Budgets for Homeowner Associations
The California Civil Code requires that each association distribute a Budget to all owners within 30 to 90 days before the start of the next fiscal year which means that the Treasurer working with the management company should provide the board with a draft budget at least 150 days before their year end. See: Example Timeline.
Property Supervisors are to assist each Board in preparing a Budget that can be distributed in accordance with the Civil Code. Be certain to allow sufficient time for the board to review, discuss, and approve it.
Failure to comply with the distribution requirement suspends the Board's right, without approval of the membership, to increase assessments up to 20% per year.
When updating a Budget from the prior year, it is sometimes best to use the existing Budget as a starting point and to make the following adjustments:
- Add any line items that are needed to provide the detail required for proper analysis and control. The standard Company "Chart of Accounts" will provide you with a comprehensive list of possible items.
- Delete any unnecessary or unused line items.
- Where possible, the Budget should reflect the actual contract cost of basic services. Good examples are landscaping service, trash service, elevator maintenance, management, and pool maintenance.
- Calculate extra charges to the basic services referenced in #3 above based upon historical averages adjusted for reasonable inflation.
- Where it is not possible to use actual contractual costs, use an average for the last 6 to 7 months adjusted for reasonable inflation. If you know that the average for the last 6 to 7 months need to be adjusted for a reason other inflation, explain the reason for the adjustment in a footnote. A good example would be to allow a higher level of maintenance.
- Use the last Reserve Study to determine the reserve allocation. If the association does not have a current Reserve Study, indicate on the Budget that the Association needs an updated Reserve Study as follows: "Updated Reserve Study Required."
- Calculate the Allowance for Bad Debts as realistically as possible based on known delinquencies that are expected to be uncollectable. Uncollectable is the keyword.
When calculating the new Budget, use the Budget Work Sheet - HOA's form which was designed for this purpose. Before a draft of the revised Budget can be sent out to the Board of Directors for their comments, the Operations Manager is to approve the draft. When the new Budget draft is completed, it should be clearly designated as a draft. Attached to the draft should be a copy of the prior year's Budget along with year-to-date operating figures. This package will make the review process easier for the Board of Directors.
Permit the board of directors' sufficient time to review the draft and to get back to you. they will probably need to discuss the proposed Budget at a scheduled meeting of the board of directors. The Property Supervisor should attend if it is a meeting there we are contractually obligated to attend or if the board wants to pay for an additional meeting. Two months is a reasonable period to give them to respond. A well thought out Budget makes the Property Supervisor and Company look professional. Everyone understands the value of an accurate Budget.
While the Board of Directors has the right to adopt a Budget that may be unrealistic, this should not discourage us from preparing the most accurate draft possible. our draft is an important document that should be retained in the "Budget File" for future reference. The draft may be necessary in the future to prove that the Company provided the board of directors with prudent advice that was not followed.
American HOA Management