurance can spike in the wake of a significant claim, a natural disaster or even a decline in the stock market.  It’s also a great time to evaluate vendor performance to determine which, if any, vendor contracts you need to replace or renegotiate.

Don’t shortchange preventative maintenance: Nothing undermines trust in an HOA board or management company more than a special assessment for earlier-than-expected repair or replacement costs. In a bid to keep HOA’s solvent, California requires HOAs submit a summary of deferred maintenance every year alongside their annual budget, reserve funding plan, and other financial statements.

Monitor delinquencies closely. Each HOA board must determine whether to create a line item in their operating budget for bad debt, which pertains primarily to late payments of HOA assessments by members. The decision will hinge on several factors, including the number and age of delinquent accounts. If fewer than 3 percent of residents are less than 30 days delinquent, it may not be necessary to add a bad debt line to your operating budget. However, boards need to monitor the trajectory of those numbers closely. Delinquencies tend to ebb and flow with the economic cycle, and the last recession hit HOAs hard. So review your collections policy and make sure you enforce it by charging late fees and being persistent in your collection efforts. While you can’t prevent delinquencies, you can mitigate their overall effect with careful budgeting.

Update your reserve study: Kuester Management Group recommends HOA boards pay for a professional reserve study at least every few years regardless of state law. Such studies estimate when significant assets – HVAC systems, roofs, elevators, etc. – will need to be repaired or replaced and how much it will cost. HOAs generally allocate 25-40 percent of membership fees to reserve accounts in a bid to keep them at least 70 percent funded, notes Kuester, which has managed communities throughout the Carolinas for more than 40 years. HOAs that let them fall below that level risk having to levy special assessments or raise association fees to cover costs.

Annual disclosures: Many states HOA statutes stipulate what financial documents HOAs must submit each year, how they must disclose their budgets to members and when and how HOA members can oppose such budgets.  North Carolina requires HOAs to hold an annual budget ratification meeting once a year, while Florida only requires the board to give 14-days’ notice in advance of a budget meeting, reports HOALeader.com. The bottom line is that prudent budgeting is the essential duty of an HOA board. Boards that shortchange the budgeting process risk saddling fellow residents with unexpected expenses and triggering a downward spiral that could lead to costly litigation.