Financials: Explaining the Budget to Homeowners

By Justin Sacoolas, CCAM

The law requires associations to disclose and distribute the budget package annually. This package contains valuable information for all members of the association. Members who open and review the annual budget package find it includes the current rules, insurance information, a reserve study overview, and, most importantly, the association’s operating budget for the following fiscal year. Unfortunately, while the budget package contains volumes of vital (often statemandated) information, it is also an involved and intimidating package for most homeowners.

When the average person receives a three-page utility bill or encounters a lengthy “Terms and Conditions” pop-up online, the inclination is not to read every line. With the average homeowner juggling careers, families, social media, and hundreds of streaming shows to catch up on, time management is trending toward a single-factor analysis – “How much will it cost?”

The modern world is increasingly pressed for time and needs more attention to detail. This reality is not yet another problem for managers to solve but one to be aware of and evolve with.

Due to the budget package containing so much information, the tendency is to treat it as if it were yet another long-winded disclosure. Of the owners who do review or skim the package, the first and most crucial piece of information they’ll seek out is, of course, “How much will it cost?”

As any manager with a few years under their belt can tell you, the vast majority of homeowners need to become more familiar with the recorded governing documents of their association and the annual budget details. Without casting judgment on owners who don’t bother to inform themselves, managers can accept this reality and empower themselves and the boards they represent to educate homeowners on how the board sets the annual budget using the following three techniques.

#1: Brevity

The budget package goes out 30-90 days before the association’s fiscal year begins. Including a brief explanation of changes in line items and how the board came to the final assessment amount can go a long way. You can also communicate this information in an email blast, newsletter, or onsite posting if budget mailing costs are a concern. Disclosing why assessments went up and where the money is going in a short and easily digestible form can garner understanding and trust. Remember, some members believe that the association should keep the assessment level low since prices are rising everywhere else. They often don’t realize that HOAs are not immune to fiscal pressures.

#2: Include Percentages

Managers often receive calls and emails after distributing the budget from dismayed homeowners. Members not on the board of directors see the final assessment amount and can experience “sticker shock.” They need to be more informed about root causes or explanations for increases in assessments or reductions in services. For those who take the time to contact their management company for a basis for the budgetary changes, the manager is duty-bound to try to explain. But knowing you must analyze the budget for someone is easier than doing it.

An excellent tool is showing the concerned homeowner where their money is going. When they understand what the dues collected pay for, it helps them to realize that assessments didn’t arbitrarily raise $50. In addition, highlighting the percentage of the budget allocated towards line items can paint a clear picture that expenses like insurance, utilities, and the reserve contribution are influencing the final dollar amount far more than most are aware. And, if the board communicates effectively with the membership, most people will understand that these items are not discretionary spending.

#3: Provide a Mid–Year Update

Another helpful tool is to provide the members with a mid-year financial status update. This economic update can be in writing, as part of the monthly newsletter, for example, or it can also be a part of a treasurer’s report during an open session meeting. Either way, the meeting minutes or newsletter can be provided to homeowners who complain about rising costs after the budget is adopted. In addition, the mid-year update should highlight rate increases in contract and utility costs and remind owners which services their assessments cover.

Without proper education, HOA members can assume that the association is raising rates instead of understanding that it serves as a pass-through for factors outside its control. Additionally, links to trusted sources noting rising labor costs, insurance costs, and the impact of inflation can all help paint the picture that associations are primarily at the mercy of the market and economic conditions.

While the annual budget package is a legal requirement, clearly and thoughtfully updating owners on where their money is going is an act of professionalism and respect.

Justin Sacoolas, CCAM, is the Monterey Regional Manager for Compass Management Group.