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Fiscal Fitness – Budgeting Ben Weaver, CMCA, AMS, PCAM Association Services, Inc. Coeur d’Alene, ID

The Duty of Care Fiduciary Duty. Act in best interest of Association. Loyalty Think of the Association as a business, putting personal feelings and motivations aside to serve all members. In the course of budgeting, planning ahead, and being reasonable.

The Budget Road map for expected spending in the coming fiscal year Governing Documents establish what shall be provided. Costs What can you control What should you control What is out of your control Basic obligations of the Association One of managements busiest times of year is preparing the annual budget for the board. Some boards may be doing this themselves, if doing it right, it’s no small task. Most associations will have some budget to start with, many have several years, others may be just getting started. Understanding your existing financial position helps bring context to what you should be planning for.

Two Budgeting Strategies Zero Base Historical Start From Scratch Start from last year

Zero Base Even for existing associations this can be a healthy process to go through every so often. Sometimes this can help weed out un-necessary items. Develop Line Items for anticipated expenses – What do the governing documents require… i.e. Insurance, building maintenance Optional Costs – What do the owners want, i.e. Cable & Internet for all units. Possible downside is missing items.

Developing Line Items Review governing documents for obligations. Other obligations – Law (fed, state), Lending Requirements Needs and Wants – Complaints, Surveys, Committee Input, Maintenance Plan, Reserve Study Contingency

Historic Trend Looking at what has been spent, anticipating changes. Often gives a great starting point, but can make process too ‘automatic’ Possible downsides are un-necessary spending, or complacence. Usually less work (But again, don’t get comfortable).

The Historical Trend Looking at past expenses – as far back as applicable. Look at every line item.

Anticipate your timing! Some things, not too soon – also look for your less frequent expenses. Time to get bids Updates to utility rates, insurance rates, etc. Time to get other items – Reserve Study Put together an annual calendar for the board/manager

Keys To Remember Try to not get stuck on the assessment amount. - If possible hide that in developing budget until the end. Build in a contingency to have a reasonable ‘cushion’ for unexpected expenses. Fund your reserves. Get a reserve study, and review it.

Fiscal Fitness – Reserve Studies Karen McDonald, CMCA, AMS, PCAM, RS Association Reserves of WA

WHAT IS A RESERVE STUDY? A Reserve Study is a planning document & budget model for the association’s expenses “whose infrequent and significant nature make them impractical to be included in an annual budget” - RCW The purpose of a Reserve Study is to prepare the association for the significant maintenance, repair & replacement expenses they can expect to face over time, while minimizing or eliminating “surprises” and special assessments.

TYPES OF RESERVE STUDIES Full study With-site-visit No-site-visit Washington requirements Required of communities with “significant assets” HOA’s RCW 64.38.065 Condo’s RCW 64.34.380 WUCOIA Idaho requirements: None

THE “3 EXPECTED RESULTS” 1. A list of what you’re Reserving for – “Component List 2. A measurement of the adequacy of your current Reserve Funds – “Percent Funded” 3. A plan to prepare for the expenses in the Component List – “Funding Plan”

What Components to Include?

THE COMPONENT LIST The reserve component list is designed to guide an association to prepare for the predictable significant expenses facing the association. The list is a key forecasting tool that helps associations plan accordingly and maintain financial stability.

Sample Expense Graph

Measurement of Reserves Adequacy This reserve fund is currently 19.5% funded. Comparatively, the 70-130% level is where associations statistically enjoy fiscal stability with low risk of special assessment and/or deferred maintenance.

% Funded of ~ 3,500 Association Reserves WA Clients

Reserve Funding Plan Based on the starting point and anticipated future expenses, monthly reserve contributions shown are designed to reach the funding objective (baseline minimum, 70% or 100%) by the end of the 30-year report scope.

30 Year Cash Flow

Reserve Funding Options Four Ways to fund reserve projects: 1. Budgeted contributions 2. Special assessments 3. Loan 4. Decline in property values

Tips From A Former Manager Fund reserves regularly Educate and involve owners Be proactive, not reactive Know basic construction red flags Collaborate with reserve study provider

Fiscal Fitness – Financial Management Catherine (Cathy) Kuhn, CPA Newman & Company, CPA, PC (Formerly Cagianut & Co, CPA)

We will cover: Key Financial Statements and Definitions Questions to ask when reading monthly financial statements/board packets Audit requirements: WA and ID

Key Financial Statements and Definitions (Accounting 101)

Board Members: Accounting How many Board members here have some accounting background? How many here are the Treasurer because you weren’t at the Board meeting when they decided this???

