It’s that time of year again! As associations gear up for annual meeting season, many boards of directors and managers are reviewing account records and projected expenses to create their association’s budget for next year. Preparing the budget is a fundamental process for community associations, as the budget is essentially a roadmap for what the association will undertake in the next year and how much the owners will pay in assessments. While no two association budgets will look exactly alike, they will contain many of the same line items, and those putting the budget together tend to have common questions—both basic and complex. Below are responses to frequently asked questions that tend to arise during budget community association preparation:
What costs should be included in an association budget?
Georgia law does not require community associations to prepare a budget, nor does it outline items that must be included in an association’s budget. As such, an association should first look to its governing documents in the event certain budget requirements are contained there. A typical budget consists of income and expenses, with the primary income source being the collection of assessments. Assessments can be collected on an annual, quarterly, or monthly basis. Some associations include fines as a source of income, but this is not always advisable as an association will never know what violations may occur in the year, nor does it want to be perceived as incentivizing fines.
How does the association determine its anticipated expenses?
While the board of directors is tasked with the responsibility of preparing and approving a budget, many boards delegate this responsibility to their association’s manager, knowing that the board will have final approval. Association expenses are either mandatory or discretionary. Required expenses include utilities, income taxes, insurance, and common element maintenance costs. Items that are discretionary may include holiday decorations, social gatherings, and décor upgrades. First, the budget preparer should examine each item listed in the budget and confirm its cost and necessity for the coming year. Next, the preparer should review historical data from previous years and either increase or decrease the line item amount based on expectations for the forthcoming year. The majority of line items in a budget tend to be for day-to-day operating expenses, like repairs, insurance, utilities, management, and legal services. Capital improvements, which consist of upcoming large-scale projects, and reserves are also included in the budget.
Are there budget requirements for insurance and/or reserves?
Georgia law requires condominiums to carry casualty and liability insurance. As such, condominium associations should ensure they have these policies in place and that the amounts budgeted for insurance are sufficient to cover at least the premiums associated with these required policies. Condominiums who are seeking FHA certification should have a fidelity insurance policy that covers at least three months’ worth of assessments for all units plus the total amount in the association’s reserve account. As for reserves, Georgia law does not mandate that associations contribute any particular amount to their reserve account. Many associations obtain a reserve study to help ensure the association will be prepared to pay for long-term expenses as they arise. While Georgia law does not mandate a specific reserve contribution, associations should check their governing documents for such a requirement. And finally, condominiums seeking FHA approval should ensure they are placing at least ten percent of their income into reserves.
How is the budget finalized?
Under most association governing documents, the budget is approved by the board in advance of the annual meeting and must be sent to the ownership within a certain number of days of its effectiveness and/or the annual meeting. Many associations are surprised to learn that most declarations do not require an ownership vote to approve the budget. Rather, the board approves the budget which becomes effective unless disapproved by a certain threshold of owners at the annual meeting.
What if the budget is not finalized before the annual meeting or is disapproved at the annual meeting?
In either of these scenarios, the budget in effect for the current year will remain in place until a new budget is approved and presented to the community, assuming the requisite disapproval does not exist.
What happens if association is over budget during the year?
An association that is over budget during the year will need to consider alternate ways to create income or to consider holding off on some discretionary budgeted items. Associations can create income through special assessments, or depending on the purpose for the funds, with a loan.
While association should always consider the requirements in their governing documents when preparing a budget, the above should serve as a helpful framework. Should any question arise, the association can always reach out to its association attorney for feedback.