You often will hear new board members ask their manager or management company just “what exactly is my responsibility as a board member?” While the Bylaws generally do a satisfactory job in explaining the day-to-day duties of each officer, they (Bylaws) often miss the mark on what the board’s main objective is. The main focus of the Board of Directors is to uphold the property values of the community through financial planning and responsible spending. It is incumbent upon all board members to make sure the assets of the community are protected and money is readily available to help protect those assets.
Over the last 20 years, I have run across some board members that feel their job is not to raise assessments. This notion could not be farther from the truth. While the residents may appreciate the consistency in keeping the assessment the same for a period of time, they will be less than thrilled, to say the least, when the association invariably has to either (a) raise the assessment sharply in a given year (unless otherwise stated in the governing documents: single family – maximum 20% in a given year; condominium-no cap) or (b) put forth a special assessment. The ladder of which can be a nightmare for some communities. The bottom line is that all of the aforementioned issues could have been prevented with simple long-range fiscal planning.
The cost of living increases each year, so why would anyone think homeowner associations aren’t affected by the cost of living and commodity increases? Board members and the management companies that manage their communities need to develop fiscally responsible policies which will govern the way their respective Associations are managed from a financial perspective. As managers and boards sit back and breathe a sigh of relief that budget season has finally come to a close, both should already be thinking about fiscal 2019-2024. As we all know, most budgets become antiquated by the end of the first quarter and some even sooner than that. The assets within your communities do not stop depreciating in between budget seasons. So why should Associations go on cruise control until the start of the next budget season in August? The key to any successful business is financial planning for both, the short and long term. The majority of boards and managers tend to focus much of their efforts on the immediate future and leave little room for long-term strategic planning.
Below are a few simple planning tips that the manager and board can utilize at the beginning of each year to help aid in long-term fiscal planning.
1.Develop a 5-year budget plan:
a. Plan on increasing your assessments a minimum of 1-1.5% each year to keep up with inflation.
b. The plan should put forth a general idea of expected costs and revenues.
2. The plan should outline general community enhancements outside the scope of a reserve study.
3. The operating account should have 2-3 times the amount of average monthly expenses in it.
4. The reserve study should be reviewed at the very least on a quarterly basis. The objective of which would be to identify assets that have reached the end of their useful life and need replacement and/or assets that will exceed their useful life and replacement can be pushed out to a subsequent year.
5. Depending on the size of the community and number of assets, associations should plan to revise the reserve study every three years. Make sure you allocate for the revision in your budget.
6. You need to talk about the budget throughout the entire year and not just during the budget season. Go ahead and include a budget discussion at every one of your board meetings.
7. Create a Finance Committee to help the board with short and long-term planning. Finance Committees can prove to be invaluable and offer the board another perspective on the association’s finances. Finance Committees also have the added benefit of getting other owners involved in the committee.
There are many other ways boards and managers can help themselves be better prepared for the future, depending on the size of the community and number of assets involved. The overarching point, however, is to make sure you plan ahead and are always thinking about the future of the association.
Frank Puma, CMCA
Vice President of Client Operations
Arizona Community Management Services, LLC