HOA Budget Planning: Operating Budget vs Reserve Budget
As a board member, it’s your fiduciary responsibility to make sure association members’ dues are well accounted for in the budget. To do that, the HOA can use two vital budgets: operating budget and reserve budget. Both budgets are crucial for the smooth and effective running of the association and community operations.
To help you with budget planning, learn about the key differences between the two funds and what to include in each budget.
An HOA operating budget/fund should feature the day-to-day expenses of the association for a period of two to three years. The budget should highlight how much money will be available in a checking account to support the monthly dues and expenses of the association.
In an operating budget, the main expense you should note is staff or contractor services from vendors who undertake various contracts in the neighborhood. Such services can include lawn care/ landscaping services, pool upkeep, security services for the gate and fence, plumbing, or lighting services.
More budget items you should include in the budget are:
- Insurance and Taxes. You should state the HOA’s annual insurance premium along with unexpected claims in case of a disaster. Also, note annual tax increments.
- Administrative Costs. You should state expenses you will incur during the running of the association, including accounting and legal fees for professionals, association management fees, utility expenses, and office supplies such as postage and stationery.
You can use the previous year’s operating budget to predict most of these expenses; however, the amount for each year can’t be the same, mostly because of utility fees for electricity, water, and gas. Therefore, include an additional amount to cater to such increments.
Lastly, note that the operating budget should cover a two to a three-year term, but you can adjust depending on increases or decreases in dues and expenses.
A reserve fund caters to large capital costs such as major replacements and repairs, for 5 to 30 years. The budget will highlight planned and probable large expenses such as new community equipment, street repairs, and replacements on common area buildings.
Unlike the operating fund, the reserve study should be kept in a savings/ investment or interest-bearing account where access is limited. Furthermore, the account should require authority from board members and not the manager only.
Your association member’s dues fund the reserve budget, but up to what percent remains guided by your community laws, rules, regulations, and bylaws. Other sources of the reserve fund can be loans, and special assessments levied to pay for major projects by the association.
There’s no minimum or maximum amount that your HOA should keep in the reserve fund. Still, the aim is to have a fully funded reserve that will reasonably cater to 100 percent of the community’s foreseeable expenses. If not, stick with the rule of thumb, which is at least 70 percent funded and can cater to expected expenses according to the association’s schedule or maintenance plan.
To estimate how much that reserve should be in dollar amount, you need an accountant to conduct a reserve study. The study will analyze the association’s assets, budget, revenue and probable long-term expenses depending on the community’s needs. The accountant can lay down an estimate or a long-term schedule of expected liabilities such as repairs, maintenance, and replacements from this report.
You then use this report to draft your reserve budget for your association.
To ensure proper financial management of your HOA, you need an in-depth understanding of these two budgets. If you need help with budgeting or any accounting service, contact Southern Property Management Group. We’ll help keep your association’s finances organized and in line with your financial goals.