HOA 101: Budgeting Best Practices
Responsibly managing a homeowners’ association’s (HOA’s) funds is a crucial part of a board member’s fiduciary duty; however, the task can be too overwhelming for one person to handle. While a board treasurer takes the lead on preparing an annual budget, it’s the responsibility of the entire board to keep it balanced. A budgetary shortfall can put a financial burden on the association and lead to increased dues, special assessments, and overall discontent in the community. Luckily, there are steps board members can take to maintain a healthy budget and secure a stable future for the association. Here are some best practices to consider for budgeting success.
Refer to Your Community’s Governing Documents
Every action taken by the board must be within its legal authority and responsibility. That means consulting your community’s governing documents before any major undertaking. Your governing documents will include specific requirements for the preparation and distribution of the budget. They will also detail the services and maintenance requirements the association must provide, which should be factored into the budget.
Create a summary document of the specific requirements from your governing documents to serve as a quick reference when completing the budget.
Create a Budget Development Committee
The budget development committee should be comprised of homeowners but led by the board treasurer and receive input from the HOA president, community manager, and the leader of the finance committee. Committee members should be dedicated to the budget and confirm they can:
- Devote sufficient time. Don’t schedule a budget committee meeting immediately before or after a board meeting. Instead, schedule an all-day planning session when everyone is available and fully focused on the budget without other distractions.
- Ask and listen to homeowners. A well-developed budget begins with a business plan that addresses both immediate and long-term needs and wants. A homeowner survey can reveal a list of projects or repairs that might not even be on your radar.
- Establish a schedule with deadlines. Develop a timeline for key action items, such as establishing and communicating dues, budget approvals, notifications, and ratifications. Determine homeowner communication methods, such as a meeting or an article on the HOA website.
Look to the Past and Towards the Future
Review past financial statements and create an itemized spreadsheet that compares budgeted expenses to actual expenses for each year for the past three years. Maintain this worksheet annually going forth to make future budget development easier and more accurate. Identify the categories where underspending or overspending occurred, why it happened, and if and when special assessments were levied.
It’s also important to do in-depth research on future expenses to guarantee your budget doesn’t fall short of projected costs. Specifically, make sure to:
- Review existing contracts for renewal dates. Contracts with a CPI (Consumer Price Index) clause might result in higher costs.
- Contact existing contractors and confirm upcoming costs with a formal Request for Proposal (RFP).
- Solicit competitive bids via RFP from other potential vendors.
- Review insurance policies and request updated insurance information from vendors to certify compliance.
- Contact the utility companies and ask if they’ve set a price rate schedule for the upcoming year.
By doing these things, you might save your HOA a little money, ensuring you’re prepared for whatever changes a fluctuating economy might bring.
Review Your Reserve Fund Analysis
Some states, provinces, or HOA bylaws require an annual reserve fund analysis. Even if yours doesn’t mandate this, it’s imperative to review and replenish your HOA’s reserve fund each year. An HOA reserve fund is money set aside by a community association for additions to major components the association is obligated to maintain and future replacements and repairs that don't occur annually. Ideally, maintain a 20% reserve fund to cover unforeseen expensive repairs. At the minimum, maintain sufficient funds to cover the deductibles on HOA insurance policies.
This will help your association take care of needed repair and replacement projects before they turn into larger, more expensive projects.
Itemize by Categories
An HOA budget includes three main categories—projected revenue, projected expenses, and reserve fund contributions—with subcategories for each. Revenue primarily comes from assessments and dues. Typical expense categories include:
- Administrative expenses. Accounting and legal fees, bank fees, management fees, office expenses, and website maintenance.
- Operating expenses. Common area maintenance and supplies (HVAC, plumbing, landscaping, cleaning) and utilities (electricity, gas, water, sewer, and trash removal).
- Fixed costs. Federal income taxes, property taxes, secretary of state filing, and insurance.
There are software programs that can assist with creating HOA budgets, but hiring a professional CPA may help the board understand how costs were calculated and better inform next year’s budget committee.
Understanding Budgeting, Financial Management, and Reserves
As a board member, you’ll spend a fair amount of time projecting and monitoring the financial condition of the organization. You don't need to have a financial background to be effective in these tasks. It's simply a matter of knowing what information is most important for you to review. Watch our video, “Video 4: Budgeting, Financial Management, & Reserves,” to learn the steps to achieving financial management proficiency.