Community association managers are responsible for the preparation of an annual operating budget with the final approval coming from the association board of directors. The fact that the residents are also the owners, creates unique budgeting issues because there is technically no income in a not-for-profit organization. Specialized training, such as that provided by The Community Associations Institute, is required for a manager to be effective, as well as the board members.

An effective way to properly budget is to understand that even in a period of relatively low inflation, costs do go up. It is reasonable to assume that some elements of cost will go up faster than others. For example, if interest rates start to creep upward, you can expect electrical costs to rise disproportional to other costs. This is because the utility industry is very sensitive to interest rates and rising interest rates result in higher electrical costs. Some items that need a more penetrating evaluation include: utilities, as mentioned, Insurance, pool maintenance and repairs, and general repairs particularly for older buildings. Today, because of the tight labor market, it is nearly impossible to hire a repair person for the same hourly rate as just one or two years ago.

It is a disservice to the entire community to create a budget that does not represent the real needs of the community and adjust the cost projections to reflect conditions of the economy. Frequently, the manager is under pressure from the board and community residents to keep the draft budget and the resultant assessments unrealistically low. While the board and the resident’s desire is honorable, it is not realistic.

Managing the finances of the association is usually the toughest job board members have. Despite the importance of the budget, when it is brought before the board for review, most board members figuratively cover their eyes and only peek out from behind their fingers occasionally. A good community manager can help with the economic issues such as interest rate projections, and inflation factors. However, it is up to the board to be responsible for such things as; the Capital Reserve Study projected needs of the community for this year (surely you have an up-to-date Capital Reserve Study!!!), community desires and goals (often derived from committee reports or from resident surveys), and revenue projections (what is the "pain threshold" of the residents to an assessment increase?)

It is rare for an association to budget for emergencies. Most boards believe that if an emergency does develop they can use the accumulated capital reserve to cover it. This is not good strategy. Capital reserves should be set aside to cover major replacements such as roofs or asphalt parking lots, but not flooded basements.

The argument is often made that insurance will cover emergencies and we (the board) do not have to fund for them. This is also a specious argument. Insurance for example, will not pay for the trees that get knocked down in a storm (it will pay, in some cases, to have the downed trees removed but not replaced). In any event, even in situations where the insurance company does pay, there is a deductible of either $1,000.00 or $2,000.00. A modest emergency fund should be established and if you’re fortunate enough not to use it in one year, add to it in the next year.

Many budget experts argue that a budget should be for a long term, three to five years. With all of the problems in developing a workable budget for one year, it is difficult to imagine the complexities of a multi-year budget. It is not unusual for a contractor to agree to perform a particular service for the same price as last year, assuming the manager and the board agree not to compete. However, it is difficult to visualize a contractor agreeing to keep the same price for three or five years. It is also difficult to visualize a management company keeping its monthly fee the same for an extended period.

It is not unusual for a builder/developer to turn over a community where each unit pays the same monthly assessment. This is frequently done because it is easier to sell units and easier to manage them if all the assessments are the same. However, if the Master Deed (Michigan term for a Declaration) shows owners with different shares of ownership, it is patently unfair to about half the community that is paying more than their percentage of ownership.

A resident’s ownership percentage is usually determined by the ratio of the square footage in the individual’s unit as a percentage of all the square footage in the community. The ownership percentage is expressed as a percentage, such as 1.234%. This percentage is critical because the residents assessments should be that percentage times the final annual budget, divided by twelve. In addition, any special assessment should be developed the same way. And the final significant issue is that voting at annual meetings should assign each voter the appropriate percentage and count the percentage when tallying the vote. That way a person with 1.234% actually has more than one vote for their unit.

The first time a responsible board changes from a flat assessment to a pro rated assessment, the community is in a turmoil. Again, about half will be paying more and about half will be paying less. In the long run, the board can avoid those nuisance law suits that are so prevalent in this business, by a resident who is paying too much, by making the correction and dealing with the turmoil. Occasionally, a pro rata share is developed by circumstances other than a percentage of ownership. For example, how close is a resident to a lake or what view they may have. In any event, the basis of the pro rata share is developed, the fact that the Master Deed provides for a pro rata share is very important.

