Spreadsheets, Charts and Graphs - Operations & Maintenance (O&M) Budgets

 

Comparison, approved O&M budgets 2011-2018
and projected year end budgets.
If the "Projected Year End" is less than the "Approved budget", 
then a board has spent less than the fees collected, and a surplus was created.
Better controls = better and more stable budgets
Caveat: Kicking the can down the road, an old favorite technique
of boards prior to 2010 will fool current owners and penalize future owners
with higher fees and inadequate maintenance.

Note : click on images to enlarge.

Spreadsheets, Charts and Graphs - An Aid to the Board in Making Better Decisions

This is one in a series of posts about how spread sheets which can then produce charts and graphs are very helpful when boards need to make financial decisions.  This is particularly true with delinquencies, budgets, bid reviews and Replacement Fund studies and decisions.

Not all board members agreed about this when I was a board member for eight years. In fact, one very long serving member insisted that she "could run this place with a columnar pad" and in the past the board did.  However, those boards also raised fees relentlessly and continued to vote for fee increases even when the numbers indicated a large surplus existed for the prior year (see the 2019 budget).

This post looks at Operations and Maintenance (O&M) budgets. These are short-term budgets for a single year.  The O&M budget is separate and distinct from the Replacement Fund (reserves) budget.

The following chart compares O&M approved budgets to O&M year end projections for several years.  As you can see, the budgets generally increased each year.  However, the projected year end surpluses increased as the expenditures decreased.  That was not an accident.

Boards must be cautious, and sometimes first glances at data can result in poor decisions.  There is a lot of information and board decisions behind the graphs below.   An analysis of the categories of the budget each year in October-November provided insights into why there was a difference between Approved (designed)  and Projected Year-End budgets.  In some years, the approved budgets were too large or small.  That knowledge was used to make adjustments when determining the budget for the next year. However, a board member should be careful to do the work to determine why and how approved budgets deviate from the projected year-end budgets.  As a board member I did not allow a single problem or issue sway the design for the following year.  For example, a large snowfall season (ice and/or snow) can have a significant impact on the expenditures for that category in one year. A spike in water bills certainly warrants a careful determination of how and why. So too if the Grounds Maintenance expenditures were larger than anticipated.

Not all board members do the analysis required and some merely argue for higher annual fees; i.e., increase the budgets by 3% or so each year.  It may be tempting to use inflation as a guide or justification. But the CPI-U is not useful for determining a HOA O&M budget increase or decrease.   

Changes in contracts, utility price hikes, anticipated weather patterns, and so on are useful for determining future budgets.

At BLMH we did repairs 2011-2018 which were intended to not only maintain the association, but to also decrease the annual O&M expenditures.  Improving efficiencies is one way, stopping waste is another.  Doing meaningful and long term repairs is another. Such repairs can reduce the maintenance hours spent each year. Maintenance  hours come out of the O&M budget. Similarly, landscaping improvements such as transitioning from decorative wood chips to stone can reduce annual O&M expenditures by $20,000 or more, if it reduces the annual cost of chips, reduces flooding and maintenance around buildings.  I've published lists of maintenance and projects which were intended to have long term benefits while reducing annual costs, with no reduction in services, etc.  

O&M Budgets - Approved budget compared to actual (projected year end)

Next is the same chart shown above, but with trend lines added.  The trend lines indicate something interesting.  The black line is the approved budget designed each fall. The red line is the expenditures projected for the year, as determined about a year later, after much of the year had passed.  Comparing the two is something that the board should do when determining the budget for the next year.  The board should also question any anomalies.  I did, but not all board members do. 

In the chart, the black trend line is the approved budgets ········ . That trend line indicates that annual O&M Approved Budgets increased by about 13.64% over a 7 year period. That's an increase of about 1.95% each year.

The red trend line for the projected year-end budgets ········  indicates actual annual expenditures increased 2.29% over a 7 year period. That's an increase of 0.33% each year. 

If we compare the approved to the projected year end O&M budgets it seems a surplus occurred.

During the period 2011-2018 the board Approved O&M budgets collected $7,214,060 via owner fees. (Note 3).  That was about $256,186 more than was spent.  (Note 2).  Such a difference between budget and actual is a surplus, which normally flows into the Replacement Fund as reserves.  I've included a summary for boards of the seven year period 2004-2010 (Note 4).

