How to Plan Your HOA's Budget

Budgets for homeowners associations

Budgeting for an HOA isn't an easy task. The process includes disclosures to association members, time restrictions, assessment limitations, and more - all necessary to remain compliant with Civil Code Section 5300 of the Davis-Stirling Act.  This article explains each step of the budgeting process, breaking down the Civil Code requirements into a step-by-step process so you don't have to get tangled up in HOA law. 

Gather Your HOA's Budget Information

The budgeting process is a marathon, not a sprint, and your first step should be gathering the proper information for your budget. Knowledge is power for homeowners associations: the more knowledge and information gathered prior to starting the budgeting process, the easier and more accurate the process will be. You should begin researching and gathering information to prepare your next budget on the first day of your current fiscal year.

Every month your HOA prepares financial statements that become the basis for the future budget. Use these financial statements to your advantage. Prepare them with enough specificity that associations can analyze the information months later during budget time. For example, when your homeowners association has an unbudgeted expense, don't bury it in an inappropriate line item. It will only get lost at the next budget time. Try placing the expense in the appropriate category, regardless if there is an existing budgeted amount. When the new fiscal year comes around, you'll know where you need to adjust the budget. 

End of the Fiscal Year Requirements

Be aware if you're a part of a calendar-year ending homeowners association—The formal budget process starts roughly five months prior to the start of the new fiscal year. At this point you should gather all the documents necessary to complete a draft of the budget

  • Current reserve study
  • Current financial statements
  • Projected income statement
  • Prior year financial statements

After gathering the information from your last fiscal year, you can...

  1. Estimate each operating expense (the cost of performing normal, day-to-day operations);
  2. Apply an inflation factor to adjust for the next fiscal year (try the Bureau of Labor Stastics Inflation Calculator); 
  3. Discuss your major operating expenses (utilities, landscaping, pool service, insurance, etc.) with your providers to help you adjust accordingly.

Planning for Industries with Radically Changing Rates 

Pay close attention to expenses that can shift dramatically from year to year. The most common culprits are utility and insurance expenses.

Utilities

Utilities typically include:

Insurance

​Insurance costs and policies vary greatly depending on the association and location. You should know which types of coverage are a requirement (or maybe just advisable) for your HOA. Unfortunately, low interest rates and stock prices have hurt the insurance industry. Over the last several years, HOAs have seen an increase of 30-60%. 

Don't allow important coverage to lapse! Non-renewal forces HOAs to lesser known insurers (with low ratings by AM Best) at higher premiums—300% or more! If possible, stay "renewable" by keeping in regular contact with your broker. Find out if you need to increase deductibles or keep tighter control of open claims.

Trying to budget for these industries is extremely difficult. When faced with an unbudgeted operating expense, most homeowners association boards "borrow" from reserves by not making the reserve transfer. While this may seem like the easy solution, it is not ideal and can quickly deplete the reserve fund. Instead, budget for a reasonable amount of miscellaneous contingency to cover a possible unexpected operating expense. The best option may be for your homeowners association to disclose the situation to the homeowners and special assess the necessary amounts to cover the unbudgeted expense.

Follow HOA Law

Homeowners association law is contained in the Davis-Stirling Act - part of the California Civil Code.  All board members and HOA managers need to understand this section, because it controls the annual pattern of planning and disclosure within homeowner associations.

Annual Disclosures 

To remain in accordance with HOA law, you must distribute to all owners two disclosures: the Annual Budget Report (§5300) and the Annual Policy Statement (§5310) within 30 to 90 days of your HOA's next fiscal year.  The Annual Budget Report and Annual Policy Statement, replaced the old budget and disclosure requirements, commonly known as the "budget package."

The Annual Budget Report must include, at a minimum:

  1. A pro forma operating budget, showing the estimated revenue and expenses
  2. Summary of the association’s reserves (an update is required every three years)
  3. Summary of the reserve funding plan
  4. A statement regarding outstanding loans with a term of more than one year
  5. Summary of the association’s insurance policies
  6. Statements about:
    • Deferred maintenance
    • Plans to levy special assessments
    • The means by which the board will fund reserves to repair or replace major components
    • The procedures used to calculate reserves with respect to those major components for which the association is responsible.

The requirements for many of these statements continue to expand and boards should review them annually.Read the detailed requirements for each piece of the annual budget report in Civil Code Section §5300

Failure to provide the required Annual Budget Report disclosures on time may prevent your association from raising assessments (up to 20%) without a vote of the membership.

Other Financial Disclosures

Civil Code Section 5305 states that a California Board of Accontancy licencee review must be made for any fiscal year in which the HOA had a gross income of over $75,000 and distributed within 120 days after the end of the fiscal year.

Prepare for Mid-Year Problems

Notwithstanding your diligent efforts in the budgeting process, things will happen requiring action outside that process -- an elevator hydraulic cylinder unexpectedly fails, costing $40,000. Or the earthquake insurance renewal premium jumps by 50 percent . What to do?

Assessments

Assuming the association has made all of the necessary disclosures, you can assess the membership to cover costs. Just be sure to observe the limitation listed by Section 5605 in the Davis-Stirling Act

If a regular assessment  is more than 20% greater than the regular assessment of the preceding year OR a special assessment exceeds 5 percent of the budgeted gross expenses for that fiscal year, then the association will need approval from the owners.

Reserve funds

You can temporarily use reserve funds for operating purposes (as described by Section 5510 of the Davis-Stirling Act) for:

  • Repair
  • Restoration
  • Replacement
  • Maintenance
  • Litigation involving all of the above

However, your homeowners association must be obligated to repair component that needs maintenance, and the reserve funds must have been established for that component. To withdraw money from your reserves, "[t]he signatures of at least two persons, who shall be directors, or one officer who is not a director and one who is a director, shall be required" (Civi Code Section 5510).

Ultimately, significant and unbudgeted expenditures must be recovered through assessments. Regular communication with homeowners through meetings and letters will help make major changes to the budget easier and more successful.


Adapted from "Budgeting for Community Associations" by Joelyn Carr-Fingerle, Tom Hill CCAM, and Rob Rosenburg CCAM. Carr-Fingerle is a CPA with a large homeowners association practice, Hill is the manager of finance for PML Management, and Rosenberg is the president of Massingham Management