An annual budget is the lifeblood of any financially healthy association. A properly crafted budget guides the association in financial decisions throughout the fiscal year and helps minimize unexpected costs. Generally, the membership of your community will recognize the budget as a way of determining assessment amounts. While this is an integral part of the budget, it also provides for the continuity of community services, helps the community maintain its desired quality of life, plans for activities, and provides an opportunity for the community to balance its needs versus wants. Working in tandem with financial reports, the budget is a means of controlling the entirety of the community’s financial operations.
There are a lot of things an association should consider when preparing their budget, not the least of which is timing. Some associations have accounted for this question by designating a specific timeline for budget preparation in their documents. If your community does not have a designated timeframe, aim for early in the third quarter (usually early July) to start drafting your budget for the following year. Schedule a date for the budget meeting as soon as possible and notify the residents within the required time frame listed in the Florida statutes. Keep in mind the budget should be finalized with plenty of time left to send out the mailing to the membership and order coupon booklets for the community. It can be helpful to follow a reverse timeline when scheduling the different parts of preparation, starting with the date you want to finalize the budget and fill in dates working backwards.
The budget cannot simply annualize in many cases due to special projects that have either already occurred or will occur in the future. Utilize the most current year-to-date figures to make adjustments to the budget including: the general ledger, most recent income statement, reserve studies if applicable, and a current A/R (accounts receivable) report.
Like any budget you need to allot for income and expenses. First, consider your potential sources of income. The primary source of income for any community will be derived from assessments. There are very few restrictions on how assessment income can be applied and it is nontaxable. The frequency of assessments is generally set during development in the Association’s Declaration. Rental income from association owned units should be considered an additional source of income. Take caution when accounting for these funds due to the unreliable nature of rental units and keep in mind that these dollars are taxable. Interest on Operating and Reserve accounts as well as delinquent accounts can also be added to an association’s total income. Remember to look for other revenue sources that are contracted such as: cell tower, signage, and bulk services contracts; and non-contracted sources such as: clubhouse rentals, laundry machines, parking permits, etc. Always be conservative when budgeting non-contracted revenue sources. Finally, if your association is in need of another source of income you can turn to the prior year’s operating surplus as a last resort. This action requires full Board approval and the vote should be recorded in the budget meeting minutes.
After calculating your total income take a look at your expenses. The budgeted expenses are either an Operating or Reserve Expense. Operating Expenses cover your daily, weekly, monthly and yearly expenses. Restrictions are minimal in regards to the usage; the goal is to stay within your budgeted limit. Reserve Expenses are set aside for major capital expenditure repairs/replacements. The items that are being reserved for are required by Florida Law or the Association’s Declaration and are established by the Declarant/Developer or by a membership vote. Reserves are highly restricted and can only be used for their respective categories. For example, road reserve funds can only be used for roads. Any other use of those funds would require a membership vote. All of the association’s expenses are paid from reserve funds, therefore, the budgeted expenses should reflect the amount the Association is funding the reserves for that budget year.
Operating expenses can be broken down into two types: contracted and non-contracted expenses.
-Contracted Expenses: cover long-term contracts for either service or utility agreements. These are known expenses that will only change based on a renewal increase or change of scope to the current contract. Examples are Landscaping Contracts, Security Services, Professional Agreement for legal and CPA counsel, and Bulk Cable Agreements. Make sure to adjust for inflation; the current rate per year is 3.22%. Reach out to vendors to ask for next year’s rates or review the renewal clause to avoid unexpected adjustments to the final budget due to rate changes.
-Non-Contracted Expenses: cover general repairs and maintenance, administrative expenses, utilities, special projects, and everything that is not covered by contracts. The cost of these expenses are either known or unknown. “Known Expense” amounts can be determined by proposals from vendors or trend history. Examples are annual plant rotation or mulch replenishment. These known expenses will occur at some point during the budget year and generally have a marginal variance of over/under spending. “Unknown Expense” amounts can be calculated by estimations, vendor suggestions, and trend history. Examples of unknown expenses are irrigation and entry gate repairs. The goal is to minimize the margin of over spending on these items. Unknown Expense funds are only used as needed in the event something breaks or needs replacement.
The Operating Expenses are broken down into the following general categories required but by but not limited to the Florida statutes:
- General Administration: Management Fee, Office Expenses, Insurance, Bad Debt, Professional Fees (Attorney/CPA), etc.
- Grounds Maintenance: Landscape Contract, Irrigation Repairs, Landscape Replacement, Mulch, Tree Trimming, Lake / Pond / Fountain Maintenance, Minor Infrastructure Repairs, etc.
- Repairs & Maintenance: Entry Gate Repairs, Pressure Washing, Fence Repairs, Signage Repairs, Electric Repairs, Perimeter Wall repairs, etc.
- Recreational Area: Pool / Cabana Cleaning contracts, Pool Equipment Repairs, Pool Furniture Repairs, Cabana / Clubhouse Supplies and Repairs, Playgrounds Maintenance, etc.
- Utilities: Electric, Water/Sewer, Phone/Internet, Cable, etc.
Reserve Expenses: While this is labeled an expense, consider it the amount the Association will fund the reserves for that budget year. Reserve funding can be determined by a reserve study or professional quotes. The goal is to determine the components or assets that the Association is responsible for maintaining. From there determine the remaining life and replacement cost for each component/asset. Knowing this information will allow you to calculate how much money is needed each year in order to ensure the Association will have adequate funds for the reserve items when the time for repairs/replacement occurs. Either a Component Method (aka Straight Line Method) or Pooled Reserve Method can be used to fund reserves pursuant to Florida law.
If you find the assessment amount will increase for the membership after the budget is finalized, first review your association documents to determine the maximum percentage allowed in a year. Consider the other sources of income that can be incorporated into the budget to reduce the assessment increase. Examples include rental income, interest, resale contributions, cable easement agreements, and prior year operating surplus. If the income is not guaranteed to be received (rental income/interest) you are running a risk of not having adequate funds for that budget year. This would result in a potential long-term cash flow issue. The prior year operating surplus should only be used as a last resort. The rule of thumb is to use this option only if the association operated at a surplus (more income than expenses) for three consecutive fiscal years.
Finally, make sure to monitor your budget each month to determine projected to actual operating results. Preparing an association budget can be a lengthy and sometimes difficult process; however, if done correctly will ensure your association is meeting their fiduciary responsibility and on the path to financial health.