HOA Boards Must Develop Realistic Budgets Annually

Every year a homeowners association’s board of directors is required to establish the association’s annual budget and provide notice to the members of the budget and how it is going to impact the association’s regular assessments for the next year. An accurate and properly developed budget is critical to the short-term management and the long-term financial condition of a homeowners association.

While different associations have certain common expense items, no two communities are identical. Because every association has differing needs and expectations, a board of directors cannot develop a realistic budget based on guidelines or by copying the budget that has been prepared by another association. The development of a realistic budget should involve the creation of a list of commonly incurred expenses coupled with a review of past expenses to identify the expenses actually incurred in prior years and to develop a historical trend that can be used to predict an increase or decrease during the next year.

Recognizing that the association is responsible for the maintenance of the common area property in the community, the board of directors must identify expenses that are required for routine maintenance and repairs in addition to long-term expenditures that will be required for the service and replacement of various components. Short-term maintenance generally involves those expenses that are regularly incurred for such items as recreational facilities (i.e. swimming pools, tennis courts, or playgrounds), landscaping, and building exteriors. Long-term repairs and replacements can include items such as roofs, roads, parking lots, elevators, and building exteriors. Note, some expense items should be classified as both short-term and long-term expenses because they will require both routine maintenance as well as future replacement. As all components have a useful life, an accurate reserve study is necessary to establish a time table for periodic servicing and replacements and to reflect the updated costs for replacements and repairs.

The list of expense items to be covered in an association’s budget should include all of the items that are specified in the association’s governing documents as items that the association is responsible for maintaining. Commonly overlooked (or foolishly ignored) expense items are those which are related to the maintenance of long-term capital reserves. Many associations fail to perform or maintain proper reserve studies in order to adequately provide for large expense items that will ultimately be required, such as roof replacements, in an effort to minimize the annual assessments payable by the association’s members. An association’s board of directors is responsible for maintaining proper reserves and the cost of periodic reserve studies should be included as an expense item in the association’s budget. Maintaining proper reserves will minimize the need for the dreaded “special assessments” that generally go hand-in-hand with poor budgeting and maintaining inadequate reserves.

The development of a realistic budget that adequately provides for all necessary expenditures and reserves for the coming year will enable the association’s board of directors to determine the realistic assessments for the next year. If the current level of assessments adequately cover the budgeted items, there will be no need to increase member assessments. If they don’t, there will be a need to increase the assessments. Raising assessments may not be popular, but controlled small periodic increases that result from realistic budgets and proper reserve studies are understandable and are far less likely to result in issues with homeowners than large special assessments that are not anticipated.