In your own household, you have money coming in and money going out. You have things you want to save up for—say, a new cool high-def, flat screen television or the latest iPad. Yet you owe your car company and your creditors. To keep it all straight and get a handle on your spending and what you need to save for, financial experts recommend creating a budget.
Running an association is no different. There is money coming in from resident fees and money going out to pay such items as the landscaper or the maintenance crew. But what about if the roof springs a leak, the insurance rates go up, or the cost of electricity skyrockets? How does an association keep track of it all? The same way an everyday Joe would—they draft and stick to a budget.
An Integral Part
There is one major difference with our own personal budgeting and an association’s budgeting. Unlike our individual budgeting process, there are two kinds of budgets for an association—an operating budget and a capital budget. Capital budgets apply to long-term, big-ticket items like new roofs or an HVAC overhaul.
By contrast, the operating budget covers recurring monthly expenses such as payroll and salaries, taxes, utilities, insurance and maintenance items (see the sidebar for a more complete list). In creating and managing an operating budget, co-op and condo boards must try to predict expenses, balance cash inflow and outflow, and be aggressive in collecting arrears and late fees from delinquent residents.
Budgets are an integral part of an association’s financial plan. They help to set goals for achieving an income and monitor how much is being spent. In a condo, co-op or HOA, the final budgets need to be presented in front of the board of directors for their stamp of approval. The board of directors must vote on and approve the budget, depending on the association’s bylaws.
“It’s a requirement of the Illinois Condominium Property Act and the Common Interest Association Act to distribute an annual budget with detailed accounting,” says Marshall N. Dickler, an attorney and principal with the law firm of Dickler Kahn Slowikowski and Zavell, Ltd. in Arlington Heights. “However, there is no outline as to how you have to establish or create that budget.”
Dickler explains that two required items are income and expenses. Income is the money gained from several sources depending on the property. It can come from rental monies, dues, assessments, interest on bank accounts, financial penalties, user fees and security deposits. Expenses, or what is paid, are those that are set and are paid every month, such as personnel and maintenance expenses, or variable expenses—which vary from month to month—such as utilities and various maintenance charges.
“But it doesn’t tell you what you have to put in the budget,” he says. “It can run the full spectrum and we have some properties that do nothing and those who put in everything. Some boards, who create the budgets, have people with business backgrounds and some don’t have a clue as to where to start.”
Hear ye! Hear ye!
The best place to start is a meeting with your association’s team players. “Usually the property manager, treasurer and the finance committee sit in on the meeting with the board,” says Steven Silberman, CPA and shareholder of Frost, Ruttenberg & Rothblatt, P.C. in Deerfield. “Board involvement is so important because they have a fiduciary responsibility. We give them monthly reports and review them from the management company. Accountants are usually asked by some associations who have a property manager to tell them about fees and income but typically we don’t sit in on the meetings unless we’ve been hired by a self-managed building to help with the budget.”
Dickler explains that in Illinois, meetings must be open if you are taking action. “You don’t have to have an open meeting when discussing budgets, but it’s a good policy to let people come in if they want to and aren’t going to be disruptive. You don’t want residents to think you’re doing things behind closed doors. You want them to understand the process.”
When should the meeting be held? “It’s a misconception that you put together an operating budget at the end of the year,” says Silberman. “What associations should be doing is gathering information from prior budgets before the end of the year. We always recommend that associations review their actual budget and compare it to their actual expenditures so they can see what they budgeted against what actually happened.”
Silberman says that when the meeting is held depends on the association’s fiscal year. “A budget is usually prepared to go to the whole board for approval and distribution by October,” he says. “But that’s if you’re using a calendar year. Typically you want to start the process five months before your year’s end.”
Preparing a Budget
The main parts of any budget are income and expenses. “If you’re looking at last year’s budget, you’re going to want to keep ongoing expenses,” says Dickler. “For example, you spent a half million dollars a year on common electrical expenses, so that gets put in the budget.”
Dickler also suggests looking at the last few years of budgets if they are available. “Look at three to five years of expenses and see if there is any consistency on recurring expenses,” he says. “Are certain expenses rising on a regular basis? The more you break down the categories, the more you quantify recurring expenses so that people look at them and get a better picture.”
When you’re writing your own personal budget, there are so many categories you can create down to shoes, makeup, books and more. In any budget, there are sure to be some things that are forgotten. Most commonly, Silberman says that boards forget income tax payments and assessments. “Many associations have residents who are slow paying. One of the key things they have to do is keep slow payments and possible bad debts to a minimum,” says Silberman. “They can talk to a good collection attorney about this, but they should have a line item for bad debts.”
Once a budget is created, it’s normal to go through sticker shock—or see how much you’re truly spending, so it’s important to generate some money saving ideas that will help to limit your association’s debts. Costs should always be on the forefront of everyone’s mind and there may come a time when you have to tighten your belts. Energy prices rise, businesses close, and suddenly you’re paying more for the same services. Reviewing the budget on a monthly basis gives you plenty of opportunities to find hidden dollars in savings.
Silberman suggests first deciding between the association’s want and needs. “You have to look at what’s mandatory and then what’s discretionary, or what you’d like to get done but don’t have to,” he says. The association can look to save money but make sure not to compromise the safety, cleanliness, maintenance or security of the community.
“For example, one way to save money is to get competitive bids,” he says. “Don’t just say that this is last year’s vendors and costs. Have a proven vendor list that you can turn to and make sure they are independent good companies and see if they can reduce their costs.”
Projects may also need to be reconsidered. When the economy is tough, it’s hard to find the money to pay for capital projects. Unfortunately that may mean putting some things on the back burner.
He also suggests bulk purchasing. “For example, certain supplies such as salt—might be cheaper to buy in bulk—and certain contracts might be less expensive to do for a whole year rather than paying on a monthly basis.”
In simple terms, the bottom line is the last line of the budget—the line that shows whether there is a profit or loss. Finding this number can be done by taking the fixed and variable expenses and subtracting them from the total income. This is net operating income. Once you have this number, you can see how much money is flowing in.
What if, once the budget is done, you end up with extra money in the plus column. What do you do? No, this isn’t a trick question and divvying it up among the board members or the residents is not an option.
“The declaration should have the provisions of what to do with surplus,” says Dickler. “You can actually give it back to members as a reduction in assessment or not collect it for a month or two, but in most cases, you add it to the reserve account. Now your budget is zero.”
One of Dickler’s pet peeves is when budgets don’t cover bad debt—having a fund to cover a shortfall is important. It’s a common scenario to have a tenant who has hit a rough patch in his life and they are affected by the local economy. “They forget to cover for delinquencies,” he says. “There should be a 5 to 10 percent reserve, not necessarily for bad debt, but in case there’s a shortfall.
Emergencies are going to happen. For example, even though it has been properly maintained, the boiler suddenly breaks down. “To pay for the repair, you use your building’s reserve fund, which is exactly what it sounds like, money reserved in case something goes wrong,” says Melissa Prandi, a California-based property manager and best-selling author. “Each month, part of the rent or the dues collected from tenants is designated to pump up the reserve fund to cover emergencies. How much money should be in the reserve is determined by a reserve study.”
How much should be set aside? “Every association is different,” says Silberman. “That’s why you need the study, so you can see what large projects you have coming up and can budget for them.”
Financial statements and budgets are prepared so the goals and objectives of the association can be met. Carefully planning your capital expenses and budgeting for them properly can significantly reduce overall building expenditures while maximizing the use and enjoyment of your building community.
Lisa Iannucci is a freelance writer and a frequent contributor to The Chicagoland Cooperator.