Author: Philip C. Bateman, CPA, CFE
Reflecting back on the year end 2015 audit and review cycle, which recently concluded, I am impressed with the financial condition of many of the Associations. Over the past couple of years, collections have improved in most associations, which has helped to offset inflation in other common area maintenance expenses and utilities. Many associations have good working capital or even excess operating funds and area addressing reserve funding.
Now the financial cycle begins all over again – looking forward to 2017. Many Associations now begin the budget cycle for 2017, which will quickly be upon us.
Unlike many for-profit businesses that may prepare a budget, and more than likely not follow it, the budget is the lifeline to having a financially successful association. If the community budget is “not right”, it can have a severe impact on the community. The budget is an association roadmap to financial success.
The budget process is governed by NRS 116.31151. It is important to note that not only is an operating fund budget required, but also a reserve fund budget (which tends to be forgotten). If the community has other funds, like a capital fund or special benefit areas (neighborhoods), budgets should also be done for these areas.
The beginning of the budget process is critical. First, establish your budget team. Yes, the budgeting process should be a team effort, not just the community manager or accountant copying the 2016 budget and pasting in the 2017 spreadsheet. Your team should consist of the community manager, the accountant, AND most importantly the board member(s). Having board input from the beginning is important, and will save time in the overall budget preparation. More than likely, board members are in the community on a daily or regular basis. They see and know, first hand, what is being addressed and what may need more attention.
The prior year budget can be a good resource. However, copying the budget, without using other considerations, can provide a problem budget (garbage in, garbage out).
Obtain the most current 2016 financial statement. If the community had a 2015 audit or review, you should have an issued CPA financial statement (or draft) at this point, since we are now beyond the 210-day requirement in NAC 116.457 1(b). Be sure the prior year equity in your current financial statement ties to the 2015 audit or review equity. If not, more than likely, your CPA adjusting entries have not been posted, and the revenues and expenses being used for your budget may not be correct. Have your accountant resolve the issue BEFORE you start pulling numbers.
Review the year to date actual numbers on the budget, and project where they will end up at year end. Accounting can be a great resource in this step. Contracted items are easy. Repairs and maintenance and utilities can be a different story. Use past history to assist.
Part of the operating budget is what is going to be transferred to the reserve fund. The reserve budget should come directly from your reserve study. If the community needs or wants a reserve study update, this update should happen BEFORE the budget is completed. If the study has problems, resolve them with your reserve study specialist. Many specialists will do quick, inexpensive updates that will address incorrect replacement costs and lives and missing components. Having a complete and accurate reserve study is critical to the financial success of your community. Following the reserve study, pulls liability off the board members, since they are following their expert. Choosing not to follow the approved study, can put additional liability on the board.
If the community does not have adequate funding, the budget is the time to address the issue. If the association has excess operating funds, make a one-time transfer to reserve to increase your funding percentage (not over 100%). Use the annual funding amount per the approved reserve study. If the community operations do not support being able to fund the required annual funding for the following year, consider implementing a reserve assessment. The reserve assessment is defined in NRS 116.3115 2 (B). This allows the board to impose a reserve assessment (without owner approval) to adequately fund the reserve.
Look to the board for input related to changes in existing services or addition of new services. A board member may see the landscaping deteriorating, the clubhouse not be adequately maintained, or the need for more patrol service. A change or increase in service may solve the problem. Check with existing vendors on potential price increases. These items will impact your budget. The more board involvement in the budget preparation process, the less revisions and easier adoption and ratification will be down the road. If an assessment increase is needed, the board will better be able to explain this to owners, since they have been involved in the process.
If the community is struggling financially – either with an operating deficit (more operating liabilities than operating assets) or inadequate reserve funding, encourage your board not to “bury their head in the sand” and just keep the assessment the same. As board members, they have a fiduciary duty to provide for and maintenance the common area – not just today, but for the future. Boards have to make tough, unpopular decisions sometimes to raise the assessment. However, it may be needed to keep the property at a highly maintained level and have reserve funds available for when items need replacing. It is much easier to raise the assessment a few dollars each year, than a significant increase all at once.
As you start your budget process, consider using a team of community manager, accountant, and board. Be sure your current financial statements tie into your 2015 CPA financial statement, so your revenue and expense actuals are accurate. Get board feedback on changes or additions to services that they may want to implement. Use and follow your approved reserve study. If needed, make the decision to raise the assessment and/or implement a reserve assessment. By doing these steps, you will be on the right track for an excellent budget that will help the Association financially prosper in 2017.