The beginning of the fiscal year for a community is the end date for the budget process. A properly prepared milestone schedule begins about three months prior to the beginning of the fiscal year with the budget being approved and in place at least one month before the beginning of the fiscal year. Most fiscal years, certainly not all, coincide with the beginning of the calendar year, January 1. This means that to be effective and properly in place, the budget process must begin no later than October 1.

The start point is historical data and information. The manager should prepare a spread sheet (preferable on Lotus or some similar spreadsheet computer program) showing the budget and expenditures from two years previous. Without the expenditures, the budget alone tells you nothing. Then add to the spreadsheet the budget and expenditures for the current fiscal year. You won’t have the entire year so add fixed expenditures that you know about, like management fees, for the remaining months. For other expenses, such as snow removal, you can make reasoned judgements about the coming three months.

You now have a pretty good idea of how close to the target you’ve been in the recent past. Analyze those expenditures that deviate substantially from the budget and try to understand why the difference. Was the estimate just plain wrong, no one’s fault? This is the most common reason but the one most feared. Boards like to blame the manager and the manager argues that they are not clairvoyant. Forget this exercise in futility. It will not solve anything. Fix it in the new budget.

Income should be based on assessments only. It is futile to try to budget for interest income and late fees. Most budgets show both interest income and late fees but for what purpose? It may make some board member believe they have more money coming in than they really do and this will give the board member a false sense of security. In addition, some management companies take the approach that the late fees belong to the management company because it is compensation for their extra work and does not impact the entire association. Doesn’t matter what your position is, putting this potential income in the budget is not useful.

Begin the budget process by accumulating expenses in four categories; Administrative, Utilities, General Maintenance, and Capital Reserve. Not everyone will agree with these categories and the manager should respond to the preferences of a particular board. Not everyone will agree with the sub categories either but the key to success will be not to leave anything out.

Some boards want a budget with major categories such as grounds maintenance which would include both lawn and snow service. Other boards want many subcategories such as lawn cutting, lawn edging, blowing clippings, shrub edging, shrub trimming and so forth, you get the idea. The key point is that the budget format must satisfy the board. The manager, however, had best breakdown the categories into as much detail as possible, and save the detail so they can substantiate for the board where they got their numbers from.

At all times, as the next step takes place, the manager must take into consideration the factors described previously; results of a capital reserve study, the needs and goals of the complex, and the age of the buildings. If the entire community is complaining about no mulch around the beds and trees, and that the grass is filling up the beds and circles around the trees, for heavens sake, budget to mulch the community. The fact that five years ago the mulch had some ugly "creepy crawlers" with it is no excuse for not adding mulch. Just attack the problem of keeping the insects out but add the mulch. Certainly budget for it.

If an association does not have a capital reserve study done by a professional company that specializes in community capital reserve studies, either it is a relatively new community, less than five years old, or the manager and/or the board are not doing their jobs right. How can you run a major corporation, and that is what a community is, without a plan for the future? The answer is you can’t! Its just that simple. Assuming you have a study done, refer to it and see what it recommends for the budget year you are working on. It may just suggest the accumulation of certain funds or it may call for certain work to be done. In any event, add this to the budget.

The fun begins when you start allocating funds to each of the accounts you have established. Have a cogent reason for each amount you decide to put in the budget, making the same kind of evaluations discussed above, especially anticipated increases. That’s where the arguments will be. The board rightfully has the obligation to be comfortable with each projected expense and challenge anything it is not clear on or disagrees with. After presenting their rationale, the manager backs off and adopts what ever the board decides. The manager’s ego cannot be dented because the board disagrees with their conclusion. This is tough when the manager is convinced the board is acting foolishly, but the manager does not always know the political issues the board may be dealing with.

Now for the capital reserve expense. In Michigan, the Condominium Act is pretty clear. It says that a minimum of 10% of the annual projected expenses must be set aside as a capital reserve each year, on a non-cumulative basis, unless projections for that year indicate there are sufficient reserves to handle any contingency. Well, forget that last part because there is never enough to handle every conceivable contingency.

What does the statute mean when it says "on a non cumulative" basis? This was put in the law because of the pressure from developers when the law was being written. Many law review articles and other articles have been written about this, but it is the law. Non cumulative means that if operating expenses budgeted for one year are over spent, and the association dips into its capital reserve to be able to pay all its bills, the association does not have to add back the funds in the following year. Not a very nifty way to operate.

