No-one likes to write a budget, especially now when money is tight and associations may be feeling the strain of rising receivables. Presently the law makes no provision requiring the funding of reserves although some of the government’s insuring agencies are demanding to see at least 10% funding annually. What’s a board to do?
Usually community budgets start with the various sources of income and then list by category the expenses divided into administrative, common area repairs, utilities and finally the reserve deposit. The reserve deposit is where they should start. All too often the reserve deposit is the balancing number between the expected income and the expected normal expenses.
In my view the process should start with an analysis of the reserve study and its projections. The reserve study, which is usually prepared by a third party who provides a dispassionate view of the number of years a capital item has life and its anticipated cost of replacement. They include a modest projected interest rate on both the funds being reserved and the likely cost when the item is to be replaced. From that study they propose a variety of scenarios for achieving full funding of the reserves and alternative plans for shorter terms. Boards should review that study and select a rate at which they choose to fund the reserves to meet a certain objective, such as to be 60% funded in say 5 years.
From that decision they can determine what amount to set aside for the forthcoming years as a reserve deposit each month.
Then working upwards they would determine say the cost of utilities for the ensuing year, followed by maintenance and administration. The sum of these costs will provide a total expense for the coming year. Divide that by the number of units and that is the amount of dues needed from each unit annually.
Sadly boards and managers start from the top and decide not to increase dues FIRST and then shuffle the numbers to fit that scenario leaving the reserve amount until last. It is the leftover difference between income and expense.
While that will make perfect arithmetical sense and be exactly correct it make consideration of the reserve study almost worthless.
In 2006 we suggested making a provision for bad debts. There were howls of derision. “That will mean we have to raise the dues, we have no money for that.” When the results for the year came in, the lack of a provision resulted in a shortage of funds transferred to reserves. Following my suggestion, at least in the drafting stages, allows an association to see the real cost of doing business and therefore the necessary dues required. Any shortages can be seen in advance and perhaps alternative changes to the line items can be made to cover whatever increase in dues is suggested by the study.
2362 – 490