Budget Planning: Pitfalls
Budget season is around the corner for many communities. For some, budget planning is the predecessor for homeowner complaints. And assessment increases directly correlate to increased frustrations over onsite services and manager availability. But the budget process does not have to be come a season of terror. We can leave the spooky season to October’s festivities. When working with communities, here are three pitfalls I’ve observed that can be corrected to provide more transparency and buy-in from your homeowners.
Over-Complicated Budget
It is easy to focus on details when those come into question. “What exactly are we spending our landscaping budget on? Tools? Services? Materials?” But the solution is not to create a new line item for each expenditure. A budget that has too many line items can overcomplicate the picture rather provide clarity on expenses. When a board is focused on too many details, the overall picture is lost. And a budget with too many factors can hide both necessary and unnecessary expenses. Even a reputable management company can come under fire for hidden expenses when the budget itself doesn’t encourage budget management and accountability.
Further, a budget that is overcomplicated and too detailed will take a considerable amount of time to review and approve. A budget that takes more than a single budget meeting to review will drain precious meeting time and increase back-and-forth emails that no volunteer board member enjoys reading. With an extended budget preparation period, we begin to push back the date on homeowner notice, which leads to my second observation.
Little to No Advanced Notice
Homeowners that are given little to no advanced notice of an assessment increase before a budget meeting will spend more more time in complaints than the Board will spend in explanation of the budget. A “surprise” increase in assessments creates distrust between homeowners and their board volunteers. Is the increase necessary? Likely. And has the Board spent time reviewing all other options before the increase? Also likely. But homeowners are not always privy to the day-in-day-out events of a community and the expenses caused by those events.
Understandably, today’s increases in every day expenses has caused a lot of discussion around transparency. Are the increases due to obvious service needs or due to incremental increases throughout the budget, causing an assessment increase beyond what service level homeowners believe they’re receiving? We have all been in situations where we felt as though we bought into a bait-and-switch service and thus the seeds of distrust were sown. A board that knows the budget issues but doesn’t provide any advanced information to the community may be digging their own proverbial grave. Don’t expect to be re-elected at the next annual meeting.
Operating Budget Focused
Most budget discussions center around the operating budget. The operating needs are often more urgent and demanding of our attention than future expenses. However, those communities that do not spend any annual discussion time on the reserve fund are more likely to require special assessments in the future. A management company may provide the annual reserve increase in the budget, but unless your homeowners understand those numbers, it’s likely they will see that expense as unnecessary. I’ve observed as Boards have, against my recommendations, used what should have been the reserve budget for operating increases. This habit tends to reinforce the idea that reserve funds are non-essential. And until the roof actually needed to be replaced, no one seemed to know why the reserve fund was on the budget. If your homeowners find the reserve concept nebulous, perhaps it’s time to start spending time on the reserve plan during homeowner meetings.
If any of these pitfalls describe part of your budget planning process, there is hope! Budget season can be a season of homeowner engagement and education. Here are a few steps we can take to minimize the stress around budget season and rebuild trust with your homeowners.
Refine the Budget
Even the most basic budget should have three operating categories - administrative expenses, property expenses, and utility expenses. I would argue that any community less than a large-scale community should stick to those three main categories. If you aren’t funding a golf course or onsite restaurant, then we’re really only looking at the general community. If your community has separate expense lines for building A electricity vs building B electricity, you will want to ask yourself why and if the reason to fixate on the specific building electricity stems from a complaints that building A has one (1) more “can light” than building B, we’ve lost the big picture.
When possible, combine accounts that manage the same physical aspect. Landscaping - Supplies and Landscaping - Labor both manage the same physical component. Your fluctuations month to month should be noted, but the line item doesn’t have to split to account for both. When you look at your performance report, you should be able to spot the big picture right away: “Landscaping is up this month.” Or ask the pertinent questions: “Why is Natural Gas under budget?” And go the extra step to ensure the per-month view of the budget shows when each expense is expected. A budgeted amount for plowing in July will confuse anyone.
If in doubt, ask a few homeowners who don’t regularly work on the budget whether they can understand the budget. If not, there might still be work to do. The goal is to have a comprehensive budget that gives us the general big picture of where homeowner money is going. Even broken down into each line item, the budget items should easily tell the story of how the property and community is maintained.
Communicate with Homeowners
In Colorado, homeowners have an opportunity to veto a board approved budget through the ratification process. This legislation came from a knee-jerk reaction to a few poorly managed communities that approved and enforced budgets that were unreasonable to those communities. I have a love-hate relationship with this legislation because although it requires another level transparency and homeowner involvement, it increases the administrative management of the budget and for many communities, it increases the number of meetings per year. Any increase in management means an increase in costs to the association. Additional transparency, additional work.
However, if we inform homeowners of the big picture before sending out the budget at ratification, the work to convince homeowners of a necessary increase may not be as hard. Special Assessment buy-in will require an equally special amount of communication or you may need to be prepared for a veto, revision, and re-ratification process. Communicate in advance or pay for it afterwards.
Reserve Fund Planning
Communities with a nebulous reserve fund plan are more likely to require a special assessment. Since entering this industry, I’ve begun advising friends or family to look at the reserve study AND the budget before buying into an Association. If there is no clear plan to fund capital projects, there is clear evidence you will end up paying a special assessment in the future.
Your Reserve Fund should be included in the discussion of the budget annually, both in the Board budget meeting AND in the Annual Homeowner Meeting. When homeowners are aware of the increases in building materials as related to their property, they’re less likely to fight the increase to the reserve fund. If the roof project will cost $500,000 and there is only $250,000 today and 5 years to save the rest, homeowners have a clear picture of the future and where their funds are going. A nebulous roof project with no budget and no due date and a homeownership with no idea of what’s coming will spell disaster for your Board when budget season hits and there’s not enough money to finish the project.
Review your Reserve Study annually with details of the next three years, broader information and implications for the following 5 years, and end with notes on future large scale projects that exist on the study. Make sure you provide the Reserve Study link or location to those homeowners who want to dig further.
Budget season doesn’t need to be spooky or stressful. It may take a few years to change old habits or rebuild trust, but it is possible! Perhaps your community has successfully avoided these pitfalls. Congratulations! Be open to feedback from your homeowners for any other budget concerns, but you are well on your way to a transparent, trusting community.
If your budget is overwhelming or you need assistance in the budget process, Candor Community Management can help you. Whether you are looking for an unbiased third person view of your budget or you would like to look at our management services, please reach out! We provide Homeowner Association consulting services throughout Colorado and full management services in Summit County.