Some boards like to break down capital reserve into subcategories. For example, roofs, road replacement, balcony replacement and perhaps others. This is not a bad idea but can cause a problem. It smacks of "fund accounting" where once the money has been allocated to a specific category, roofs for instance, the money can’t be moved into road repairs. If the roads break up the association could not fix them. If the association decides to break it’s capital reserve into categories, make certain the minutes reflect that it is not the board’s intention to be bound by the allocation. This may well prevent some resident angst. In Florida, Fund Accounting is required. The only other place you see it commonly is in budgets for governmental agencies.

Just about every C.P.A. involved with community associations, will recommend an accrual system for setting up and maintaining the associations books of account. This is very difficult for most board members when they try to make heads or tails out of their monthly financial report from the management company.

Try to explain to the board member that the total income shown for the month is really not the income that really came in but just the projected income, and...you see the point. Use a modified cash system for your association and don’t let the association C.P.A. change your mind. They will try.

There are certain items of expense that are frequently not identified in a budget and they should be. Categorizing costs under "Miscellaneous" is a big mistake. The one biggest problem concerning budgets occurs when a resident who is already upset about some perceived unfair event, sees miscellaneous in the budget. The automatic assumption is that someone is getting the money for their personal gain and simply calling it miscellaneous.

There are a number of items that should not be put in miscellaneous and must not be forgotten. Some examples of these items are: membership in C.A.I., bereavement fund for cards or flowers to residents who have suffered a loss, congratulations fund for residents who have had some special event take place like a birth of a child, a marriage, a confirmation or bar mitzvah, board meeting costs to include renting the hall and any meal brought in for the board members, or holiday celebrations like Christmas parties that the entire community is invited to attend.

Now that all the categories have an expense and a rationale assigned, it is time to total everything up. If an increase in monthly assessment is needed, so be it, as long as the projected budget is not just a wish list. Multiply the total by each resident’s percentage of ownership, divide by twelve, and that results in the new monthly assessment for the year. This is what is presented by the manager to the board.

The real test of the manager comes now. The draft budget must be presented to the board for final approval. Each board approaches this responsibility differently. Some will go over each line item and discuss the issues that were considered in developing that particular estimated cost, and others will ask for questions, and, there being none, approve the budget as submitted. Irrespective of the boards approach, the manager should be prepared for the probing questions they will get from an interactive board and not slack-up on the preparation of the draft budget.

It may take more than one meeting to approve a budget. Many associations set up an ad-hoc committee just to deal with the budget; when the budget is approved, the committee folds. However, at some point, the budget must get approval. If the approval takes place in December or later, there is not enough time to properly notify the residents. Many management companies provide residents with coupons to include with their monthly assessment. Time must be available to print these coupons and mail them to the residents also.

If the budget results in an assessment increase, residents become very upset if they simply get a letter with new coupons and are directed to just send in the new amount. A nicely worded letter explaining the need for the increase and how it will benefit the resident is very important. This letter should precede the letter with the new assessment and the coupons. This approach provides a little sugar to make the medicine go down easier.

Once the budget is approved, most Master Deeds require it to be distributed to all residents. This can be by a separate mailing or with one of the letters referred to above. It is critical ,if the fiscal year starts on January 1, that the budget is approved and in place to be fully operational. Some managers and boards believe that once they have completed the budget process they can go on to other things However, the budget is a living document, not in the sense that it should be changed (don’t change the budget during the year, only note the differences and understand why) but that it should be consulted for most all of the decisions a board makes during the year. A manager is responsible for advise to their board as to whether or not the action they want to take is within the budget or they need to switch monies from somewhere else or, in general, what the boards options are.

As a general comment, a board needs to look realistically at the companies it hires, including the management company. A professional property management company, earning a reasonable fee can avoid or solve many of the problems that boards often deal with. Getting a company at the lowest price is not usually in the best interest of the community. The same can be said for any of the companies the association contracts with. It is often best to obtain quotes to compare from companies with a reputation for long experience and dedication than "Fly By Night Construction". The board can compare quotes from top companies and make a selection on cost but also on other related factors. Remember, the emphasis must be on managing for value rather than profit. These thoughts are important considerations during the budget process.

There is an old adage used by accountants for years; "Debits by the windows, credits by the door." Just remember not to move your desk!