Preparing next year's budget for your homeowners is one of the most important undertakings for the HOA board. Fiduciary responsibility is something you pledged to look after for your community and this is an area where that really comes into play. There are a few things the Board should consider for next year's Association budget.
Considerations for Next Year's Budget
Any HOA board has to sit and take a hard look at budgeting for its community. Homeowners association fees and assessments depend on how well things are budgeted. Let's look at some of the things your HOA board members should consider (these are not by any means comprehensive, but are some major areas to look at):
- All contracts with outside parties should be reviewed. This gives the Board a chance to see if you are getting what you want and paying for only what you need. This process may need to be started early if you want to put out some of the contracts for bid. Even if you are satisfied with your present vendors this may be wise to do from time to time just to make sure your Association is getting the best value for its money.
- Examine the previous three years budgets to see the actual expenditures the Association made. This will give the Board a good idea of where the money is going and show any trends that occur. If you don't know how you spent your money how are you going to figure out a budget? Look back at what you have typically spent and use this as a guideline for next year's budget.
- Review financial statements (both income and balance sheet) to see the condition of the Association's finances at that moment. These figures provide key insights into how a new budget should look. If you are spending more than you take in, obviously as an HOA board member, you need to know this and the new budget should address this.
- Contact all utility companies and find out their anticipated rates for the coming year. Figure this into the new budget.
- Look at the most recent reserve fund study. Work with your reserve company to keep the reserve updates accurate in relation to the actual expenditures each year. You also want to make sure that the reserve fund is being properly funded and maintained. If it isn't then as a board member you need to know this. Also review the upcoming expected reserve projects and make any adjustments as necessary. Properly funding the reserve will significantly reduce the possibility of needing a special assessment.
- Compute the new year's homeowner fees. This is a pretty simple calculation: operating expenses + annual reserve contributions = homeowner fees. This number will typically be divided equally among homeowners, although there are a few exceptions where assessments may vary within some associations. Budgets and assessments, should be expected to rise within reasonable percentage increments, however there may be a need for more significant increases occasionally. Avoid the temptation of keeping the assessment the same by underfunding. This will lead to more significant increases that could have been avoided. Be prepared to take tough steps if the numbers show a big increase is needed.
- The Association treasurer along with those serving on a budget committee should review all the figures and prepare a draft budget for the entire HOA board to consider, present to members, and approve.
One of the most important jobs you have as an HOA board member is to help out with each year's budget process. This is a necessary step in running the Association and part of your fiduciary duties as a board member.
How well the budget is prepared determines several vital things for your Association, mainly how much homeowners pay in fees/assessments and that the Association has the proper funds to operate and meet its responsibilities. Reserve funding is also affected by the budget. Take budget matters seriously and take your homeowners association into a great financial position.