Written by David Silver, Peryea Silver Taylor (edited from contribution originally drafted for WSCAI Journal)
No doubt that many boards feel pressure to lower—or at least not increase—monthly assessments. Yet, the method of setting a budget based on an inflationary or CPI increase relative to last year’s budget can be problematic. I call this practice “budgeting to a number.”
Budgeting to a number can be a tough habit to break. Owners become accustomed to the way things have been done year after year. Some boards also feel pressure to keep assessments low, thinking that owners are on a fixed income or simply can’t afford to pay more. The reasons are practically countless. Yet, if owners say they cannot afford a $50 monthly increase, for example, just think how the membership would handle a large special assessment.
As a community association attorney, I have first-hand experience dealing with some of the difficult problems caused by budgeting to a number. Top of mind is when a condominium’s siding, windows and decks begin failing, but the association has virtually no reserves. A special assessment, and perhaps an association loan, are often the next issues the board has to navigate. When a board finally realizes a special assessment cannot be avoided, I have yet to counsel a board that did not express regret for not assessing more in previous years.
Preparing the right budget that serves the association’s best interests should not start by concentrating on the revenue side of the equation. Rather, boards that begin by focusing on their particular association’s expenses based on their governing documents have a better chance of avoiding future budgetary issues.
Under-budgeting, and subsequently having to raise funds by special assessment, is not altogether uncommon. While there are ways to successfully deal with a major repair or other expense coupled with underfunded reserves, the sooner an association sets the right budget, the lower its chance of a special assessment.