Budget Season is Here! No, Really… Budget season begins much earlier than you may anticipate.

Budget season is here! The reality is, if your fiscal year end coincides with the calendar year, you should begin the budget preparation process by early August. If your fiscal year falls at another time throughout the year, I suggest allowing a full 5 months before your Association Budget Report is due to be received by the membership to begin the budget preparation process.

Every year it seems Associations rush to get their budgets drafted, approved and mailed out to meet California’s civil code deadline. The preparation of the Association’s annual budget is one of the Board’s most important responsibilities, ensuring the proper funding of operational expenses as well as reserve allocations for the repair and replacement of aging common area elements. As such, Boards should plan ahead and provide for adequate time to ensure the budget preparation process receives the attention it deserves. Below is a tentative timeline to help guide your Association through budget season:

Reserve Study (Phase 1)

Budget season begins with an updated reserve study. The purpose of a reserve study is to estimate current and future expenditures related to the repair and replacement of common area elements over time. The reserve study will include a monthly expense allocation that will need to be included as part of your annual operating budget.

Associations in the State of California are required to have an on-site, visual reserve inspection and study prepared by an expert specializing in Association reserve studies once every three years, unless total replacement costs of all common area elements are less than 50% of the annual operating budget (Civil Code 5550). Civil code goes on to state that Boards must review their reserve study, or cause it to be reviewed by an expert, annually. I recommend that Boards plan to have the reserve study specialist who prepared the on-site visual study prepare annual reserve study updates. The cost is relatively nominal given the importance of adequate reserves to defray future common area repair and replacement expenditures.

Reserve study firms or analysts are selected the same way any other Association vendor is selected – through a competitive bid process, included on a properly noticed meeting agenda, and approved by the Board of Directors at a properly noticed Board Meeting. While I support the same analyst performing annual reserve study reviews, I suggest using a different analyst every three years for the on-site visual reserve study so that the Association receives a fresh perspective from another competent analyst.

Obtaining competitive bids to hire a reserve study analyst will take between 30-45 days, and the preparation of the study will likely take an additional 30-45 days. As such, I suggest you allow up to three months for this first phase of the budget preparation process.

Vendor Contract Increases/Changes (Phase 2)

Review the Association’s vendor contracts and note all automatic annual fee increases. Most contracts have an automatic increase based on the Consumer Price Index (CPI) for the respective region to account for inflation year over year. The Board will want to capture any contract increases in the updated annual budget. It is also important to keep in mind that effective July 1, 2018, minimum wage increased again, impacting many Association vendors, and likely their contract rates. I recommend proactively reaching out to vendors to inquire whether they intend to submit contract increases within the next 12 months so that these planned increases are reflected in the updated budget.

Please note: Phase 1 & 2 may be done concurrently.

Preparation of Annual Budget (Phase 3)

PMP will prepare a draft operating budget for the Board to use as a template, utilizing year to date actual expenses to extrapolate and forecast expenses for the next fiscal year. Typically the draft operating budget is prepared 60 days from the Association’s fiscal year end, but this date can be moved up at the Board’s request. While PMP prepares a draft budget, it is ultimately the Board’s responsibility to review and update the budget to reflect specific expense projections for their Association. The Board should allow a full 30 days (one month) to prepare the annual budget, assuming that it will go through several draft revisions.

I encourage Boards to allow assessments to be expense driven, not the other way around. In other words, when preparing your annual budget, initially ignore the revenue (assessments) numbers and begin populating expenses based on past 12 or 24 month averages for each itemized line item. I often find that Board Members become so focused on keeping assessments low, that often it is at the expense (pardon the pun) of critical operational functions, such as landscaping, janitorial services and adequate funding of future repair and replacement costs. The result is an underfunded operating account, deteriorating common areas, and a future of significant assessment increases and special assessments.

Pursuant to the Open Meeting Act the Association budget is not a task that can be performed in Executive Session, and it would not be productive to deliberate and prepare a budget at a General Session Board Meeting in front of the membership. I recommend the Association appoint an Executive Committee of less than a quorum of the Board to meet, confer and draft the Association’s budget for the Board’s review and consideration.

Finalize, Approve and Disseminate Annual Budget (Phase 4)

Once the draft budget has been finalized, the Board will need to adopt the budget at a properly noticed General Session Board Meeting before it is disseminated to the membership (all legal owners) as part of the Association’s Annual Budget Report. Pursuant to California Civil Code § 5300, the Annual Budget Report must be distributed to the membership (all legal owners) at least 30 days (and no more than 90 days) prior to fiscal year end.

In closing, please remember that Association Board Members are fiduciaries of the non-profit corporation with the same fiduciary responsibilities as the Board of Directors at Apple, Microsoft and Disney. Adequately funding the Association’s operating and reserve budget to properly maintain common areas and defray future replacement costs is a fiduciary obligation of the Board. While it is important for Boards to be fiscally responsible, striving to maximize value on behalf of the Association, it should not come at the expense of properly budgeting to fund the Association’s operating expenses to responsibly maintain the Association’s common areas.

Questions or additional requests for information can be e-mailed to Brad Watson, President of PMP, at bwatson@PMPManage.com

Please Note: PMP is not a law firm and nothing contained in this document should be considered legal advice. Legal questions should be directed to your respective Association attorney.

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