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HOA Budget Planning: Guidelines for a Smooth Budgeting Process

/ 6 min read

Homeowners association budgets have many elements, which means difficult decisions are often part of the budgeting process. If you’re wondering how your HOA can navigate through some of these decisions, you came to the right place.

Where to get started
First, the requirements found in your state statutes and HOA documents will filter out some of the decisions. If it’s legally mandated, there’s no question.

Next, revenue and expenses must be reconciled – balanced with owners’ needs and desires (mandatory versus discretionary expenses). It’s tempting to think of budgeting for long-term large expenses as discretionary. That’s why you have to ask yourself—what’s best for the HOA? And the answer is long-term budgeting is good for the HOA, and here’s why.

Operating budget versus long-term reserve budget
Both annual operating budgets and long-term reserve budgets (studies) are essential to the health of an HOA. Each are very different, serving unique purposes with separate bank accounts. Yet they are interdependent, primarily supported by the same revenue source – member dues. To help you understand the differences, here are some distinctions:

Operating BudgetReserve Budget (or Study)
Covers a 2-3-year periodCovers a 5-30 year period
Outlines monthly or routine expensesFunds are saved for large capital replacements or repairs
Is adjusted based on things like dues increases and expense reductionIs adjusted by special assessments and/or loans
Funds are managed from a checking accountFunds are managed in an investment/interest-bearing account
Manager may have payment authorityBoard check signatures/authority required
Staff and/or service vendor term contractsOne-time or project-based vendor contracts

The two budgets interact by having monthly contributions to the reserve budget, which should be a line item in the expense section of the operating budget. In part, the reserve contribution is determined by two main factors:

  1. Operating Expenses. The starting point for an HOA operating budget is knowing what you spend. Using 2-3 years of historical expenses and revenue is ideal. Audited financials are preferred, providing objective facts that are hard to dismiss, when used in forecasting future expenses. Expenses come in two basic categories—those you can control and those you can’t. Discretionary spending is the easiest place to cut. Other cost-cutting may involve capital improvements, such as conversion to LED lighting, or lawn reduction to save utility costs. Other expenses offer little or no board control. For example, contracted vendors will likely pass through mandated wage increases to the HOA. Insurance premiums will increase, following claims from the previous year’s policy. As expenses are totaled, consider this as a general rule: smaller expense overruns can be accommodated with increases to dues and/or cost-cutting measures. Large overruns, or seriously underfunded reserves may require special assessments or financing.
  2.  Revenue/Income. In community associations, revenue sources are dominated by member assessments, a.k.a. dues. A conservative budget may not necessarily include less reliable sources, such as clubhouse rental, parking permits, non-compliance fines, or other inconsistent income. However, with enough historical data, a baseline of miscellaneous monthly income can be included in revenue totals.

Of course, no one can accurately predict economic factors. The most recent example was the downturn of 2008-09. Many HOAs suffered significant revenue loss. Owners who defaulted on their mortgages, had no reason to continue paying HOA dues.

Elements of the Final Budget

  1. The overview – gives a high-level description of how and why the board came to its necessary budget conclusions, especially important when dues are expected to increase. Including expenses shown as a percentage in a pie chart, or historical expense increases displayed in a bar or line chart can help members visualize the costs faced by the HOA. 
  2. The line-item budget – for those analytical members who want to drill down into the details. 
  3. The budget narrative – provides brief explanations of budget line items. This is especially beneficial for large expenses or changes from the previous year.
  4. Annual disclosures – gives owners and potential buyers a clear understanding of the HOA’s current and expected future finances.

Looking for a sample HOA budget?

Download an example of a small or mid-size HOA budget. And for more help on HOA Finances, download these Best Practices

We would love to hear from you, especially if you have any questions.

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