Budgeting for a Different World

Budgeting for a Different WorldBy John Beaman, CMCA, AMS, PCAM, LSM

Developing an annual budget is one of the primary tasks

for a board of directors. Sometimes it can be challenging. We are in one of those challenging periods that affect all associations in the Coachella Valley.

The good news for HOAs is the economy is strong; with low inflation. Housing values have been holding steady; with some uptick. Delinquencies and foreclosures are at a manageable level.

THE COACHELLA VALLEY CHALLENGES

The principle challenge for boards in developing a budget over the next three years is the mandated increase in the minimum wage. A large percentage of association budgets are tied to landscape maintenance and security, both of which use employees paid at or slightly above the minimum wage. This also holds true for food and beverage staff and often administrative staff. It also affects related services like delivery truck drivers.

The minimum wage has already increased 20% over the last four years. Vendors have worked to absorb this as best they can i.e. delaying equipment purchases, slimming down crews, maximizing their resources, etc. They have run out of opportunities to absorb so the 25% minimum wage increase scheduled over the next three years will be passed on to associations.

The challenge for associations and vendors is not just raising wages for the minimum wage employees to comply with the law, employers must also address “wage compression.” For

example, if an employee currently makes $3.00/hour more than minimum wage, if you fail to increase wages commensurate with the minimum wage increases, then that employee may be only making say $1.00 more than minimum wage at the end of the three years. You will lose valued employees because they see new hires earning almost the same as them and morale issues will surface.

The minimum wage increase challenge is coupled with a highly competitive job market in the Coachella Valley due to low unemployment and a limited supply of some skilled positions, often due to the reluctance to relocate to the Coachella Valley due to our hot summers. To retain good employees and recruit quality new employees, associations and vendors need to keep wages competitive.

As if this were not a big enough challenge, aging infrastructure in many of our older communities is becoming a major challenge – especially for those communities without adequately funded reserves. Associations need to work with their reserve specialists to ensure all components are correctly identified and replacement costs valued correctly. Also make sure that association operated hidden infrastructure, such as electrical distribution systems, are identified and included.

Rising utility costs will continue to impact the Coachella Valley. The next drought could be right around the corner. Our water rates are significantly lower than many parts of the country so we do not generate much sympathy when we complain about increases.

Our large inventory of golf courses that made the Coachella

Valley a favorite destination of golfers is becoming a burden for some associations as the valley is overbuilt when it comes to golf, especially with the retiring baby boomers playing less golf than previous generations – and this will continue to decline with subsequent generations who have a wider range of interests. Operational costs are also rising, putting a greater squeeze on the golf course operators.

What can boards do? Unfortunately, tactics such as deferring maintenance or using operating equity to avoid or minimize assessment increases is merely an avoidance tactic. These impacts are not going away so it is better to address them now. A strategy to mitigate effects must be developed.

OPTIONSSome potential options for addressing the budget squeeze are:

Develop a 3 – 5 Year Budget Plan

Identify Expense ReductionsRevisit long-standing service levels and expectations

• Alterations to maintenance matrix

• Convert flower beds to perennials

• Reduce flower beds

• Reduce pool heating

• Reduce frequency of painting

• Closure of amenities

• Reduce security coverage

• Reduce association office hours

• Automation

Identify Other Revenue Sources

• Implement or increase use fees

• Increase administrative fees

• Increase transponder fees

• Implement or increase rental fees

• Vendor access programs

• Cell tower leasing

• Implement advertising or increase advertising fees

• Memorials

Spend Now to Save Later

• Turf conversions

• Irrigation system modernization

• Lighting investments

Use Operating Equity/Retained Earnings

• This is only a delaying tactic because the increased costs remain after the operating equity is depleted. Important to use in combination with other tactics, including assessment increases, to avoid a large assessment increase when the operating equity is depleted.

Use of Volunteers

• There is some question as to whether the upcoming generations will be as willing to volunteer as previous generations

Volunteer options:

Adopt a flower bed

• Assisting with office administrative functions

• Lifestyle programming

Develop an Education/Communication Plan

•It is essential that the board educate the membership about the evolving economic realities to attain buy-in that assessments are going to increase and/or service levels are going to be reduced.

Communicate, communicate, communicate

• In newsletters, eblasts, town halls, etc.

• Communicate the projected increases over the next five years

Enlist suggestions from the membership to create a partnership in addressing the budget challenges

In the end, even implementing the various options, assessments must increase.

John Beaman, CMCA, AMS, LSM, PCAM is Division Vice President of Resort Communities for The Management Trust. John was a guest speaker at CAI-CV’s June 14th Educational Lunch Program. He can be reached at (769) 776-5100, Extension 6331 or by email at John.Beaman@managementtrust.com.