The association board is responsible for preparing the HOA budget, but this task is more than just listing down expenses. Boards must rely on assumptions about future costs, income, and financial conditions. If these assumptions are unrealistic, the association may face funding gaps, forcing the board to either levy special assessments or significantly increase dues.
What is the HOA Budget?
Everything starts with the homeowners association budget. The budget is essentially a forecast of all expenses, with the board estimating how much the association will spend in the next year. From these estimates, the board will calculate how much it must collect in dues to meet funding needs. A condo budget works similarly.
The HOA budget is integral to operations because the board uses it to project accurate dues. It ensures that the association has enough money to cover expenses and keep operations going. Furthermore, it supports long-term stability by minimizing the association’s debt and maximizing reserves.
That said, the budget consists only of projections, not exact figures. To arrive at accurate estimates, the board must make assumptions on expenses, revenues, and reserve funding. Unrealistic projections can stifle cash flow.
Is an HOA Budget Required?
Yes, association boards are required to adopt a budget, as per state laws and their governing documents. In Illinois, 765 ILCS 160/1-45 lays out the HOA budget requirements.
According to this statute, boards must provide a copy of the proposed annual budget to all homeowners at least 30 days but not more than 60 days before adoption. This budget must indicate how much is allocated for capital expenditures, repairs, real estate taxes, and reserves.
HOA Budgeting Assumptions to Promote Accuracy
When projecting the HOA budget, boards must make certain assumptions to get more accurate estimates.
1. Utilities
In single-family HOAs, utilities are typically confined to common areas. Meanwhile, in condo communities, the association may cover utility expenses.
The board must also take utility usage into account. Heating systems are used more during the colder months, leading to higher gas or electricity costs. In the summer, water consumption will rise.
Additionally, utility providers may raise their rates in response to economic factors. It is common for providers to increase rates every year, so the board must adjust the budget to accommodate these changes.
2. Insurance Renewal Timing
Insurance costs often rise annually due to market conditions. For example, if an area experiences more natural disasters, carriers will likely raise premiums on coverage. Claims histories and industry-wide rate adjustments can also affect premium increases.
To avoid budgeting surprises, the board must estimate renewal increases before the actual renewal date. If a policy renews mid-year, for instance, the budget must reflect both the current premium and expected increase.
3. Payroll and Vendor Escalators
If an association employs on-site staff, wage adjustments must also be considered. Payroll expenses include salaries, benefits, and payroll taxes. Check local wage trends and review employment agreements before finalizing the projections.
Vendor contracts may also contain escalator clauses. These provisions allow vendors to raise prices every year to keep up with inflation or other rising costs. Boards should review these contract terms carefully.
4. Reserve Contributions
Reserve contributions take up an essential portion of the HOA budget, too. These funds pay for major repairs and replacements in the future. Boards should check their reserve study to understand how much homeowners must contribute each year.
That said, reserve needs don’t stay fixed forever. Construction costs can increase, and components may deteriorate more quickly due to weather and other factors. To avoid surprises, the board must have the association’s reserve study updated every few years. This ensures that projections remain accurate according to current market and asset conditions.
5. Delinquency Rate
Homeowners are obligated to pay regular dues to the association. These dues serve as the community’s primary source of income. Even so, not every owner will pay on time or in full.
Boards must expect some level of delinquency. Homeowners might face financial hardship, or disputes may cause people to intentionally default. A small percentage of dues will likely go unpaid, creating a budget gap.
Association boards must account for this delinquency when crafting the HOA budget. Past financial reports, particularly delinquency reports or AR aging reports, will provide useful insight into delinquency trends. For example, if historical data shows a five percent delinquency rate, it’s safe to assume the same for the coming year.
From there, board members can cushion the budget to ensure delinquencies don’t affect cash flow. This way, even if some owners don’t pay, the association will still have enough operating funds to cover daily expenses.
6. Maintenance and Repairs
The age and condition of infrastructure will often dictate maintenance costs. Over time, as components deteriorate, the association will need more aggressive and expensive maintenance plans to keep the property in good shape.
Unexpected repairs may also come up. While reserve funds cover major replacements, operating budgets should still have room for routine repairs. Adding a line item for unanticipated repairs should help keep the association in the green.
7. Legal and Administrative Costs
Legal and administrative expenses can also vary from year to year. Contract reviews, policy updates, and regulatory requirements can all increase costs in one way or another. Boards must account for this by making adjustments accordingly.
Best Practices for HOA Budget Planning
Preparing the annual budget can be challenging, especially for boards with little to no experience. That said, there are still some strategies boards can adopt to ensure proper budgeting.
- Review Historical Data. Boards should never make assumptions without a basis. Historical financial data is a good indicator of trends and how much the association should expect to spend.
- Consult Vendors. The best way to predict vendor price increases is to talk to the vendors themselves. Ask them about any anticipated spikes, and if the relationship is healthy, try for a discount to lower costs.
- Rely on Reserve Studies. The reserve study is a valuable planning tool that boards should never ignore. This study helps the board estimate reserve contributions, so updating it every few years is a good idea.
- Work With Professionals. Hiring an HOA management company is the best option for budget planning, as professional managers have the expertise and training necessary to complete the job.
For the Good of the Association
The HOA budget plays a key role in continuous and successful operations, including financial management. Board members must understand how to prepare this budget as accurately as possible. In doing so, they can prevent significant increases in dues or special assessments, keeping everyone happy and the community well-funded.
Hillcrest offers HOA financial management services to communities in Chicago. Call us today at 630-627-3303 or contact us online to request a proposal!
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