The HOA’s budget year runs from January through December. The board of directors approves a budget every fall for the upcoming year, including dues level, a framework for an annual maintenance program (which includes contingencies), and any capital projects to be undertaken in the upcoming year. It is generally presented to the owners for comment at the annual fall community event in October before final action is taken, and is reported to the owners at the annual meeting in January. Members of the unit owners association are encouraged to engage with the board of directors throughout the year to help with budget decisions.
The Laurel Mews HOA’s annual budget includes items that single family homeowners, or other condo communities, might get directly from the County, e.g., water/sewage and trash removal (note 1). Water/sewage and trash removal together make up the majority Laurel Mews’ community expenditures. Other items include insurance, electricity and maintenance of the exterior lighting system, snow removal, landscaping and general maintenance in the common areas, e.g., trees, fences, walkways, and the parking lot.
When you look at our budget, the big ticket items are transfers to the reserve fund, common area maintenance, water/sewage, landscaping, snow removal and trash services. The HOA board can play around with landscaping, maintenance, snow removal as well as small ticket items like community events:
https://www.laurelmews.org/budget-bibliography/#landscaping
https://www.laurelmews.org/budget-bibliography/#snow
https://www.laurelmews.org/budget-bibliography/#community_events
But this is a community that should not be well-given to slumming, i.e., dis-investing so much that economic values and livability are negatively affected.
Low HOA fees are attractive to current owners, but they really can hazard a community, and leave future owners holding the bag. Current parsimonious owners might figure when matters come to a head, they will be long-gone and living elsewhere, which is something owners intending to be here for the long-run should guard against. (See section 4.10 in the reserve study.)
Rational budgeting should follow an analytic framework. This means budgeting responsibly and realistically. It is one thing to assert savings or even the possibilities of savings; but it’s another thing for the assertions to be true, lawful, doable, desirable, appropriate, or adequate. An analytic framework helps keep budget decisions tethered to reality.
It also means building a sufficient reserve fund. Building a capital reserve fund is not so much about the repair/replacement of components, but really about paying the current cost of using the components, aka, depreciation. When cohort of owners decide not to adequately fund its reserve, what they are really doing is shifting their cost of using the component onto the next generation of owners.
One key thing that the HOA officers monitor is whether or not we are getting good prices on our services. By far the most significant expense is for water/sewage services from Arlington County. This expense accounts for 30-35% of our operating budget. Individual owners are implored to help control HOA costs by making sure their plumbing fixtures are of low-volume variety and are in good repair.
Another key cost area is trash removal. Here we remind you that the HOA trash removal contract does not include removal of bulk items. When you have a bulk item you must call Olivo Trash Service (703-237-1139) and pay on your own for the removal of the item. But often we have people that place bulk items in the trash, with no prior notification of the trash company. The trash company then removes the items and charges the fee directly to the HOA. The effect is that what should have been an individual owner cost is socialized to an entire community cost.
Our annual budget also includes an annual maintenance/repair/replacement plan (AMP) which includes projects involving the parking lot, the wood fences, brick walls, and other common elements. The plan is devised by referring to the reserve study to get some insight into what components might be coming to the end of their lives, by doing inspections and determining what needs to be repaired or replaced, and by addressing whatever contingencies that come during the year.
Inexpensive repairs or replacements can normally be fit within the normal annual operating budget. But large repairs or replacements, e.g., replacement of our bricked components, resurfacing of the parking lot, constitute one of the main reasons why we have a reserve fund. That is, in any given year the annual maintenance plan may include small projects that can fit within the operating budget, contingency maintenance, and/or large projects that have been budgeted via the capital repair/replacement fund.
