Creating Budget Surpluses through better Processes

 

Budget status August 31, 2018, prior to annual budget meeting

This post will compare two budgets. The 2018 annual budget included a zero percent fee increase.  This was not an accident, nor was it a financial gamble.  This was the last budget I participated in at BLMH and it was one of a series that created a surplus.  In other words, the board ran the association in such a manner that all work per the Operations & Maintenance (O&M) budget was completed, the Replacement Fund (reserves) were fully funded, but not all owner fees were spent to accomplish this.

2018 was the culmination of 8 years of hard work and planning. 

Creating annual budgets was a challenge during my board tenure, from September 2010 until September 2018.  This period included the "Great Recession" and fallout from the 2008 banking crises. We experienced owner fee delinquencies that exceeded $80,000 in one year. Yet, we stabilized fees and avoided the 3 to 7% annual fee increases of earlier boards, and we simultaneously eliminated an extensive maintenance and repair backlog.

During this period Homeowners Associations (HOAs) experienced severe financial difficulties. Some owners found that they could not afford to pay the mortgages and HOA fees. Dealing with this was a challenge for boards.  To do so responsibly as a board member required that owners be held accountable for their agreements. In other words, all owners were equally and fairly required to pay their fees.  The budgets were constructed with that understanding, even though some owners did not, and some foreclosed.  As a consequence, annual "bad debt", which is uncollectable fees reached a peak in 2013 and 2014 of about $30,000.

Commencing in 2011 significant changes were made to better monitor and control the fallout of delinquencies and foreclosures, and in so doing, shield other owners from the consequences of their neighbor's misfortune or financial mistakes.  Earlier boards had never considered such problems and so there were limited financial controls in place.  I saw the handwriting on the wall in December 2006 and so I began preparing.  Few would listen at the time.  By fall of 2008 owners elected a new board with no prior HOA board experience, and very limited business experience.  Some said "We have enough money" but I attributed that to denial.  It wasn't until September 2010 that things had become so ugly that desperation set in among owners and some board members.  So, I got a seat on the board but it was solely because of an earlier treasurer who created a vacancy for me.  "You can lead them to water, but you can't make them drink" is an old expression.  

From the period 2011-2018 the board was diligent in collecting fees.  I've written about that in other posts.  Even so, there were significant delinquencies and "bad debt" which is owner fees and related legal collection expenses which were owed the association and never collected.

Delinquencies and "Bad Debt" 2009-2018

As a responsible fiduciary I worked to construct budgets which would balance, keep fees to a minimum, maintain the association and a balance. It isn't possible to create a "perfect" budget in which expenses match the forecast made in the prior year. As a consequence, budgets were designed to create a small surplus each year.  Of course, that might or might not occur.  The budget could balance, but it was paramount not to overcharge owners, or create a shortfall which would be an issue for the next year's board to deal with. So, I led boards in creating budgets which could include a small surplus.

That small, anticipated surplus was to be a cushion.  If such a surplus did occur, it was a contribution to the Replacement Fund (reserves).  This was important because there were failing roofs at end of anticipated life as well as failing streets and failing water mains that had to be dealt with.