Budgeting Done Right
In the Association world, we are busy preparing budgets for the upcoming year. Association budgets may have lots of lines, and in some cases a few more zero's, but the principles are simple, just like our personal budgets. Personally, I like preparing budgets by looking through different perspectives. Let's talk about some different ways to approach creating an HOA budget:
Set expense levels based on historical costs. I like the point of reference, using prior experience to gauge the future, but certainly we need to be aware of how inflation, or other factors may affect pricing. In an established community, where utility bills (for example) are fairly consistent, using historical data is very useful. We can reach out to the utility provider to know the expected rate increases. And with that input, set a reasonable budget.
Start with a zero base budget. From this viewpoint, every dollar needs to be justified to be in the budget. In some cases this does not make sense. Say your building supplies budget is made up of lots of very small purchases. I don't see the value in spending time in the budget process to itemize the rolls of toilet paper, batteries, pens, paper or other office supplies. For items like this, perhaps a historical view works better. But, when looking at something like landscape projects, perhaps a zero-up approach works well. Let's justify every dollar of tree care, sprinkler system revamp, or replacement of ground cover, based on the specific needs of the upcoming year.
Consider service levels to set budgets. The primary question to be answered here is: how much do we need to budget to maintain (or change, up or down) the current levels of service. What are the service intervals for the custodial vendor or the pool service? Has the use of the facilities changed? Is more or less service needed as we go into the new year? Looking at services this way, not only helps in the setting of the budget, but also provides clear talking points to the community so there is understanding why a budget is increasing or decreasing.
Limit expenses based on a certain income level. Is there some target to keep assessments from increasing, or only changing by a certain percentage? Usually these targets are arbitrary, so be careful here. Be aware of intended and unintended consequences. There doesn't seem to be anything specifically bad about keeping assessments from increasing. I only urge an awareness of how service levels may vary, and successfully communicating those changes to the members of the community. On the other hand, for a Board that is wanting to increase assessments significantly for new services, inflation, etc, there may be some restrictions in rules that limit the amount assessments can change year-to-year. Again, communication to the community will be key to the success.
Determine amounts of developer subsidy. For communities that are being built, association costs are often subsidized by the developer. We've found success when the amount of subsidy matches the amount that would have been raised through assessments, if the community was completely built-out. This way, as completion draws closer, the amount of subsidy decreases. And ultimately, when the development is done, there is little-to-no change in assessments to the homeowners.
When we approach the process by looking through different perspectives, the result is a more complete budget. Specifically related to association budgets, I believe the most successful years are had when egos subside and collaboration thrives. But, I guess that seems to make sense in our personal lives and budgets too. Good luck to boards, management, and committees through this budget season! As we all work to do 'what's right' and worry less about 'who's right', our association's will be stronger for it!