When a reserve fund expense happens in the current year, it is included on the statement of financial operations (vide infra). But the funding for the expense does not come from current year revenue. Rather it comes from the reserve fund, an equity account on the balance sheet that contains income that was logged in some prior year. Counting those funds as income in the current year would be double-counting. The reduction of the reserve fund will be reflected through the Retained Earnings account (sometimes called Net Income or Profit(Loss), see paragraph 972-10-45-5 in FASEB 972), and the current year’s statement of financial operations will show a deficit. The reduction in the reserve fund will also be reflected in the statement of cash flows. If you look at a plot of reserve fund cash vs time, it should be a saw-tooth pattern.
In fact, when budgeting and analyzing the HOA’s finances, you need to study 3 key financial reports, the balance sheet, the statement of financial operations, also known as profit-loss or income-expense statement, and the statement of cash flows. The first report indicates the association’s financial position on a particular date, the P/L gives a running account of revenues and expenses, and the cash-flow statement gives you an indication of how well the association finances itself. These 3 reports have be understood in the context of the reserve study and maintenance planning.
The HOA contracts with GHA Community Management for operational financial management. This ensures that our finances are managed professionally and in accordance with generally accepted accounting principles (GAAP). Each month the board gets a financial report from GHA. Likewise every year financial operations are audited in accordance with general auditing standards, and the AICPA Audit and Accounting Guide on Common Interest Reality Associations (CIRA) and Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 972 (FASB 972).
Owners are invited to acquaint themselves with our bibliography on budget matters. Any owner can get a copy of the monthly reports and the annual audit report by simply contacting the board. Also, any owner can at any time make an appointment with GHA and/or the association’s auditor to get information and/or clarification on any association financial matter.
Income and Expenses Summary
The table below summarizes the annual budget and monthly expense reports that the board gets each month from GHA.
| 2021 (budgeted) |
2021 (actual) |
2022 (budgeted) |
2022 (actual unaudited*) |
2023 (budgeted) |
2023 (actual) |
|
| Assessment Income | 235,400 | 235,400 | 259,740 | 259,740 | 278,370 | 278,370 |
| Other Income | 10 | 253 | 900 | 2,280 | 23,895 | 18,138 |
| Operating Expenses | ||||||
| Water/Sewage (note 2) | 55,730 | 48,847 | 56,000 | 55,400 | 56,000 | 48,939 |
| Payments to Reserve Fund | 77,000 | 77,000 | 57,400 | 57,400 | 102,975 | 102,918 |
| Landscaping & Grounds (note 2) | 36,050 | 23,475 | 35,000 | 29,715 | 29,700 | 32,080 |
| Repairs & Maintenance (note 3) | 41,970 | 45,589 | 36,250 | 105,616 | 30,000 | 27,757 (note 4) |
| Trash Removal (note 2) | 14,935 | 13,573 | 13,980 | 15,759 | 15,000 | 14,652 |
| Admin & Professional Services | 11,375 | 14,651 | 21,555 | 20,861 | 43,540 | 34,446 |
| Snow Removal | 16,715 | 8,825 | 17,000 | 12,980 | 17,000 | – |
| Electricity | 1,255 | 584 | 620 | 668 | 750 | 750 |
Notes
- When mortgagors calculate affordability they typically include the HOA fees. In contrast, apparently they do not typically include whatever fees for water/sewage and trash services that are billed separately by the municipality, i.e., are not included in the basic property tax collection. The effect is that properties that get those services from the municipality artificially look more affordable than ones that get those services from an HOA. The reality might be, as in our case, that the HOA solutions might be cheaper, thus the HOA property is actually more affordable, all other things being equal. That is a vagrancy of the mortgage application system that somebody somewhere should probably do something about.
- As yet, the 2022 financial statements are not audited. During the audit process the statements are corrected to include expenses incurred in December, but not presented on the financial statements until January or sometimes even later than that. That is especially true for Water/Sewage account where there is an irregular pattern of meter read and billing dates and time it takes for invoices to arrive and be processed. But it is also true for other accounts, e.g., Landscaping & Grounds, Trash Removal, etc.
More
| The Reserve Fund(s) | Analytic Framework for Budgeting | Budget bibliography | 2024 Approved Budget |