birthday, most people pledge that the next year will be better than the last. Most associations probably say the same thing when it comes to their annual budget. Associations may even be thinking that this year’s budget process will be better than the prior year’s and that they will end up with excess budgeted income. What they should be thinking about is what needs to be done with any excess budgeted income. Should assessments be held at prior-year levels, or decreased, or used to fulfill some or all of your wish list?
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t’s that time of year again, and just like birthdays (but much less fun), annual budgeting is back on the calendar. On their
such as snow plowing or heavier-than-usual utility usage due to extreme seasonal weather. If you do budget for these contingencies and still do not use all of the funds during the year, you may still end up with extra icing on the cake. You may be able to transfer these unused contingencies to a separate Operating Contingency Fund to be used in the future. Associations should check their declarations first, before transferring excess operating funds. Some declarations state that excess operating income should be refunded to unit owners.
ON THEIR BIRTHDAY, MOST PEOPLE PLEDGE THAT THE NEXT YEAR WILL BE BETTER THAN THE LAST. MOST
Many associations are also not budgeting, or not budgeting properly, for all of their funds. This must be done before budgets are finalized. In addition to the Operating Fund, other possible funds to budget for include the Operating Contingency Fund, the Reserve Fund and the Capital Improvements Fund.
ASSOCIATIONS PROBABLY SAY THE SAME THING WHEN IT COMES TO THEIR ANNUAL BUDGET.
The first thing associations have to determine is whether they really will have excess budgeted income. Budgeted operating assessment income is determined by the budgeted operating expenses. Operating income is based upon billed assessment income. However, many associations do not collect all billed assessments. Every association must have an appropriate and consistent collection policy that is diligently followed, as well as a quality, experienced collection attorney. This will help minimize the number of slow- paying unit owners or units that go into foreclosure. At budget time, associations should review their aged assessment receivables and their operating assessment income, and estimate the amount that may not be collected. This estimated uncollectible amount should then be added as a line item in the budget as a contingency for bad debts.
The Operating Contingency Fund typically includes payments for painting, caulking, sealing and power washing. The Internal Revenue Service has determined that these expenditures are periodic maintenance that should be paid out of the Operating Contingency Fund and not the Reserve Fund. Since these expenditures are periodic and not annual, associations may not budget for them each year and, therefore, may not have funds available to pay for them when they are needed. As a result, the association may have to borrow funds or increase assessments in those years.
RESERVE FUNDING IS ONE OF THE MOST OVERLOOKED AREAS IN ASSOCIATION BUDGETS.
Associations should also determine whether to budget for contingent or unexpected expenses before they begin enjoying that icing on the cake. Contingent expenses can include items
Many associations do not need to budget for a Capital Improvement Fund. This fund is designated for the acquisition or construction of new common area components. Examples of capital improvements would be a parking garage, a new clubhouse, a swimming pool or purchasing additional land. As with each birthday that passes, we all become another year older, just like an association’s common area components. Aging is the reason proper budgeting for reserves is so important.
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