I Don’t Need a Budget Oh Yes You Do!

By Ed Morrissey Note: This article first appeared in the Summer 2024 Edition of The Communicator Magazine.

HOW IMPORTANT IS a budget in operating a business? (And yes, HOAs are businesses. They are non-profit corporations licensed in the state of California.) The importance of a working budget and its implementation can be measured by the health and happiness of the homeowner’s association. 

A strong HOA community has underpinning practices that create an environment of neutrality and harmony when operated correctly. This promotes stability, which supports social equality. In order to achieve this, financial stability is a necessity. In other words, no monetary (assessment) surprises. Surprises destabilize HOA residences’ finances, particularly in lower income households, resulting in community pushback and the postponement of needed work. This scenario is the start of a downward spiraling trend that begins to envelop all aspects of HOA community life.

A budget is a wonderful thing because, in the simplest terms, it lays a path of what to expect. In other words, it establishes guardrails for responsible actions to be taken by the board of directors.

These include:

• Create, maintain, and operate from a full/complete line-item budget. This is the first step and is often the biggest mental hurdle.
• HOAs are non-profit corporate businesses and should operate as such. This means that the need for a budget reflecting all cost centers is imperative – both operational and reserve.
• Debiting the correct account, operational or reserve.
• When compiling the items that will be included in the working budget, it is important that each service provider include in their presentation the need/purpose of the (expense) proposal.

In a scenario of competing needs, like installing planned seasonal color or fixing a recently reported trip hazard, having a budget and knowing how to read it is critical.

WHAT’S NEXT?

• Now that the budget is in place, the board will need to promote its existence. The board should issue quarterly newsletters to involve the community; and understand that, at first, less than 25% of people will read it. But over time that number will increase. Like anything, it takes time to be effective.
• Generating a regular newsletter that keeps the community informed is easiest to reproduce when pre-formatted with department topics that relate to "the budget." These include items such as a seasonal intro, projects completed, upcoming projects, recent community items noticed, recent actions, or new, ordinary, or legislative information. Close the newsletter with a "look for" in the next issue. Remember to include standard newsletter formatting, who to contact for HOA needs, and similar information.
• The newsletter purpose is to telegraph the HOA actions and direction of movement. The goal is to get community buy-in support for the past, present, and future (actions) budgets. This limits surprises. For those who are opposed, there is the "budget" to support the community’s actions. Over time this limits some community members’ ability to block or oppose required maintenance items, which, as most of us know, turn into expensive deferred repairs. So, "telegraphing" via a newsletter is a very effective and passive way of completing the needs of an HOA community and successfully running their HOA non-profit corporation.
• Another important consideration is understanding which expenses take priority over others. In a scenario of competing needs, like installing planned seasonal color or fixing a recently reported trip hazard, having a budget and knowing how to read it is critical. So, how can these two jobs be handled? Sure, these are "landscape improvements," but one is also a "hardscape" line item:

Scenario:

Every year, your HOA has seasonal color installed at the entrance of the community. However, a homeowner has just reported a cracked concrete sidewalk that is now posing a trip hazard. The board would likely ask itself: Should we fix the trip hazard or proceed with the scheduled seasonal color install? Oftentimes, how to pay for an expense can seem complicated and result in no action. Yes, both of these activities are in the landscape section, but they are very different. Landscape features, such as sidewalks, have more than a 10-year life expectancy and would be posted under the reserve portion of the budget. Because flowers/seasonal color is done annually, or considered reoccurring work, it would be posted in the operating section of the budget. Risk management reigns in solving this situation. The quick answer is to repair the sidewalk using funds from the reserve account and proceed with the flower install from the operating account. Here, a fully developed HOA budget allows for decisions to be made.

Side-note: Having a full and complete budget allows board members clarity in understanding how things work and where to find the answers they need to be effective in their duties. This also limits the ability of some personalities from attempting to hack budgets to pieces, thereby allowing them, on the surface, to reduce dues below realistic levels.

• As the shortage of skilled tradespersons continues to increase, the importance of having an active and annually updated budget becomes even more important.

We hope this has been helpful and makes your HOA management easier. "Look, it’s right here in the budget!"

Ed Morrissey started JPA Landscape in 1981. With an eye for numbers, Ed has spent more than 45 years working to help HOAs improve the health of their associations, both visually and financially.