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Subject: Budget Development process
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GeorgeS21
(Florida)

Posts:3411


11/16/2020 6:11 AM  
Hi All,

Relatively new (2007 incorporated), single family HOA of 650 properties - 95% built out. Pool, lodge, parks, etc.

Over the past 15 months have fired last two property managers - the first as in the subdivision development business and the second was in the very small neighborhood management business - neither business case worked for large, established communities. The new manager is certified and knowledgeable - and, has suitable online tools, accountant, and processes.

We just received our first real reserve study (previous one from 2014 included only a handful of categories and fit on one page), and are now developing the first budget with this reserve study. The reserve study contractor believes we are in pretty good shape, but does have an increasing level going to reserves over the next few years until we are balanced in around 2025.

The good news is we probably won’t need an assessment increase for another year or so, but the pressure of inflation and a bit larger percentage of assessment to reserves will dictate an increase of 10% or so by 2022-2023.

Question relates to how best to build a suitable budget for amenities like pools, lodge, gym, etc. Some want to simply flatline a budget based on last year’s totals divided by 12 months - obviously, this would include contractual maintenance and anything else spent to upgrade, repair, etc over last year - but not anything paid for by reserves - so, in general smaller repairs, and small upgrades. Another option is to determine total maintenance divided by 12 months, then have a general discretionary account with items across several categories we believe would be needed over the next 12 months determine and tracked separately.

Another lesser question is whether to adjust monthly budget numbers by month - ex: if power for the lodge is $1000 in the summer, but $100 during benign temperature months, should the budget reflect this? I think yes, as budget vs real world would help determine issues that are developing.

Thoughts?
ND
(PA)

Posts:511


11/16/2020 7:58 AM  
To your one question . . .
"Another lesser question is whether to adjust monthly budget numbers by month - ex: if power for the lodge is $1000 in the summer, but $100 during benign temperature months, should the budget reflect this? I think yes, as budget vs real world would help determine issues that are developing."

I think budget can be done either way, but I have in the past and would opt to do as you're thinking . . . break budget down monthly IAW anticipated expenses that month. Use prior year's and any knowledge about future expenses to help determine best monthly estimate. Also I would think that you selected accounting method may necessitate budgeting one way or the other (not sure though).
JohnC46
(South Carolina)

Posts:10130


11/16/2020 10:23 AM  
George

When I hear budget I think a yearly one to be used as a guideline. It should show the total amount of money to be spent on something even when the monthly expenses vary. Say $1,200 budgeted but not $100 per month is spent on it every month. Some months maybe $200. Some months $0.

Most Accounting Software shows Year to Date in dollars and in % versus budget. The numbers will not be "even" across the year. What matters is they are all even at the end of the year. If so, one lived within their budget and that is good.
ND
(PA)

Posts:511


11/16/2020 8:41 PM  
Agree generally with what John said.

What I was thinking of and referring to is a type of budget report that our MC used to prepare for us, called a 'Budget Spread Report'. This report showed for the 12 months of the year, and for each income and expense line item, what the budgeted amount, actual amount, and variance was for each month. In some cases, budgeted amounts were equal for each month (e.g., assessment income, insurance expense). But in other cases, the budgeted amounts varied by month and in some cases were zero (e.g., landscape maintenance expense, snow removal expense). And when the monthly budgeted amounts were summed together, you would arrive at the single annual budget amount for that line item . . . the sort of budget that John was referring to that I think most of us are familiar with.
GeorgeS21
(Florida)

Posts:3411


11/17/2020 9:14 AM  
ND and John,

Yes. My other neighborhoods use a process as described - a spread budget but we developed those budgets with known costs in each line by month with the monthly budget cost related to previous years and based on actual expenditures for those months - ie Florida so higher power in summer for pumps and HVAC, etc.

This latest neighborhood started off with new MC by simply peanut butter spreading the total of previous year over each of the 12 months - it is just a budget, but this doesn't help monthly tracking.

And, the averages have been adjusted to include upgrade, repair estimates, etc for various categories that are not in the reserve allocations and alignments; previous neighborhoods, we kept these in a discretionary account where each item was noted (not a separate line, just as a list sub to the line).
SheliaH
(Indiana)

Posts:3577


11/17/2020 9:27 AM  
Part of your assessments should go towards funding reserves, so rather than wait until 2022, I'd increase them by a smaller amount. You never know when a major component will need replacement (it may not wait to fall apart 10 years from now).

A budget is a guide, but cannot predict the future. There may be more use of your amenities next year, especially if there's success in getting a COVID vaccine or two next spring and there's a mad dash to get the pool ready for increased use. You should be talking with whoever maintains them to see if they're anticipating any increases in kabir, energy, insurance and other costs and go from there.

