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Contractual items such as insurance, management fees, landscaping and snow removal are considered operating expenses. Associations need to consider historical data, known contracts, and understand and identify past variances in the budgets that lead to surpluses or deficits. Budgets should incorporate cash expenditures and not expenses as codified by Generally Accepted Accounting Principles (GAAP). For example, if an association has a loan, the total principal and interest payments for the loan should be incorporated in the budget and not merely the interest which is expensed on the statement of revenues and expenses.


$ Maintaining a Budget


Budgets may at times change during the year once voted on and approved at open board meetings. While this is not to say total assessments change, the amounts budgeted for certain line items can change to reflect some unforeseen situations. For example, if there is a blizzard in February, and the association has already exceeded the budget for additional snow removal, the board may resolve to amend the budget and adjust other non-necessary expenses to determine which items may be adjusted or postponed to a subsequent year. If this is not an option, and no line items can be adjusted (i.e. all planned expenses are necessary), the board may need to inform the owners that the association will be spending more than originally planned, and the budget may be out of balance.


In addition, once the prior year financial statements are finalized and the surplus or deficit is known, the association will need to decide whether to incorporate any surplus or shortage into the current year’s budget or incorporate it into the budgeting process for the subsequent year.


What happens after the year ends? In 2018, some changes were made to the Illinois Condominium Property Act. One of the new provisions to the Act states at the end of an association’s fiscal year, if the fiscal year ended with a surplus of funds over actual expenses and if there are no contrary provisions in the association’s governing documents, the association shall account for the surplus in one or more of the following ways:


• Transfer the surplus to the association’s reserve (replacement) fund;


• Return the surplus to the Unit Owners as a credit against the remaining monthly assessments for the current fiscal year;


• Return the surplus to the Unit Owners in form of a direct payment to the unit owners; or


• Maintain the funds in the operating account, in which case the funds shall be applied as a credit calculating the following year’s annual budget.


$


This provision also provides that if the fiscal year ends in a deficit, then, to the extent that there are not any contrary provisions in the association’s governing documents, the association, may address the deficit by incorporating this amount into the following year’s annual budget.


The surplus or deficit can be determined either by having an


audit, review, or compilation performed by an independent accounting firm. If an independent accounting firm does not perform one of these types of engagements for the association, then the association’s internal financial statements may be used.


$ • special assessing for the deficit


• reducing the amount the board is transferring to the replacement fund. This is not a recommended practice since this deviates from the funding plan provided by the reserve study and can have a severe impact on the association’s future.


If the association has a significant deficit, the board may decide not to burden the owners with a one-year special assessment, but rather suggest a multiple year assessment in order to bring the operating fund balance to break-even. One issue to consider then is a possible future change of unit ownership, and effect of this on any market values. The board should strongly monitor any additional future deficits. No one, from renters and owners to property management companies, prospective unit purchasers, and audit firms, likes the sound of special assessments. While special assessments may arise from immediate unforeseen non-budgeted major items, preparing and monitoring the budget, and keeping pace with the recommended reserve funding can help mitigate such situations.


As stated previously, Illinois has mandated the ways to address a surplus. However, there has also been a trend of associations creating “contingency funds.” The association needs to be sure the establishment of this type of fund is allowed with the association’s Declaration. If not designated in the governing documents, the association should define what the fund is to be used for and what amount the association feels it needs in the fund. An association may want a contingency fund to account for unanticipated operating expenses, the ability to pay vendors on a timely basis, or even to provide a sense of security that the association has operating cash at its disposal. It is crucial that board members understand the permitted uses of contingency funds as outlined in the association’s governing documents.


Ultimately, the most important planning tools the association has is its annual budget. It is essential that the association’s board monitor actual expenses as compared to the budget and understand the reasoning behind the cause of any surplus or deficit. The board should address this through a thorough budgeting process. As Ty Webb said, “See your future...be your future...make it.” The association’s board and management can enhance and maintain the association’s future by keeping a watchful eye on the budget.


www.cai-illinois.org • 847.301.7505 | 25


 While the board must be able to understand what caused a deficit, they should plan to address and recoup the deficit from the owners. Deficits should be addressed either by:


• reducing subsequent year expense items, or increasing the assessment amount


$ $ $


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