Coping With Budgetary Challenges

Despite proper planning, even the most diligent boards can face unforeseen budgetary challenges. Most often these types of challenges are outside of the control of the association, whether its due to a rise in foreclosures and delinquencies, or due to a sudden unplanned event. The board is forced to struggle with paying costs and preventing special assessments when the association finds itself unexpectedly short on funds. When faced with a budgetary challenge beyond its control, it is important for the board to act prudently to make up the deficit in a way that minimizes the negative impact on the community.

Typical Budget Shortfalls:
1. MARKET: A sudden change in the costs of goods and services; increased insurance premiums and oil prices.

2. NATURE: A particularly nasty Northeast Ohio winter that causes structural damage or roof damage; wildfires in California; hurricane damage in the Southern U.S.

3. INADEQUATE BUDGETING: As common elements age, increased maintenance is required. Predicting the scope and volume of repair in a particular year is difficult to gauge; failing to account for a contractor’s annual price increase that has been previously approved in the contract entered into by the association.

4. CAPITAL FAILURE. The possibility that a common element may fail unexpectedly or the repair or replacement of a common element is significantly greater than anticipated.

How to Address a Shortfall:
1. UTILIZE LAST YEAR’S SURPLUS. If the association had a surplus from the previous year, it may be appropriate to use that surplus to resolve the shortfall depending upon the nature, timing and size of the shortfall.

2. REDUCE OTHER EXPENSES. Despite being prudent as a general practice, it can help an association cope with a shortfall. In most cases, a reduction in expenses alone is not enough to provided the required funds to compensate the shortfall.

3. DEFER EXPENSES. Arrange payment plans and re-negotiate existing payment arrangements with contractors and vendors, if possible. These renegotiations or deferred payments
may provide relief to problematic cash flow issues.

4. AMEND THE CURRENT BUDGET. Sometimes an amendment is unavoidable. Certain expenses, like large increases in insurance premiums, affect both current owners and future buyers. It may be the best solution to amend the budget and increase the maintenance assessments accordingly to compensate for the shortfall.

5. IMPOSE SPECIAL ASSESSMENT. Almost all governing documents provide for special assessments if needed. Unfortunately, they can dramatically hurt your owners personal budgets. Impose the assessment as soon as possible after the service is completed or payment is due, so that the owners who benefitted will fund the expense.

6. BORROW THE FUNDS. Financing can be a viable alternative when dealing with capital replacement projects (like roofs or sidewalks) if the repair or replacement would devastate the reserve fund to the point that it could not cover other anticipated, planned projects, or to avoid an unaffordable special assessment.

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