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Unmasking Your Association's Financial Situation

By Tara Baldwin, CPA

For the thousands of individuals across the country who live, work, and interact with community associations, the past few months have felt like we are living in a world fit for a movie. Our lives have been upended in ways we could have never predicted, and it has challenged our preconceived notions of what “normal” is by altering our everyday lives. However, unlike a Hollywood thriller, Matt Damon and Brad Pitt won’t be jumping out of a plane to save us. It is up to those involved in the leadership of their respective community associations to take the reins and face the challenges of today, tomorrow and those that lie further into the future. One way of ensuring the financial health of an association is in having a strong budget process. An association’s budget has a direct impact on its short and long-term success and is critical to how Boards manage the maintenance of the common elements, services provided to the community and their ability to navigate unforeseen circumstances.

Even in the pre-COIVD-19 world, budgeting could be a daunting task for associations. There is a delicate balance in managing the amount of maintenance fees being charged to owners- who are the friends and neighbors of board members- and maintaining a level of service in the community that is adequate to meet its needs. Budgeting is the foundation for all financial decisions made by the Board and can provide guidance in mitigating the unexpected expenditures that have a habit of sneaking in throughout the year. Benjamin Franklin once said, “By failing to prepare, you are preparing to fail”. This quote can be applied to the financial decisions of a community association. For example, in the present day, “new normal” associations with amenities such as pools may have lower than anticipated expenses due to not opening the pool for the season. While there is a temporary savings created, Boards need to look ahead to the future before making a decision about what to do with this “excess”. Are there maintenance expenses that have been neglected due to delinquency issues that these funds can be allocated to? Are there other areas of the association where sanitation costs are going to drastically increase over what is in the budget due to new health restrictions? Have unit owners still been making regular maintenance fee payments or are communities starting to see an increase in delinquencies similar to the Great Recession in 2008? These are just some of the questions a Board needs to reflect on during these unprecedented times.

Economic uncertainty often causes boards to pinch their pennies more than they normally would. Many associations are approaching budget season and now is the time to make decisions that will impact the financial future of the community. When planning during these uncertain times, there are things a Board should consider when drafting their budget.

  • What value are the decisions being made bringing to the community? While there is a lot of pressure to keep costs minimal, going with the lowest bid does not always translate into bringing the most amount of value. It is human nature to be fixated on a price point, however, heightened focus on the price should not lead to the elimination of the “bigger picture”. If value or quality is sacrificed, the long-term effects on the association could be much more expensive to remediate.
  • What short-term impact has COVID-19 had on the association? Whether this is a fluctuation in costs, an increase in delinquencies, or the closure of certain amenities, the situation needs to be evaluated and incorporated into the budget planning process. While no one has a clear picture of what the “new normal” will look like, it is more important than ever to be realistic and set maintenance fees at a level that can maintain all necessary expenditures.
  • Has your budget grown? For some associations, two consecutive years of minimal snow removal plus the closure of many amenities due to COVID-19 has presented a challenge that may not be too familiar to many boards: a surplus. While this can be viewed as a “good” problem to have, it is nevertheless imperative that boards develop a plan to address a surplus. Boards have many options available to mitigate a surplus- increasing contributions to the replacement fund, accelerating a large project – just to name a few. However, forward-thinking and proactive planning is imperative when choosing how to navigate a surplus issue since so much uncertainty exists right now. These decisions need to be well-thought-out with consideration given to how it potentially impacts each line of the budget.

WilkinGuttenplan’s professionals are a great resource for guidance during this time to assist an association in addressing many of the questions and concerns raised here. Each association and its board are facing their own unique set of challenges, questions, and circumstances so there is no “one size fits all” approach when developing a budget and planning for the future. Just as our physical health has been at the forefront of conversation with friends and family, the financial health of an association needs to be at the forefront of the planning conversation during these unprecedented times.

Questions? Ask a WG Advisor