If you are a calendar year-end association, this is probably the month you start budgeting. This is the time to start finalizing your spending plan for 2022 so you can get the budget in front of the owners. Here in Washington, the owners have the final say by ratifying the budget and you want everything in place prior to December so that you can begin the new year collecting the right amounts from unit owners. By working backwards, you can calculate when you need to submit the budget to the owners, which is likely sometime in October.
Budgeting is Planning
The budget is really nothing more than putting dollars to your plans for next year. Typically, you have the usual and recurring costs of operations, but sometimes you will have a wrinkle. Take, for instance, your irrigation system. If you have an older system, you may have seen costs increasing each year over the past few, which may indicate it is time for the system to be brought up to date. Unless the board and reserve specialist have taken the irrigation system into consideration, it is likely that it is not on the reserve study. You will want to get some preliminary quotes from companies so you can plan the upgrade for either this year or within the next three to four years.
If you have been talking about how your Bylaws seems antiquated, it may also be appropriate to plan to update governing documents. The cost is contingent so you will want to speak with association counsel on the range of costs to address specific areas. If your association is 20 years old and is still working on the original developer-crafted governing documents, you may find it better to have the all of your documents reviewed and restated.
The important thing is to consider “what-else” your community needs besides the ongoing routine stuff. While it won’t fully insulate you from problems, by at least discussing and planning, you can have alternatives available if you are not quite ready to charge owners to address the matter.
Reserve Fund Planning
There are a few key points about the reserve to consider. First, keep in mind that the reserve is all about the future repair and replacement of common elements. It really should not be treated as a ‘slush-fund’ which the board dips into whenever an unbudgeted expense pops up. There is nothing wrong with building a contingency reserve in the operations, but that should be separate from the reserves.
Second, the board should be looking at the intermediate term; the next three to five years. What is coming up and how much will it cost? If all of those have to be done in three years, does the association have the funds available? While it is always possible to defer some maintenance, it is important to realize that deferring projects both increases the cost and also expands the potential work as, sadly, common elements typically do not age well. If your specialist recommends painting the buildings next year, you probably should plan on it as pushing it off a year or two will mean a heightened risk of water intrusion and damage which must be mitigated.
Third, do not fund improvements out of reserves. One of our clients needed to do some major landscaping work a decade ago to address soil erosion. No, the landscape was not part of the reserve study. They used 75% of the reserves to reconstruct the landscaping and then, two years later, did not have the funds on hand to do the roofs. The board deferred the work and three buildings suffered major roof leaks. Improvements should also be funded separately and for each specific improvement project.
The Budget Process
Best practice is to get the involvement of everyone who desires to be included. Here is what we recommend to our clients’ boards:
- Form a budget committee of a minimum of 5 members. Maximum can be up to say 10% of the units. If you have a large budget committee, you can break it down into sub groups to study the financial needs of the various budget segments.
- Have management prepare the preliminary budget. Their work is based upon recent past history and their anticipation of what next year might require.
- Management presents to the budget committee. The budget committee then works on the numbers based upon what the committee sees are community needs.
- The committee meets at least twice. At the final budget committee meeting, the committee prepares the final budget report and recommends that the board adopt the committee’s budget.
- The board, at its next meeting, takes up the budget and can then amend the budget based upon their plans and vision. At this meeting, the board adopts the budget which can, if necessary, be sent to their owners for their ratification.
This approach gives you the benefit of management’s insight into operations, the community’s input on what is needed, and the board’s final say on their vision and plan for next year. This approach should provide your community with broad-based support by allowing owner participation in the budget committee process. It has the added benefit of reducing the board’s workload by allowing the board to simply review the work of the committee and make any final tweaks needed to meet the board’s needs.
C.O.R.E. Services has a special budgeting template if you need something to help you plan next years spending plan. Our template focuses the committee’s energy on the most complex portion of the budget – the property plan. The template covers buildings, landscape, hardscape and reserves. If you are looking for an effective tool to help you with your budget planning, email us for a copy and we will be happy to send it to you.
C.O.R.E. also has more information on budgeting on our website. Finally, if you would like to have a free, no obligation conversation about your association’s budget, feel free to email us to schedule a conversation. C.O.R.E. is here to help condominium board’s effectively manage the corporation and ensure that the directors’ time is used effectively so they can have a life as well.