Interestingly, some board members will conveniently ignore surpluses when arguing for a fee increase during the budget process.  In the fall of 2018 with my departure from the board, the president promoted and the board unanimously voted for a 1.88% annual fee increase. The budget and projected year-end numbers indicated a large surplus. (Note 1). but some board members are never deterred by the facts.

O&M Budgets - with Trend Lines added  
trend lines are dots  ········

Scale is important.  Altering the x-axis, which in the chart above is dollars, amplifies, or exaggerates differences, making these more apparent.  It can also distort perception.  Below is the same chart, but with a different x-axis scale.

Operations & Maintenance Budgets - 2011-2020

I created a series of spreadsheets as an owner and later as a member of the board to monitor and compare changes in the O&M budgets. It included approved budgets and projected year end numbers. These were gleaned from the financial information the board released to owners during the budget approval process.  

The next chart is one. It provides and indicator of how designed budgets actually performed, and of the trends in rising or falling O&M costs.  You will note that budgets stabilized as better financial controls were implemented by the boards. 

Projected O&M budgets 2011-2004
My spreadsheet as an owner and not a board member

Next are a several charts I created as an owner, before I was elected to the board in the fall of 2010. I would update these each year after the board released the "official" annual budget to owners. 

I didn't achieve a board position until September 2010 (Note 1):

Percent Change in O&M Budgets, year by year 2004-2011

O&M Budget Graph
Change year by year, in percent 2004-2011

Here's a comparative graph I created in November 2011 and a table. This provided two things for the board. 

1. An indicator of the magnitude of various O&M bills.
2. A comparison of two years.

I produced the following pie chart presented to the board during an association meeting. They liked it, and it was put in the association Newsletter. This led to other spreadsheets, charts and graphs:

Budget pie-chart produced 2011 and put in the Association Newsletter

 

Here's a comparative graph I created in November 2011 and a table. This provided two things for the board. 

 

 Notes:

1. A cabal of owners did their best to keep me off the board, even chanting "Norm will raise your fees".  That worked for a year or so.  Fear is a powerful motivator, particularly in the midst of a banking crises and deep recession.  The cabal succeeded until September 2010.  Even after I achieved a board position, one individual persisted and issued an email telling select owners that "Norm is dangerous".  It took a letter from my attorney to put an end to that nonsense.  The lawyer and letter was paid for at my expense, of course. Those owners were wrong, which makes one wonder why they were so dead-set on keeping me off the board.  One possibility is that some owners wanted to keep their friends on the board.  Did I raise fees? Here's a table with the fee reality.  Pay particular attention to the fees from 2011 until 2018, when I was a board member, and compare them to the years prior and to 2019: 

2. Actual annual budget surpluses or deficits are determined via audit. However, audits are completed months after a new budget is created and approved. For example, the budget for 2018 was created in October-December 2017.  The projected O&M expenditures were determined about a year later, in September-October 2018.  The audit was completed and reviewed by Management and the Board in 2019.  That audit for the calendar year ending December 31, 2018 was dated September 19, 2019 by the accounting firm that prepared it.   I know this because I requested a copy and after months of delays my threat to get an attorney involved, the board finally relinquished and gave me a copy. 

 3. Owner fees contributed these amounts in the seven year period 2011 through 2018:

• Replacement Fund (Reserves):  $3,270,920
• Operations and Maintenance (O&M):   $7,214,060
• A portion of O&M was identified as a surplus: $256,186 (Note 2).
• Fines and late fees contributed additional amounts. 
• The O&M budget was about 69% of the total over the period 2011-2018.  

           4. Budgets for the seven year period 2004 through 2010. I provide this for comparison purposes to the budgets in Note 3.:

• Total to Replacement Fund (Reserves):  $1,816,915
• Total to Operations and Maintenance (O&M):   $6,435,701.
• Total Estimated portion of the O&M identified as a surplus: $66,238 (Note 2).
• The O&M budget was about 87% of the total combined budgets over the period 2004-2010 (Replacement fund + O&M budgets). 

(c) N. Retzke 2021