by Richard Thompson
Fall is the time when most homeowner associations go through the ritual of counting last year’s cost and crunching next year’s numbers hoping to squeeze blood out of the community turnip. While the well is often dry, or close to it, crunch you must. Here are some of the ways to make the cash flow more freely.
Adjust by Inflation: This is a no brainer. Check the area Consumer Price Index - CPI (governmentese for “tax increase”) and raise all budget items by at least that amount. An exception is utilities which enjoy a larger and incomprehensible rate increase based on the utilities the utility companies expect not to sell added to the cost of maintaining antiquated power generation plants plus a fudge factor they hope to slip by the utility rate commission (just a little budget humor ☺). For a handy inflation guide, see www.inflationdata.com
Add a Contingency: Add a contingency fund of 5-10% to cover all those things you forgot to include or couldn’t anticipate.
Looking Back for Future Savings: Next year’s budget should be based on last year’s. Do a side by side comparison of the last three years’ budgets. You may learn something...like seeing large and unnoticed utility cost variances. The board three years ago may have been totally indifferent to the budget. You may catch a cost savings that got passed through unscrutinized.
Leave Out Potential Income: Late fees may not happen so don’t count on them. Besides, it’s a bit insulting to plan on owner irresponsibility.
Divide Expenses by Category: Assign expenses to either:
- Administrative (like Management Contract, Legal, Reserve Study Update, Accounting, Office Supplies, Postage, etc.)
- Utilities (like Gas, Electricity, Water, etc), and
- Maintenance & Repairs (Plumbing, Electrical, Landscape Contract, Gutter Cleaning, Pool Maintenance, General Repairs etc.). It’s important to know where significant monies are being spent. When a significant bill is paid, assign it a proper category so that next year the Budget Committee can assess whether there is a trend.
Reserve Intelligently: Reserves are funds collected to pay for repairs and replacements to common elements like roofs, siding, paint, fences and decks. It’s critical that these expensive events be forecast at least 30 years out so that this year’s budget collects a fair share of those future expenses. Failure to collect adequately from members today inevitably leads to special assessments in the future. Since costs can be accurately predicted, why not let all share the expense instead of penalizing a few? The “Reserve Study” as it is called, analyzes these future costs and provides a reasonable maintenance and funding plan that can be included in the budget. It is probably the most fundamental factor for homeowner association success.
Include Board Education: While the board members are volunteers, the HOA should invest in educating them to improve performance. Attending educational events will return big dividends as director competence levels are raised.
Some other cost cutting hints:
- Irrigation Water Costs. Does your system have a rain sensor that kills the sprinkling cycle when appropriate? If not, budget for and get it installed before the next irrigation season. These devices are surprisingly cheap.
- Control Pool Temperature A solar blanket can pay for itself very quickly. A 3-5 degree reduction in pool temperature heating can result in significant savings.
- Lighting Conservation Swap all common area incandescent lighting for compact fluorescent or other higher lumen/lower wattage alternatives. Lots of savings here.
- Offer to pay for leaky faucets and toilets. Even though not technically an HOA responsibility, the resulting water bill is.
Crunching the budget is not near as hard as you thought now is it? When you see the savings pile up, that “crunch” will sound oh so sweet.
Published: August 12, 2009
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