The Operating Budget: I
Budgeting for a homeowner association (HOA) typically involves two elements: 1) Annual operating expenses; 2) Intermittent or non-annual replacement reserve spending.
Annual operating spending in turn, typically includes spending on recurring maintenance that is expected to occur at least once of the course of the typical year. “Operational” maintenance spending is a separate category of maintenance that differs from the maintenance expenses that are expected to be paid for with the replacement reserves. Among the tests that is used to determine if a maintenance expense is operational, or a “reserve expense,” is whether the expenditure is a capital vs. non-capital expense.
In its simplest form capital spending is an expenditure of Association funds that is used to acquire or replace an asset that has a useful service life in excess of one year. A more expanded definition of capital expenditure includes spending to pay for renovation of capital assets, spending that is expected to extend to service life of the asset; and lastly, spending that adds value to the underlying asset. *
Aside from operational maintenance, the annual budget may include any manner of expenditures that are required to effectively carry out the business of the Association. On paper the budget process should be straightforward and no more difficult than any other annual budgeting exercise.
One of the failings of the management industry over the 50-odd years that “professional” HOA management has evolved into an “industry” is in the lack of standardized from one budget to the next. Throughout the industry there is lack of standardization in both form and content. Budget “form” refers to the physical format that is utilized to present the budget data. Budget “content” refers to the information presented in the budget document and the level of detail that is included in the budget.
In general, the more detailed the budget is, the more transparent the budgeting process will be. Transparency is important not only for the HOA members, whose hard-earned dollars are required to finance operations, but also for prospective buyers who are not yet obligated to support the Association, and a s a result are free to move on down the road if they find the budgeting practices of a particular HOA to be unacceptable.
The subject of budget for HOAs is a complex subject that is worthy of a book at the very least. A simple Google search on the topic of budgeting for HOAs will yield any number of titles. In future installments of this series we will review some of the more prominent books on the subject of budgeting for HOAs. In the meantime, we will continue to explore the subject from the perspective of buyers who are considering the purchases of a home located in a HOA.
*We will examine the subject of capital spending in a different series but for the purposes of the operational budgeting the discussion will be focused on non-capital operating spending.