From the HOA Files: HOA budget shortfalls
special to the daily
If your homeowner association has been budgeting sensibly, any annual net loss should be minimal. If, however, your association is like many in these difficult times, it is likely suffering from a budget shortfall due to higher than expected delinquency rates, operating expenses exceeding expectations, significant unbudgeted expenses, poor financial oversight … or a combination of the above.
To ignore a budget shortfall can be a slippery slope to financial disaster. Here’s a few pointers to help avoid such a ruinous event:
n Governing documents – review the association’s governing documents and written policies for budgetary and lending guidelines.
n Budget – be realistic in preparing your association budget and compare against actual income and expenses at least quarterly. Assign real numbers in the months they are expected to occur, allowing for traditional annual increases. Require board approval for payments of non-budgeted or non-recurring expenses in excess of an established limit. Identify and pare down discretionary items.
n Reserve Fund – borrowing from the reserves, or underfunding them (it’s the same!), should not be carried out without careful consideration by the board. The Declaration will usually state the parameters under which the reserves may be used. Is money permitted to be used to counter operating losses? When and how will the money be repaid to the reserves? What are the tax implications?
n Other Funds – does your association maintain a Working Capital or a Deferred Maintenance Fund. Look to these for any excess than what is required, or perhaps a loan.
n Financing – necessary capital maybe advanced from a financial institution, either through a line of credit or a structured loan. Usually a loan is secured by a pledge of future assessments.
n Assessments – regular assessments may have to be increased to offset anticipated budget shortfalls, or to pay back any loans.
n Financial reporting – any loan from a fund or bank needs to be authorized by a board resolution and reported correctly on the financial statements. Talk to your CPA about how to structure this.
Don’t ignore, or defer indefinitely, any substantial budget deficits. The financial well-being of your association is at risk.
Murray Bain is a community association consultant and is certified by the Community Associations Institute as a Professional Community Association Manager (PCAM). He is based in Frisco, and can be reached at (970) 485-0829, or email@example.com. As always, seek the counsel of professionals; your attorney, accountant, your management.
Start a dialogue, stay on topic and be civil.
If you don't follow the rules, your comment may be deleted.