Budgets for Homeowner Associations
The California Civil Code requires that each association distribute a Budget to all owners within 30 to 90 days before the start of the next fiscal year which means that the Treasurer working with the management company or accountant should provide the board with a draft budget at least 150 days before their year end. See: Example Timeline. Be certain to allow sufficient time for the board to review, discuss, and approve it.
Failure to comply with the distribution requirement suspends the Board's right, without approval of the membership, to increase assessments up to 20% per year.
When updating a Budget from the prior year, it is sometimes best to use the existing Budget as a starting point and to make the following adjustments:
- Add any line items that are needed to provide the detail required for proper analysis and control.
- Delete any unnecessary or unused line items.
- Where possible, the Budget should reflect the actual contract cost of basic services. Good examples are landscaping service, trash service, elevator maintenance, management, and pool maintenance.
- Calculate extra charges to the basic services referenced in #3 above based upon historical averages adjusted for reasonable inflation.
- Where it is not possible to use actual contractual costs, use an average for the last 6 to 7 months adjusted for reasonable inflation. If you know that the average for the last 6 to 7 months need to be adjusted for a reason other inflation, explain the reason for the adjustment in a footnote. A good example would be to allow a higher level of maintenance.
- Use the last Reserve Study to determine the reserve allocation. If the association does not have a current Reserve Study, indicate on the Budget that the Association needs an updated Reserve Study as follows: "Updated Reserve Study Required."
- Calculate the Allowance for Bad Debts as realistically as possible based on known delinquencies that are expected to be uncollectable. Uncollectable is the keyword.
When the new Budget draft is completed, it should be clearly designated as a draft. Attached to the draft should be a copy of the prior year's Budget along with year-to-date operating figures. This package will make the review process easier for the Board of Directors.
Permit the board of directors' sufficient time to review the draft. They will need to discuss the proposed Budget at a scheduled meeting of the board of directors. Two months is a reasonable period to give them to respond.
While the Board of Directors has the right to adopt a Budget that may be unrealistic, this should not discourage the management company or accountant from preparing the most accurate draft possible. The draft is an important document that should be retained in the "Budget File" for future reference. The draft may be necessary in the future to prove that the board was provided with prudent advice that was not followed.
Coast Management of California