Every community association must prepare an annual budget and use that budget to determine the assessments to be collected for that year. The budget projects income and expenses, and since the budget is only an estimate of future expenses, unexpected events may occur that may prompt the board to make changes to the budget.
A budget typically has three sections: income, operating expenses and reserve funding. While there are some components of the budget that must be included within these sections per Florida Statutes and the association’s governing documents, typically an association’s governing documents also grant the association’s board of directors discretion to add additional items which the board determines are necessary for the proper operation of the association.
The income portion of the budget includes assessments collected from the owners and any other income to the association such as income from laundry services, clubhouse rentals, etc.
Operating expenses cover the day-to-day needs of the association such as maintenance, salaries, accounting fees, legal fees, utilities, insurance, professional fees, administrative expenses, taxes and management fees.
Reserves are set aside as a savings plan for specific expenditures that will be incurred in the future and that are not annual expenses. Reserves cover the long-term maintenance and replacement costs of major assets of the association.
For condominiums, there are two types of statutorily required reserves: structural integrity reserves (SIRS) and non-structural integrity reserves (non-SIRS). SIRS reserves and non-SIRS reserves are detailed in Chapter 718, Florida Statutes and are only applicable to condominium associations. While SIRS reserves cannot be reduced or waived, non-SIRS reserves can be reduced or waived by a majority of the voting interests of the association. It also bears mentioning that some condominium associations are exempt from maintaining SIRS reserves.
In a homeowners’ associations, reserves are mandatory (a/k/a statutory) if the owners have voted to establish mandatory reserves as described in Chapter 720, Florida Statutes. The governing documents may also include reserve requirements, in which case, the homeowners’ association must comply with the governing documents. Reserves that have been created by a homeowners’ association’s board are not mandatory (a/k/a statutory) reserves.
Because the majority of the funding for the association comes from assessments paid by the owners, it is imperative that the Board of Directors thoroughly evaluate what is contained in the budget.
Some good practices for creating an annual budget include:
- Start gathering information needed to prepare the proposed budget in advance. Ensure that plenty of time is available to analyze previous budgets, payment histories, costs of equipment and services, and determine whether additional expenditures are needed to maintain the property.
- Schedule meetings of the board of directors or budget committee to gather and discuss information and make decisions, and make sure to properly post notice of such meetings.
- Review at least the prior year’s actual expenses to properly project future costs accurately.
- Include a buffer for potential increases in utility rates, vendor contracts, and other costs.
- Obtain bids for major contracts and insurance to ensure competitive pricing.
- Ensure the budget complies with Florida statutes and the association’s governing documents.
- Plan to have sufficient funding for the association to be able to meet its obligations despite some owners becoming delinquent.
Following these simple steps can reduce the need for an association to pass special assessments or adopted revised budgets in the middle of the year to cover shortfalls in association funds.