If you end up spending less, perfect, and that money can go to something else. If you spend a little mire, you won't be caught off guard. And you can always tweak as the year goes on, such as reducing hours of use, if necessary, to save on supplies.
JohnC46
(South Carolina)

Posts:10130


11/17/2020 11:09 AM  
Reserves should be a monthly budgeted line item. Also if excess money at the end of the year, it should be put in reserves.
ND
(PA)

Posts:511


11/17/2020 11:50 AM  
Posted By JohnC46 on 11/17/2020 11:09 AM
Reserves should be a monthly budgeted line item. Also if excess money at the end of the year, it should be put in reserves.



Agree with the first sentence that a budgeted expense should be a monthly 'deposit' into your reserve account at the amount indicated as appropriate by your reserve study. This would be one of the recurring, constant expenses in my previously-referenced "Budget Spread Report" that when summed for the year would equal what the reserve study indicated we should deposit for the year.

However the second sentence, I do not think is an accurate, blanket statement and that individual State HOA Law and perhaps even CCRs may have different requirements as to what to do with surplus. (It's been a while since I've had to look, but if memory serves me correctly . . .) In PA, any surplus remaining at year-end is to be given back to homeowners at a percentage equal to what they paid and in the form of a credit toward future assessments. So any excess money at year end cannot be simply dumped into the reserve account. This to me makes logical sense . . . it's money that the HOA said homeowners owed (based on the budget and paid through assessments IAW the CCRs); however, expenses that were budgeted for that year turned out to be lesser than was anticipated, so the money should be "refunded" to the homeowners who paid it. While it may be a good idea to put it into the reserves, unless the CCRs and/or State HOA law allow this to occur, it cannot be an automatic thing or even a Board decision to do so.
JohnC46
(South Carolina)

Posts:10130


11/17/2020 1:35 PM  
While I know of no laws, I believe an HOA is permitted to carry budget surpluses forward versus refunding.
AugustinD


Posts:4421


11/17/2020 6:09 PM  
Posted By ND on 11/17/2020 11:50 AM
In PA, any surplus remaining at year-end is to be given back to homeowners at a percentage equal to what they paid and in the form of a credit toward future assessments. So any excess money at year end cannot be simply dumped into the reserve account.
I am not convinced that this is a fair reading of the Pennsylvania Condominium Act Section 3313. This section reads as follows:

=====
§ 3313. Surplus funds
Any amounts accumulated from assessments for limited common expenses and income from the
operation of limited common elements to which such limited common expenses pertain in excess
of the amount required for actual limited common expenses and reserves for future limited common expenses shall be credited to each unit assessed for a share of such limited common expenses in proportion to the share of such limited common expenses so assessed, these credits to
be applied, unless the declaration provides otherwise, to the next monthly assessments of limited
common expenses against that unit under the then current fiscal year's budget, and thereafter, until exhausted. Any amounts accumulated from assessments for general common expenses and income from the operation of the common elements, other than limited common elements with regard to which limited common expenses are assessed, in excess of the amount required for actual general common expenses and reserves for future general common expenses shall be credited to each unit in accordance with such unit's interests in common elements, these credits to be applied,
unless the declaration provides otherwise, to the next monthly assessments of general common expenses against that unit under the then current fiscal year's budget, and thereafter, until exhausted.
====

The statute seems sufficiently vague that so-called surplus funds could nearly always be dumped in the reserve account. I mean, it's incredibly rare for a reserve account to be fully funded for any given year.
KellyM3
(North Carolina)

Posts:1575


11/17/2020 8:07 PM  
"Some want to simply flatline a budget based on last year’s totals divided by 12 months - obviously, this would include contractual maintenance and anything else spent to upgrade, repair, etc over last year - but not anything paid for by reserves - so, in general smaller repairs, and small upgrades."

I would likely prefer the method above for creating your first operational budget. To be transparent, you'd create a pool budget (with items like "furniture," "chemicals," "permits," emergency phone service" broken out by line item and funded at whatever level your 12 month analysis dictates).

Do not adjust monthly budget numbers by month (example: Lodge electrical usage). Just set an annual amount for Lodge electric and reduce it monthly as you pay your monthly bill. As the year progresses, you appear to be way under budget...then way over budget as Lodge usage increases and then your expense will taper and end up very close to your budgeted amount by year's end. Remember, you still see monthly bills come in and can chart discrepancies aka weird cost increases.

How your HOA handles its accounting is important as well. Many use accrual vs cash basis accounting methods to run an annual budget.
JohnC46
(South Carolina)

Posts:10130


11/18/2020 1:29 PM  
I believe CPA's prefer Accrual.
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