Budgeting 2016 - Oh, Oh!

It's that time of year again for the annual budget meeting. This is one of the more difficult tasks faced by boards. But this task should not be more difficult than necessary. In fact, it is my opinion that boards frequently get caught up in emotional issues and beliefs. These then become translated into positions. Rational discourse can be difficult. It happened last year and it will happen again on Thursday.

Why is this? IMHO, some boards fail to understand the budgeting process. Large numbers can be scary. We may fall back on simplistic arguments "Fees must always increase."

It is essential to establish budgeting priorities, work with management and do our fiduciary duty while operating in accordance with the Illinois Condominium Act. Even doing this, boards can stumble. Some boards were "burned" by oversights. Some members of some boards became a reaction. Others remained oblivious. Some walked when it got difficult.

This HOA apparently ignored the "elephant in the room" for decades. What is that? It's the reserves. Once called a "replacement fund" it was not the main event in the budgeting process for decades. Then in 2002 the board made a momentous decision. It decided to embark on a series of projects which would ultimately costs more than $3,000,0000. Now, that's not necessarily a problem. But it is if a HOA has falling reserve balances and less than $400,000 accumulated reserves, and collects far less than the required amount each year.

How much is $3,000,000? It's $300,000 each year for 10 years. Moving from $180,000 annual reserve collection to more than $300,000 each year is a huge change. How much? More than $30 each month for the average owner. Then add the other requirements for reserves, and requirements for increases to Operations & Maintenance and fees could increase by more than $50 a month. And they did.

A board member with decades of experience and fond of quips would use the expression "follow the money" from time to time. That's what I've been doing since about 2002.

Boards didn't do a good job of communicating the problem to owners. In fact, it remains unclear to me if the boards and presidents fully understood the nature of the problem. Where was that money to go? To new roofs, new driveways and drainage improvements necessary because of the new downspout configurations. This is simple arithmetic. Multiply the cost of one by 44 and add inflation. Voila'.

It was a very, very difficult ten years and today we are not yet complete. Why? Because we've been saving money for ten years while pushing back the replacement of some roofs, etc. So the roof in the building in which I reside is approaching 23 years of age. Not a good thing for a roof designed with a life of 18-20 years.

So What is the Problem?
The chart above shows the possible condition of reserves, looking ahead for a decade. Three board members (Treasurer, Maintenance and Projects/VP) have been working on this for over a month. In fact it was discussed by the entire board during the August meeting.

The chart which is an example and not "cast in stone" would indicate this HOA is doing a good job dealing with the "elephant in the room." It is amazing the transformation that has occurred since 2008. Remember, we have also replaced four sections of water mains and the chart also reflects the early replacement of Lakecliffe and other cul-de-sac street projects.

However, old beliefs are difficult to manage.

Budgeting can be complicated by the fact that boards should attempt to project all of the O&M costs for an entire year and not collect more than necessary. Here at BLMH we are hamstrung by the fact that our budgeting process occurs in October, long before all of the bill have come in and have been paid. In fact, to keep within annual O&M budgets boards may from time to time push current bills into the next year. Not a problem, unless someone doesn't adjust next year's budget to deal with this. From time to time such land mines have been left for new boards. I call that " throwing the new board under the bus." Can't happen? Sorry here at BLMH "been there done that."

Owners don't get very involved here. But from time to time they'll fire a board. Happened once in 2008. Owners were fed up with fee increases which were not well understood by the owner body and not explained by the boards. Some long time board members didn't appreciate being executed or the lack of confidence.

Knowing all of the above, it is easy to understand why some boards or board members might be a bit edgy about the budgeting process.

Do Fees Have to Increase Each Year?
That's one of the long held beliefs. In fact, what needs to occur each year is budgets need to be adjusted for current reality using what is known. This includes Operations, Maintenance and Reserves. Then fees are calculated. Boards are also responsible to the shareholders and are required to uphold the Illinois Condominium Act.

However, using "beliefs" some boards may count the pennies and then arbitrarily increase fees. The amount may be between 3 and 5 percent annually. In their defense, this is also an attempt to smooth budgets from year to year. But is it a backwards approach and in my opinion not proper.

In fact, boards really must focus on 10 year projections as well as annual O&M expenses. Budgeting can be complicated by the fact that boards should attempt to project all of the O&M costs for an entire year and not collect more than necessary. Here at BLMH we are hamstrung by the fact that our budgeting process occurs in October, long before all of the bill have come in and have been paid.

In any one year it is possible that reserves may fall behind, or actual O&M expenditures may increase beyond expectations. Is this a serious problem? No, it is not. Boards can compensate in the next year, can do short term (less than 12 month) borrowings against reserves to handle bills that come in above budgets. Boards can then adjust in the next year.  Simple, really.

So why the difficulty? It is a historical perspective. A few years ago this HOA had about $180,000 in reserves, had maintenance requirements piling up, didn't have an independent reserve study and frankly didn't have a plan.

Today we live in a very different reality. Good Job! Now let's act in accordance with that reality. But old habits are difficult to break.

I find this somewhat amusing. When I was attempting to join the board, there was a populist refrain "Don't elect Norm, your fees will go up!" Fear is a powerful motivator. Of course, no one runs for a board position for the purpose of raising fees? Or do we? Of course, no one would get elected if they published in the bio "I want to raise your fees by 10% a year." But at times I do wonder. Actions speak louder than words. I hope owners are watching. Very few attended last year's budget meeting. They missed some interesting and contentious discussions.


Notes:
1. Updated to correct description of one chart item.
2. We have 4 small residential buildings. The remainder are double the size of the small.  I use 42 as an average.