A Primer on Budgeting and Reserves
Few aspects of condominium and cooperative association operations are as heavily regulated as the budgeting process and yet too many boards take an informal approach to these crucial director functions. From Section 718.504, which lists the required operating expense categories, to Section 718.112, which delineates the process and the requirements for reserve disclosures, budgeting, funding and use of reserve funds, to Section 61B-22 of the Administrative Code, which addresses even more detailed aspects of the process we can see how broadly the Florida Legislature has addressed budgeting and reserves. Errors in the manner in which budgets and reserves are handled can subject associations to monetary penalties imposed by the State.
Budgeting is a process of estimating upcoming expenses. On the operating side, most communities rely on prior years’ budgets and financial statements to develop the upcoming year’s budget for operating expenses. The operating budget should be designed to meet the reasonably anticipated operating expenses. All board members should do everything they can to deliver value to the members for their assessment dollars, but some boards make the unwise decision to keep assessments down artificially for political purposes at the expense of performing necessary maintenance. When this occurs, the ultimate repair costs are usually higher because of the damage and deterioration that could have been avoided had repairs been done in a responsible and timely manner. To put it simply, budgeting to properly maintain the community is, of course, a fiscal issue, and a planning issue, but it should not be a political issue.
On the reserve side, many communities that went years or even decades without funding any reserves are finally starting to fund at some level and are considering the cash flow funding model over the component funding model, usually because the cash flow model funds a pooled reserve rather than a reserve fund in which funds are restricted for specific reserve assets rather than being available to use for any reserve asset. For those communities without fully funded reserves, an accurate reserve study is the best defense against complaints over the inevitable special assessments needed to supplement underfunded reserves or fund projects for which the membership has voted to have no reserves. Boards that pull reserve estimates out of thin air are setting themselves up for future complaints and possible recall when the figures they chose prove wildly inaccurate.
There are too many communities that do not attach an accurate reserve schedule to the proposed budget, as required by Statute. Usually this is because these communities have not obtained a reserve study from a reliable professional or, in an even worse scenario, have a reserve study and have chosen not to disclose its contents. All board members and managers are encouraged to remember that the purpose of a reserve study is to allow the board to make accurate disclosures of the upcoming reserve expenses. The purpose of the disclosure is to enable the owners to know what expenses are coming up, but does not deprive the members of the right to vote each year to waive or reduce the funding of the reserve portion of the budget. The assets for which reserve disclosures are required by law are the roof, paving and painting, regardless of cost, and any other component for which deferred maintenance or replacement cost will exceed $10,000.00. Assets costing less than this dollar threshold can be aggregated for the purpose of reserve budgeting and the Administrative Code allows the board to create other reserves (other than those required by Statute). For each reserve asset, the reserve schedule must disclose its estimated total useful life, estimated remaining useful life, estimated deferred maintenance or replacement cost, and for reserves funded on the component model, the estimated balance in the reserves for that asset at the end of the current fiscal year.
This analysis applies to both condominiums and cooperatives (the citations above are for condominiums, but there are identical requirements for cooperatives in other portions of the Statute and Administrative Code). Homeowners association are not subject to the same requirements unless the developer (before turnover) or a majority of the members (after turnover) vote to opt into the statutory reserve structure.
Preparing your operating budget and planning for reserves each year requires thoughtful deliberation as to the needs of the community both short and long-term.