What is an HOA Budget?

A homeowners association (HOA) budget is a financial plan consisting of an HOA's estimated revenues, expenses and reserve funds over a period of time, which is oftentimes a year. It is an important part of managing any homeowners association. As any board member knows, it can be stressful to work on your annual budget. A budget template helps to create a smooth process because it lists the most essential items you should be thinking about, such as insurance, maintenance needs, reserve fund contributions and more. However, it also provides the opportunity to ensure your community’s financial health. In fact, your homeowners association (HOA) depends on your budget for both its short-term and long-term planning. Read more to know where to start and how to create an HOA budget. 

Where to Start with an HOA Budget? 

Before your HOA board begins its work, be sure you are familiar with Illinois HOA laws and regulations. For example, Section 18(a) (8) of the Illinois Condominium Property Act states that owners can object to a budget if assessments exceed 115 percent of those of the previous year. Objectors must file a petition signed by at least 20 percent of the homeowners within 14 days of the budget’s adoption. The board must then hold an owners’ meeting within 30 days. Unless a majority of homeowners votes to reject the budget at that time, the budget stands as is.
You also need to be aware of any recent changes to existing laws, such as the amendment to Section 18(a)(6), which went into effect in 2016. It allows you to provide homeowners with a copy of the proposed budget 25 days (rather than 30 days) before adopting it. This change enables you to mail your proposed budget at the same time as your annual meeting notice.

How to Create an HOA Budget

Assuming you know applicable Illinois law, here are nine ways that you can create a workable HOA budget for your future needs.
1. Keep homeowners at the forefront.
The interests of your community should be your first priority, so do not allow politics to affect your budget process. What you do impacts all of your homeowners, no matter what kind of community you live in, so remember why you became involved in your HOA in the first place. Maintain your commitment to enhancing everyone’s quality of life.
2. Review expenses with a fine toothed comb.
It is not sufficient to simply annualize expenses from one year to the next. Instead, look over your fixed expenses, ask service providers to provide information on expected cost increases, consider expenditures that you deleted or considered unnecessary in the current fiscal year and take into account any new expenditures you will need to operate your HOA.
3. Reduce or eliminate delinquencies.
Part of being an HOA is dealing with delinquencies. Account for expected delinquencies as bad debt expenses. Make sure you apply late fees consistently. An aggressive collection approach will help you manage delinquencies, but you cannot avoid them completely. Remind residents that high receivables put basic services at risk for everyone.
4. Make those difficult decisions.
It is next to impossible to develop a budget and avoid making hard choices. If your property manager included a letter with your audited financial statements that outlined recommendations, look over that letter now. You might need a line item in your budget to account for accumulated deficit or a potential shortfall. Another option is to levy a special assessment.
5. Check your operating balance.
You should have an operating fund that is at least enough to cover the cost of one month of maintenance, if you do not consider adding a special assessment to close the gap. Above all, do not add a contingency line item in your budget. It will only present problems down the road. If you do not have that amount on hand, you may need to consider an assessment to cover the gap. Do not use a contingency line item in your budget – it will just spell trouble later on. Be sure you consider all possible sources of revenue.
6. Plan for your long-term needs.
In addition to planning for the next year, create a three- and five-year plan, too. Illinois law gives your board a good bit of flexibility in funding your reserves, so look over anticipated projects that you cannot fund with your current reserves and include them in your planning. Also review your current vendor list to see if you may need to plan for fee increases. You may be able to take advantage of your community management company’s purchasing power to help you negotiate better rates.

7. Don't be afraid to make conservative projections.
Expenses can be extremely unpredictable year to year. What you spent a significant amount on in one year may not be the same in another. While it may difficult to plan for expected costs exactly, you can ensure you are prepared for any emergency. Some ways to do this are to project expenses based on the current economy, and using ununsued operating funds from the previous year to cover a small percent of your yearly dues.  

8. Establish clear dates and timelines.
By having due dates for notices, budget approval, budget meetings, and so on, it makes for a clearer process for all. This can be especially helpful in knowing what tasks are most important to be prioritized first, and keeping everyone in the conversation up to date. 
9. Process makes perfect.
Do not overlook the manner in which you accomplish your goals. For example, remember to get board approval for all reserve expenditures. And make sure your internal controls are in place so you do not risk any possibility of misappropriation or waste.
A well-developed annual HOA budget is crucial for the financial stability of your HOA. Follow these nine tips to create a budget that keeps your community on track. For more insights on how you can apply best practices to your budgeting process, contact FirstService Residential, Illinois’ leading community management company.
Friday March 12, 2021