For those whose upcoming fiscal year begins January 1st, budget planning is in full swing. Often times, this begins with the community's Association Manager obtaining an updated reserve study.
A reserve study is a budgeting and planning tool prepared by an independent reserve specialist and used by Associations to determine the expected and remaining useful life of common elements. Common elements typically consist of items accessible to or used by a majority of Homeowners and are often maintained by the Association as a common expense. The study also outlines the projected replacement cost of the elements as well as reserve (savings) recommendations and strategies.
After the reserve study has been received, reviewed and approved by the Board of Directors, the initial budget preparation begins. Commonly, this starts with a budget planning session in which the Board identifies upcoming planned projects and the community's needs. After setting goals for the upcoming year, the draft budget is prepared. As non-profit corporations, Community Associations budget to bring in exactly what they plan to spend each year. Association assessments are directly linked to the budget. If an Association's expected annual expenses are $100,000, it must bring in $100,000 of income during the year to cover these costs. Typically, an Association's sole source of income is owner assessments and as such, the amount paid by owners directly mirrors the expected expenses.
Identifying the Association's financial responsibilities, as outlined in its governing documents and State Law, its planned projects and reserve savings strategies, helps to determine the expected costs for the upcoming fiscal year. Generally, recurring expenses such as utilities and landscaping maintenance are known and easily factored into the budget. In addition, budgeting often includes the review of historical spending trends.
While an Association may wish to keep costs low, if it historically spends $1,500 per month on necessary building maintenance, it should budget at least $1,500 per month for building maintenance in the upcoming fiscal year to ensure sufficient funds are available. Some discretionary spending, such as landscaping improvements, can be postponed in an effort to reduce expenses, but known, recurring expenses cannot. While an Association may wish its building maintenance cost $500 per month, it must consider trends and history. Wishful thinking cannot discounts facts and trends.
Once a draft budget has been approved by the Board of Directors, it is presented to the Homeowners for review and ratification at the Budget Ratification Meeting. Under Washington State Law, unless a majority of voting power within an Association vote against the budget, it is automatically ratified and will go into effect at the start of the fiscal year or other period, as determined by the Board.