As we are in budget season for the next fiscal year, I thought I would review the budget process and where we are in the cycle in regard to the 2018 budget for the KCA.
Homeowner association budgets are sometimes referred to as “zero-based” budgets meaning the purpose of the association’s budget is to pay for the expenses of running the association and to save for large future expenses. At the end of the year, theoretically, there should be zero in the operating bank account (though plenty in the reserve accounts). In practicality, that doesn’t usually happen. The budget is a road map by which we try to get where we’re going, but we can’t foresee every pothole in the road. The budget numbers are arrived at, by looking at historical expenses and projecting what those same services will cost the following year. Most larger associations have a committee that is dedicated to looking at the association’s financial position throughout the year and assisting with the budget for the next year in partnership with the community’s Treasurer.
In 2011 the Budget and Finance Committee (BFAC) was named a standing committee through a resolution of the Board, Administrative Resolution #20. Its role is to formulate a draft budget, with the Community Manager’s help and input that it can then present to the Board of Trustees. The BFAC has no power to implement any of the suggestions, only to make recommendations to the Board based on their research and observations.
Since the inception of the BFAC, the Association’s Treasurer has been the liaison from the Board of Trustees to the committee. The liaison does not get a vote on any items that the committee feels they need a consensus on; the liaison is there to offer advice and feedback. The liaison may have input that effects the committee’s recommendations and can take questions from the committee back to the Board.
All committee members are appointed, per the association’s recorded documents, by the Association’s President. It is helpful if the members have a financial background, but not absolutely necessary. The BFAC, as a rule, begins to meet in February or early March. The first meeting usually consists of reviewing the previous month’s financials as well as the closed books from the previous year. The second meeting has the committee reviewing the final audit from the previous year and becoming familiar with the KCA’s Reserve Study, which is incorporated into the budget. By late spring, the committee now has enough information from historical data from the previous year and current data from this calendar year to actively begin to work on specific line items in the upcoming budget.
This process takes several meetings to complete with the goal to have a draft budget for the Board’s review at its August meeting. This allows the Board time to send the budget back to the committee with any revisions they would like made before the Board sees the final draft at its September meeting. The Board then approves the draft budget to be published for Titleholders comments before formally adopting it at the October meeting.
While every effort is made to get accurate data both from past expenses and projected expenses, as we know in our own lives, every expense cannot be foreseen. Part of your Board of Trustee’s role is to plan for the needs of the community over an extended period of time. This is why it’s important to save (reserves) for those large expenses that we know will eventually come (clubhouse roof needs to be replaced) and having an up-to-date Reserve Study helps identify those items and estimates what the cost of those expenses will be.
If we project that the clubhouse roof needs to be replaced in five years at an expense of $25,000, then we would want to save in reserves $5,000 a year over the next 5 years to anticipate that expense. The Reserve Study might take fifty such items into account, assign them a replacement cost and estimate the year the repair will need to take place. All of this information goes into a table, formulated by a professional engineer, which estimates what the association will need to plan for over an extended period of time.
The Kentlands has a General Reserve and a Recreation Reserve schedule that are generated from this information. The association also has a Capital Reserve, to save for items that we may want but don’t have yet (electronic Clubhouse access system, for instance) and last year, a Snow Reserve was created. The snow reserve last year was only $5,000, but over time it will grow and take the pressure off the budget in those years where the dollar amount set aside in the budget for snow removal is inadequate, such as the winter before last when we received 30+ inches of snow.
While the expense of the retaining wall is in the past, the KCA is still in the process of paying back bank loans that were taken out to complete the repairs, avoiding a special assessment of titleholders at the time. In addition, after the General Reserves were drawn down for the repairs, money was borrowed from the Recreation Reserve as well. As all reserve money is earmarked for specific future repairs, it must be replaced so that it is there when we need it.
The BFAC is working hard to meet all of the association’s commitments while trying to avoid any additional costs to homeowners for next year. Being new to the Board this year and my first time as liaison to the committee, I have a new appreciation for the time and effort that goes into this process. I want to thank the volunteers who have given their time to this process and to the General Manager, Beth Brittingham, who works diligently in the background to provide the necessary data the committee bases its recommendations on.
We are one meeting away from being ready for “prime time.” Stay tuned!