Budgeting Whys and Wherefores

Community associations operate and execute their duties based upon an annual budget. That budget is developed and approved by the board of directors but is sometimes subject to a vote of the membership during the association's annual meeting. Requirements for budget approval are typically outlined in the association's by-laws. Throughout the year, the board then monitors the economic condition of the association through periodic (usually monthly) financial reports and updates.

The association's budget is, essentially, an estimate of the income and expenses of the association for the year. A budget reflects an association's policy decisions (as proposed by the board of directors and approved by the members) regarding the programs and services that will be completed during the budget year. Often, the governing documents of the community will define the common property expected to be maintained by the association and other maintenance and service requirements. The budget then establishes what services the community will provide, when they will be done, and how much they are expected to cost.

Purpose of the Budget

The budget for the association, as in the case of a personal financial budget, provides a blueprint balancing income and expenses. However, it also serves several other purposes. It allows the community to plan its activities, is the basis for determining the level of assessments, helps control the association's finances, provides for continuity of services, helps maintain the association's desired quality of life for its members, and minimizes the chance of unexpected financial crises.

Items included in the association's budget are often dictated by its governing documents or developed as the association grows. These consist of mandatory items based upon the association's needs and requirements and discretionary items based upon owner, board, or committee desires. Federal, state, and local laws also often require mandatory budget items to implement tax requirements, fulfill environmental regulations, provide access to common areas for person's with disabilities, maintain minimum levels of necessary insurance, and provide security for certain properties. These all can add to the costs of operating an association as reflected in the budget.

Income and Expenses

The two main components in the budget are income and expenses. The assessments are the primary source of income for the association, but income is also generated from interest from the association's bank account(s), financial penalties for owner's delinquent in their dues and fees, user fees for certain services or equipment, and other miscellaneous sources. Expenses are generated from swimming pool management services, landscaping services, professional management fees, utility costs, maintenance and repair costs, and personnel costs if hiring employees. Some associations also choose to make major improvements which enhance the value of the community, but cost additional funds.

To keep track of the financial condition of the association regarding the budget, the board of directors usually receives a budget variance each month. This variance is a statement of revenues and expenses that lists the difference in each budgeted revenue and expense item and the actual revenue and expense. These reports allow the board to monthly track how well the association is meeting its budget. Sometimes, associations will include this budget variance in the publication of its member newsletter.

Developing the Budget

The process for developing and approving a budget often takes months, so it is recommended that the board of directors and property manager begin in plenty of time to examine past records and develop the budget to distribute to the members for their review before the annual deadline. Variances, both positive and negative, during a previous year should always be investigated when preparing the next year's budget. Determining if a variance is due to an unexpected increase in costs or for a planned item which is not completed can help provide the board a more accurate budget for the proceeding year.

A budget should always be prepared based on the realistic expectations for both income and expenses of the association. It is imperative that anticipated expenses fall short of the budget in order to limit an increase in assessments. In cases of a budget shortfall, a special assessment should always be the last resort for providing funds necessary to meet the association's obligations.

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Source: Association Times
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