Budgeting – Plan for 3 Act for 1

We have seen the best and worst of budgeting for condo operations.

One way, what is probably the simplest way, is also probably not in the association’s best interest. That is to take last year’s numbers and multiply by 1.XX, where XX stands in for whatever rate of increase the board believes it can realistically get away with. Sometimes, this is hard-coded into the Bylaws; where the budgeting section might say something to the effect that any increase less than 10% does not require a vote of the members. So, to be safe, the board approves a budget increase of 9.0%. Thus the calculation is CURRENT BUDGET X 1.09.

While this might be easy, it is really more of a cop-out – a way to avoid the hard part of thinking and planning. Whether you like the idea or not, the board’s real purpose is to craft a plan of action for the next year and then hold the association’s agents accountable to that plan. It is great to say that you want an A+ landscaping, but when you only increase the line item for irrigation to 9% and not take into consideration that your piping is aged to the point of substantial repair, then you have not given the situation enough thought.

When CORE prepares our first pass budget, we are thinking 3 years ahead. We first assume that nothing is sacred – that all budgeted items are discretionary and they are not necessary next year. We then look at what the board’s priorities for next year and beyond are and start putting numbers to those plans.

Yes, it is true that some budget items appear non-discretionary, but that is not really true. Even insurance, which shifts the financial burden of certain risks, has a substantial amount of discretion. The coverage limit, the deductible, what your association wants unit owners to insure, are all subject to association policy. Nothing should be left in the budget on the assumption that it is a sacred cow which cannot be evaluated.

As part of our looking forward, we evaluate the reserve study and see what is contemplated. We look for the obvious, what is planned to happen next year and evaluate if there is enough money on hand to address that and still leave money available for the future. If roofs are due and our projection is $1.0 Million and there is only $1,2 Million available, we are concerned about how low reserve funds are heading. This can be especially worrisome when there is another large planned expenditure in 2-3 years.

Beyond that, we look for those ‘every few year’ expenditures that do not show up on the reserve study. Power washing might be one expense item that your association does every 2-3 years. Even though it is not an annual ‘operating’ activity, it does not show up on the reserve study. Since it is done every other year, a way to smooth out the assessment is to break it in half and charge it over 2 years.

When you approach budgeting this way though, you must ensure that you keep that money available. All too often we see board’s looking at a budget surplus and think it is money that can be spent on pet projects. Nothing is further from the truth! Money set aside using a rolling forecast must be safeguarded to ensure that it is available for next years planned expenditure.

After we prepare management’s first-run budget, we sit down with the association’s budget committee and explain why we allotted money to certain activities. Our goal is to provide the context of why numbers show up the way they do. We then let the committee do its work and add/remove based upon their understanding of what the community needs and expects. We have seen our budget plan completely rewritten by some committees; our role at that stage is to help document the financial changes in the budget workbook and the reason why the committee believes the numbers should be what they recommend.

Budgeting should be the most important aspect of governing the association. The board and interested owners start thinking about what they want to happen and assign costs to those items. They can see the financial impact of those decisions on the amount to be assessed to the owners and can explain why assessments go up, or maybe even down. The goal is to avoid those terrible special assessment spikes which cause nothing but anger and resentment within the community. An effective process which works hard to address all the real financial needs of the community goes a long way to getting budgets passed and accepted by unit owners.

C.O.R.E. Services is here to help condo associations better management the common elements and compliance with the governing documents. If you would like more information on our budgeting process or would like a copy of our budget workbook, send us an email. If you have other questions, let us know.

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