THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Saturday, September 24, 1994 TAG: 9409220328
SECTION: REAL ESTATE WEEKLY PAGE: 34 EDITION: FINAL
COLUMN: Common Ground
SOURCE: G. Robert Kirkland and Michael A. Inman
LENGTH: Medium: 71 lines
Once again we are at that time of year when our association is beginning to prepare the budget for next year. Your recent column outlined the procedures that a budget committee should follow, which we are using. We have also done a reserve study and feel that we are OK in that area. What we need are guidelines for insuring that we have budgeted the operations portion of the budget.
It sounds as if you have taken the first steps to properly prepare your budget. Budgeting for the operations side of the expenses is really the easiest part of the task. Most associations' documents allow the board to set assessment at the level necessary to operate and maintain the property.
Unless you are dealing with older documents that require you to limit the amount of the assessment or to have the owners approve the budget, the process is very straightforward. It begins with the budget committee gathering all the information needed to identify the activities for which the association is responsible. This will include grounds, clubhouses, pools and similar physical plant operations. Also, items such as management, recreation programs, insurance, legal and accounting services need to be identified.
Once the various activities are identified, the next step is to decide the service level for each activity. Examples would include when the pool will be open, the type of management and even the amount of the delinquencies anticipated during the year.
Service levels are the most difficult portions of the process because they must reflect the judgment of the persons preparing the budget as to the wants and requirements of the community. This often results in differences of opinion and concerns over the amount of the assessment.
If we do not consider the political aspect, the board would simply determine what fee is required and pass the necessary assessment. However, the reality is that if the board sets the assessment too high, there will likely be a revolt among the owners. Unless they are actively involved with the association, few owners understand the cost of operating the association.
Most boards as a result will try not to increase the assessment or at the least limit the increase to inflation level. This is both dangerous and likely to lead to an inaccurate budget. The committee should prepare the budget to reflect the anticipated cost of operations. The board would deal with the political issues.
Once the service level is determined, the budget committee can determine the costs by of of several methods:
1. Review of existing contracts, such as management and insurance, which may not change in the coming year.
2. Request bids on new specifications, whereby the contract will expire or the service level is being changed. This would include grounds maintenance or pool operations.
3. Soliciting advice from potential contractors for new items.
4. Review of the historical cost data.
You may also compare costs with other associations, but only if they are similar in style, size and service level. Many mistakes are made when using data from dissimilar properties.
With the various estimates of cost, the committee should assemble the new budget without regard to any considerations other than how much it will cost to operate the programs at the prescribed service level.
The board must remember that its primary duty is to protect and enhance the property values of the community. Failure to adequately maintain may result in decreasing property values. This concept means that you may have to bite the bullet and approve an increase larger than you would like. However, it is usually cheaper in the long run to maintain the property at he appropriate level than it is to correct the problems at a later date. by CNB