It's Budget Time- Did you overlook any items?

It is hard to believe it is that time of year again.  It is the end of summer and of course, the beginning of budget season.  Even though all Boards should be reviewing their monthly financial statements each month, comparing actual results to budgeted amounts and gaining an understanding as to why there are any material differences, the actual budget process begins now in August.

As an accountant and CPA involved in the condominium and homeowners association industry for over 35 years, there are certain budget items that are overlooked many times.

We all know that the amount of operating fund assessment income that is budgeted each year is determined by the operating fund expenses.  We also know that the operating assessment income is based upon the amount of assessments that are billed each year; however, Associations do not always collect all of these assessments.  When preparing your budget, an overlooked item is contingency for bad debts, which is determined by reviewing the operating assessment income that cannot be collected. 

This starts with reviewing your monthly aged accounts receivable.  Every Association needs to have a good and consistent collection policy that they must diligently follow along with a good experienced collection attorney.  The key is to minimize slow paying unit owners or units that go into foreclosure.  Once the Board has reviewed its aged receivables, there should be a budget line item for contingencies for bad debts. 

The controversial Senate Bill 2664, that could become law if signed by the Governor, will change how condominium associations will compute bad debts on foreclosed units.  Currently Associations can collect six months of assessments, special assessments, late fees, attorney fees and damages to foreclosed units.  This bill will change the amount an Association can collect to nine months, but the Association will only be able to collect regular monthly assessments.  The amount can include, for example, attorney fees incurred during this nine month period; however, the total amount cannot exceed the sum of the nine months of regular assessments.

Besides, budgeting for contingency bad debts, Associations can budget for other contingency expenses.  These contingency expenses can include possible excess snow plowing costs due to heavier than expected snow falls or higher than expected utility costs due to colder than normal winters or hotter than expected summers.  If these budgeted contingency expenses are not used during the year, the Association may be able to transfer these unused contingency expenses to an operating contingency fund.  Associations should review their declaration first before transferring these excess funds to see if your declaration indicates what to do with any excess operating funds.  It may reflect excess operating funds should be refunded to unit owners.

Additionally, I always notice there are two budgeted operating expenses that are overlooked a great number of times; accounting fees and income taxes.  When preparing the budget is the time when the Association should ask for proposals for your year-end accounting and income tax preparation.  Although year-end audits are always recommended over compilation and reviews, every Association should look at its by-laws and declaration to see if it states whether audits are required.  If these documents are silent, and you have a loan, look at your loan document to see if an audit, review or compilation is required.  With respect to income taxes, the Association should then determine if income taxes should be budgeted.  We have many Associations that ask us to review their financials through June or July and estimate if any taxes should be budgeted.  Even if your Association had no taxes due in prior years, it is possible that you could owe in the current year.  For example, signing a licensing agreement with a cellular company most likely would be taxable.

The last area that is overlook is properly budgeting for reserves.  Many Associations always ask me, “How much should we have in reserves and how much should we budget each year?”  Each time I am asked, I say the same thing, “It is dependent upon your reserve study.”  What we find is that many Associations either do not have a reserve study prepared or if they do have one, it has not been updated or reviewed in many years.  Every Association should have a reserve study prepared every 3 to 5 years, preferably by a professional engineering firm.  Your Association should designate in your annual budget an itemization and allocation of reserve funds. 

The Palm II case found the condominium association breached its fiduciary responsibility by failing to provide an annual budget for the reserve account that itemizes and allocates reserve funds.  The real key is that the Boards need to review this reserve study and the funding schedule every year at budget time.  The Board needs to update the funding schedule depending upon what actually happened during the past year compared to what the reserve study showed. 

Often we find that Associations have commingled the reserve and operating funds by paying reserve expenses out of the operating fund or not transferring the budgeted reserve assessments to the reserve fund.  The Palm II case held that the Board of a condominium breached its fiduciary duty by commingling operating and reserve expenses.  Once the reserve study has been updated, your Association can now properly budget for reserves.

You can now enjoy the end of summer and look forward to the beginning of budget season since you will have a more meaningful and successful budget if you overlooked any of the above items.

Steven M. Silberman, CPA