Budgets and financial statements should be reviewed regularly, and adjusted if necessary.

If your Association’s fiscal year-end aligns with the calendar year, your approved budget along with the legally required disclosures has already been mailed out to the membership. While it may no longer officially be budget season, roughly defined as the last quarter of your Association’s fiscal year, is budget season ever really over? Not if you’re properly utilizing the annual budget to aid in the governance and oversight of the Association and its assets.

The budget should serve as an operational maintenance guide to ensure that day-to-day common area components are receiving the necessary on-going maintenance required to preserve Association assets and maximize each components’ useful life. Regular preventive maintenance of components such as elevators, pools, spas and common area HVAC units should all be budgeted operating expenses. By regularly reviewing the annual budget via the monthly financial statements, the Board can be sure that these critical maintenance obligations are being scheduled and performed.

Budget season can be exhausting, and in some cases overwhelming, causing many Board Members to simply “check the box” once the budget is completed, and move on to other pressing Association business. But the Association’s budget is far too important to simply be filed away until next year’s annual review. The budget serves not only as the foundation for the Association’s monthly financial statements, but as a tool to evaluate the Association’s obligations and performance month-over-month. A thoughtfully prepared budget reviewed regularly can guide the Board to ensure operational maintenance obligations are being met, that the Association is prepared for long-term asset replacement expenses, and that unforeseen financial obligations requiring special assessments are mitigated.

Operational Maintenance Obligations

The budget should serve as an operational maintenance guide to ensure that day-to-day common area components are receiving the necessary on-going maintenance required to preserve Association assets and maximize each components’ useful life. Regular preventive maintenance of components such as elevators, pools, spas and common area HVAC units should all be budgeted operating expenses. By regularly reviewing the annual budget via the monthly financial statements, the Board can be sure that these critical maintenance obligations are being scheduled and performed.

Long-Term Asset Repair & Replacement

A key component of the Association’s annual operating budget is the reserve contribution allocation. Each year the Association has a reserve study performed or updated to account for the future repair and replacement of common area elements. The reserve study will recommend a monthly allocation amount that is treated as a monthly expense line item in the operating budget. Each month this reserve allocation is transferred from the Association’s operating account to a separate, interest bearing reserve account, which serves to defray future replacement costs of common area assets. The Board should be reviewing the operating budget/financial statements regularly to confirm that the reserve allocations are being transferred to the reserve account each and every month. At the same time, the Board should also be reviewing the reserve study itself, and specifically the useful life of each common area component. If the reserve study shows one (1) or zero (0) useful years left for a particular common area element, the Association should use this information as a guide, contacting the respective vendors to inspect the component to ensure it is functioning properly.

Please note: Just because the reserve study calls for a component to be replaced does not mean it needs to be, but at the very least it should warrant an inspection. At PMP we actually include a reserve study summary and useful life matrix as part of our financial summary accompanying the Association’s monthly financial statements, so this critical information is shared with our Board Member clients regularly in an easy to review summary.

Unforeseen Financial Obligations By regularly reviewing the Association’s annual budget via the monthly financial statements along with the reserve study, and using these tools as a guide in making important maintenance and repair decisions, Boards are able to mitigate unforeseen financial obligations that may lead to special assessments.

What if an Association does encounter unforeseen expenses or realizes that the annual budget is inadequate to meet the Association’s financial obligations? A common misnomer is that an Association’s annual budget can only be updated once annually during budget season, which is simply incorrect. If it is determined over the course of the year that the operating budget is underfunded or that specific expense line items need to be adjusted, Boards may make mid-year adjustments, including assessment increases (up to 20% in any given fiscal year), so long as the updated budget is approved at a General Session Board Meeting and distributed to the membership for the required thirty (30) day notice period.

So this year, as opposed to simply filing the Association’s budget and reserve study away, use these documents as tools to help guide the Association’s planning and decision making. If you or your fellow Board Members would like to learn more about Association budgets and financial statements, PMP offers an outstanding DR. HOA Board Member Training Forum, “Understanding Association Financial Statements,” complimentary and available upon request.

If you have questions or additional requests for information, please feel free to e-mail Brad Watson, President of PMP, at mailto: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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