On July 1, 202 we wrote a blog on 5 Tips for Budgeting. We felt that since “budget season” has arrived, it would be beneficial to take a deep dive and further evaluate what budgeting is and what it takes to generate a successful budget within a community association.
A budget can be defined as an estimate of income and expenses for a set period. For Community Associations, the set period is typically 12-months (it should be noted some associations are on a fiscal year and others are on a calendar year). In a community association, budgets are used to determined how much money an association needs to operate to meet the short- and long-term goals.
They majority of our community associations operate on the two-fund system which is compromised operating expenses and reserve expenses. Operating expenses are typically day to day expenses that are incurred through normal operations. This typically includes general maintenance, utilities, contracts, and administrative expenses. Reserve expenses are expenses that are associated with major replacements such as road repaving, roof replacement, etc.
When Boards are completing their budget process, one should budget for both the operating and reserve expenses for the upcoming period. It is strongly encouraged to start with the projected expenses as this will help you determine the income requirements. To determine projected expenses, a good starting place is for Boards to consider factors such as governing document requirements, current variances in the financials, contract increases, inflation changes, and utility rate increases. It is encouraged to reach out to the parties to see if there will be any anticipated increases in costs for the upcoming year. In todays world, many contracts are increasing due to inflation, labor, and materials increases and typically the vendors can anticipate the increases for the upcoming period. Additionally, when completing the operating budget (and reserve budget in this instance) we encourage Boards to confer with the community for their wants and needs. This allows the Board to get feedback on scope of works and contracts to see if there are any needed changes.
When budgeting for the reserve expenses for the period, one needs to look at the current assets and the useful remaining life of the communities assets. In other words, one should look over multiple years to see how much its going to cost to properly maintain the property over the next 20 years. The best way to do this is to complete a reserve study. There are various companies throughout North Carolina that will provide professional reserve studies, which will help you in the budgeting process. We strongly encourage this as it provides a natural party conducting the study and it also helps yearly in the budget process.
Once you have completed the projected operating and reserve expenses, one should analyze much income it is going to take to cover the expenses for the current period. Additionally, the reserve study should be analyzed to assure that Association is funding the proper amount of money to properly maintain its assets. It is important to communicate to the membership potential changes in the assessment amount prior to the budget being sent to the membership. If you are proposing a significant increase in dues, consider a pre- and post-approval budget presentation and/or communication. This allows transparency within the community and will make the budget ratification meeting smoother. It should be noted, that there are some North Carolina Statutory requirements for budgeting and notification of proposed budget:
For planned communities created on or after January 1, 1999, and governed by the NC Planned Community Act:
Within 30 days after adoption of any proposed budget, the executive board shall provide to all the lot owners a summary of the budget and a notice of the meeting to consider ratification of the budget, including a statement that the budget may be ratified without a quorum. The executive board shall set a date for a meeting of the lot owners to consider ratification of the budget, such meeting to be held not less than 10 nor more than 60 days after mailing of the summary and notice. There shall be no requirement that a quorum be present at the meeting. The budget is ratified unless at that meeting a majority of all the lot owners in the association or any larger vote specified in the declaration rejects the budget. In the event the proposed budget is rejected, the periodic budget last ratified by the lot owners shall be continued until such time as the lot owners ratify a subsequent budget proposed by the executive board. NCGS § 47F-3-103(c)
Overall, budgeting is one of the most import aspects of running a community association. Associations that properly budget typically result in a community that is properly maintained which results in preserving, protecting, and enhancing property values within the community. If you have any questions about your Associations budget process, please reach out to us a Info@priestleymanagement.com.