Balance Sheet: What you OWN, OWE & What’s left over Assets, Liabilities, Equity (Fund Balance/Net Worth) Cumulative and at a POINT in time (ex: Dec 31, 2017)

Sample Balance Sheet Cathy

Statement of Revenues and Expenses: Income less expenses 1- year PERIOD of time

Sample Income Statement Cathy- Lots to look at here ~ Focus on the Year to Date Columns right.

Fund Accounting: Separate “buckets” of cash accounts and Equity May be separate financial statements (Balance Sheet-Statement of Revenue & Expense) Buckets: Operating Replacement (Reserves) 3rd fund (Optional) Special Assessment, Construction Project, Litigation settlement

Accrual Accounting: Transaction recorded when the event OCCURS, not when the cash is collected or payment is made. Assessments are billed January 1 for January assessments, regardless of when cash is collected Landscaping expense incurred in January and paid in February is recorded in January January revenue matched with January expenses

Cash basis accounting: Revenue (assessments) recorded when collected Expenses recorded when paid

Accrual accounting is GAAP (Generally Accepted Accounting Principles) WA RCW: GAAP is required for WA “New Act” Condominiums and recommended for “Old Act” Condominiums, and HOAs ID Statutes: Condominium Property Act (Title 55 Property in General, Chapter 15)- No mention of GAAP/finance ID – No mention of Homeowners Assns except Title 55, Chapter 27: Floating homes (No mention of GAAP or audits)

Accrual can be a fraud control Accrual provides a better financial picture including recording Assets and Liabilities Accrual can be a fraud control

Questions to ask when reading monthly Financial Statements (Board packets)

Opening Question: National Survey: How many minutes, on the average, do CA boards spend each meeting reviewing their financial package? 10 min? 5 min? 3 min?

Survey says: 3 minutes!!! Pets, Pools, Parking, Petunias…more than 3 minutes?? Consider spending sufficient time each month to monitor and protect Association funds

Operating Cash: (Asset) Balance Sheet: Operating Cash: (Asset) Are there bank reconciliations for all cash accounts at least quarterly and do they match the Balance Sheet? Unusual/old reconciling items and transfers? Are there bank statements (INCLUDING CDs) at least quarterly that match the reconciliations? Is there sufficient cash to meet needs? (CAI- 1-3 months of average operating expenses in Equity)

Replacement (Reserve) Cash: (Asset) Do monthly deposits into reserve cash match the monthly budgeted allocation? If not, why not? (There should typically NOT be a payable or receivable between operating and reserve cash) Are disbursements out of reserve cash documented in the board minutes? Have 2 board members approved the reserve cash disbursement? (WA)

Assessments Receivable: (Asset) Does the AR Aging report match the AR on the Balance Sheet? What are the “delinquencies” (or late AR) in the report and what is being done to collect? At year end, has the Board determined which accounts to “write off” (expense) or, set up as an “Allowance for Bad Debts” because there is some doubt it will be collected?

Accounts Payable: (Liability) Does the listing of Accounts Payable match the Balance Sheet? Are there unusual/old payables, and why? Cash flow issues or incorrect vendor amounts?

Prepaid Assessments: (Liability) Assessments paid in to the Association earlier than earned by the Association Does the listing match the Balance Sheet? These can generate the appearance of excess operating cash

Statement of Revenues & Expenses Does the assessment income agree with the budget each month? (accrual) Is all significant “other income” being recorded? (Laundry income, parking, move in/out fees, guest suite fees, recreational center usage fees?). What are the controls in place to ensure this income is being captured and recorded?

Expenses: Significant monthly variances actual to budget? Sufficient explanations/documentation? Unusual/non-recurring expenses: explained/approved/documented? Material contracts: Contracts approved, bid process used? Progress billings approved? Change orders approved? Documentation will help the next year’s budgeting process!

Audit Requirements: WA: New Act Condo (After 7/1/90) RCW 64.34.372 50 or more units: Annual audit Less than 50: Waiver required (60% of owners other than the Declarant) Old Act Condo (Before 7/1/90) Defaults to New Act, UNLESS the Governing Docs require an audit

IDAHO: No requirements noted in Idaho Statutes HOAs: 64.38.045 Annual Assessments more than $50,000 Waiver allowed, more than 67% of owners   WUCIOA: (7/1/18 HOAs and Condos SB 6175): Annual assessments $50,000 or more – audit required, no waiver Less than $50,000: May be waived with “majority of votes allocated excluding Declarant” IDAHO: No requirements noted in Idaho Statutes

Resources: CAI TIPS brochures WSCAI Journal: March 2018: Taxes & Audits: 20 questions April 2018: New Tax Act hoacpa.com FAQs, Classes

Thank you! Questions???

CAI and the Washington State Chapter of CAI Working Together to Serve You Locally and Nationally www.WSCAI.org 425-778-6378 www.caionline.org 1-888-224-4321