Of all of the things that a Community Association board is responsible for within the Association, managing the community’s funds is one of the most important tasks. Proper money management helps cover vital projects, fosters ongoing relationships with key vendors, and otherwise ensures that the community has access to all the resources needed to run smoothly and successfully. Oftentimes, however, balancing the books is easier said than done. Everything from emergency maintenance projects to improper board member behaviors can threaten the financial health of the community.
Thankfully, keeping an Association out of the red is much easier with a proper HOA budget in place. Here are a couple tips to ensure that your budget is working hard for your community — and protecting the board from any financial lawsuit claims.
Talking the Talk
Before getting down to the nitty-gritty of budgeting, it’s important to understand what exactly should be budgeted for in the first place. Associations have both an operating and a capital budget. Within the operating budget are all those expenses that are recurring and relatively predictable, including taxes, utilities, salaries of any staff members, as well as any insurance or maintenance costs. A capital budget, on the other hand, is for those expenses that vary depending on what the community wants, need, and, most importantly, can afford, including major or long-term projects and emergency funds.
Establish and Maintain a Reserve Fund
Making sure that the community has a healthy, well-stocked reserve fund is the foundation of proper Association money management. Allocating an appropriate amount of the community budget to funding the reserve is a simple way to protect and provide for the community.
More than a way to finance major, long-term projects or clean up after a weather emergency causes structural damage to the community, for example, a reserve fund provides an Association with a resource to rely on in the instance of any unexpected costs. Failing to build a sufficient reserve fund forces an Association to continually solicit special assessments or raise dues, which can foster resentment among residents and threaten the overall sense of community within the Association.
The first step in building a reserve fund is to hire a professional to perform a reserve study in the community. Although New Jersey doesn’t have any laws that require an Association to perform a reserve study on a specific schedule, doing yearly studies will keep your Association prepared in the wake of any unexpected financial burdens. Ideally, an Association would want a 100 percent reserve, but most Associations can realistically aim to keep their reserve at least 70 percent funded without causing too many financial headaches.
Learn from Past Mistakes
One of the best ways to build a solid yearlong budget is to see the ways in which the Association may have wisely (or not so wisely) spent money in the past. Looking back not just through the previous year’s financial records, but also through the financial records of the past couple or even several years can help an Association better plan for the future.
Looking for any patterns within these financial records, as well as comparing the predicted expenses against the actual cost of various items, allows the Association to create a more accurate and reliable financial foundation for the upcoming year. Noting, for example, that the Association’s utility costs have increased by a significant amount every year gives the Association the opportunity to allot a bit more for utilities in the upcoming year — which keeps from having to levy special assessments or raise homeowner dues. Choosing a method for keeping financial documentation and creating thorough, detailed financial statements helps make this part of budgeting easier.
Stick to Your Guns
Perhaps the most important part of the budgeting process is to stick with that budget as best as the Association is able. Granted, there are unexpected costs that come with maintaining the safety and comfort of everyone in the community, and these costs can derail even the most well planned budget. (However, the best kind of budgets anticipate these emergency or unexpected expenses to some degree, which may not completely cover such a cost but could significantly offset any expenses, making for a smoother financial journey overall.) Splurging on a renovation to brighten up the community’s common area, on the other hand, when that expense is not accounted for in the budget will only cause monetary problems down the line.
Once the budget has been approved, distributing this document to all homeowners in the community is a great way to keep the board accountable while also maintaining transparency between the board and residents.
Sound money management is the foundation upon which all Community Associations are built, and that foundation starts with developing a well-informed and appropriately anticipatory budget. With such a budget in place, the board can be confident that it will be able to keep the Association running smoothly — no matter what.