Preparing the annual budget is by no means an easy task. Those charged with preparing condo association or HOA budgets will soon begin reviewing costs, gathering data and projecting expenses for the coming year. Communities, businesses, individuals, families, groups and organizations of all kinds must have a budget in place in order to navigate both everyday expenses and unexpected costs, while maintaining a certain life or business style. A well-defined, well-written budget is a powerful financial tool allowing funds to be saved and/or allocated for specific costs and projects; budgeting is a way to estimate expenses and allow for those funds to be available when needed.
Budgeting for community associations or HOAs actually involves not one, but two budgets, each covering a specific range of expenditures. Recurring (and more or less predictable) expenses such as taxes, utilities, staff salaries, insurance and maintenance are the line items most frequently found in the operating budget. Major projects, and long term plans, and emergency funds are budgeted for in the capital budget,and those items will vary, depending on the individual community’s needs, wants, and means.
“You have to be realistic about what those fixed costs are going to be,” says Amanda C. Brady, CPA, a manager at the accounting firm of Wilkin & Guttenplan, P.C., which has offices in East Brunswick, New Jersey and in New York City. “You need to look at what your replacement fund is. You know that you have to have insurance, you know that you have to have certain items, that you have to have a managing agency. You have to look at what those fixed costs are in order to be very realistic about how you're going to come up with what your maintenance fee is going to be for the year,” she says.
While expenses are divided into operating or capital expenses, income is generally obtained only from HOA dues or fees, and any fines or penalties incurred and repaid by residents. When any member of the board is unclear or confused on which budget should be assigned which cost, it can be difficult for the board to function properly and to uphold the fiduciary duties for the community. That's why it's important for every board member to have at least a working familiarity with the way their community's budgets function and interact.
The Budgeting Process
Reviewing the existing budget and formulating a budget for the upcoming year is an annual duty for the community association or HOA board. Association managers play a central role in the budget, and the process starts with them. The manager usually prepares the draft budget, reviews it with the treasurer, and the finance committee, and the board. “Most of the association managers do the leg work on it,” says Stephen Beer, CPA, a partner with the Manhattan-based certified public accounting, auditing and management consulting firm Czarnowski & Beer, LLP. By working with managers, Beer says, accounting pros can gain a clearer, more specific picture of what a building or association needs to budget for and how to plan accordingly.