Quick question for community association volunteers: When does budget season begin and end?
If you have prepared an annual budget, perhaps while on the board or finance committee, you know that preliminary meetings usually take place in late summer or early fall. After a few weeks of gathering prices and plugging numbers onto spreadsheets, the proposed budget is sent to owners for review. Then the board approves the final draft at an open meeting before the end of the year. And you're done.
Not so fast.
"Certainly we adopt a budget once a year, but budgeting is a year-round process," said Wheaton-based certified public accountant Mark Cantey, who specializes in community associations.
He explained: Your budget is a legal document that establishes your revenue stream and obligates owners to an assessment amount. At the end of the year you shouldn't be short on funds, and you shouldn't have money left over. Long-range planning and constant monitoring are the keys to accuracy.
Get a jump on your 2014 budget while there is time to establish policies and negotiate costs. These nuggets of fiscal wisdom will get you started:
Keep an ongoing wish list. Board members and other owners frequently come up with suggestions for improvements. And there are always new concerns such as rising utility costs and the deadly emerald ash borer to keep an eye on.
"You should be collecting data all year long," said Richard Hiles, regional director of Lieberman Management Services in Elk Grove Village.
If you wait until fall to decide what to spend money on, your budget is likely to be incomplete, he said.
Commission a reserve study. Illinois law requires associations to have "reasonable reserves" but does not define reasonable. A reserve study helps boards meet that responsibility by specifying how much money to set aside each year, said Cantey.
Update your reserve study at least every five years, he said.
"A reserve study isn't a static document," he said. "Life changes. Some components age faster than you thought, and some components last longer than you thought."
A reserve study is a professional set of eyes on the property, said Hiles.
"Board members can't be experts in everything they touch," he said.
Associations that have mortgage approval from the Federal Housing Administration or are seeking approval are required to have reserve studies, added Hiles.
Design your spreadsheet. Make sure your line items for income and outgo reflect your true cash flow.
Hiles includes provisional line items for budget shortfalls, assessment delinquencies and repayment of money borrowed from the reserve account.
But don't plan on income from late fees and fines.
"You might not collect," said Hiles. "Or you might end up waiving some of those fees as part of a negotiation later on."
If you do allocate an income amount for late fees and fines, put the same amount under a expense category for uncollectible funds, said Cantey.
"You never want to overstate your balance sheet," he said.
Redesign your spreadsheet. Hiles recommends adding space for explanatory notes. For example, if you allocate $25,000 for snow removal, you might add: "Historical average is $20,000. If the 2014 winter is trending toward that amount, the remaining $5,000 will be used to redesign the entry sign."
"The more detail you can give your homeowners, the better," he said.
But skip the positive spin. Boards often attach to the proposed budget a memo or cover letter that praises board accomplishments and raves about how great the association is doing. You could be in legal trouble if a buyer was swayed by those cheerful words and later finds out the reserves are underfunded and expensive projects are coming up, said Cantey.
"Less is more," he said. "All you have to say is, 'Here is the budget.' "
Even out the work flow. Many associations have high-ticket upkeep needs that come around every few years or so. Avoid assessment spikes by breaking those projects into phases and completing a portion of the work every year, said Hiles.
For example, instead of spending $10,500 every three years to seal and stripe the three parking areas, budget $3,500 every year for one parking area, he said.