1. WASHINGTON STATE CHAPTER
Welcome to the
WASHINGTON STATE CHAPTER of
Community Associations Institute
The leading professional organization providing education,
resources, and advocacy for community association living.

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

3. 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.

4. 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.

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

6. 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.

7. 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

8. 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).

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

10. 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

11. 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.

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

13. 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.

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

15. 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”

16. What Components to Include?

17. 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.

18. Sample Expense Graph

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

20. % Funded of ~ 3,500 Association Reserves WA Clients

22. 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.

23. 30 Year Cash Flow

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

26. 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

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

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

29. Key Financial Statements and Definitions (Accounting 101)

30. 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???

31. 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)

32. Sample Balance Sheet
Cathy

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

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

35. 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

36. 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

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

38. 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)

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

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

41. 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?

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

43. 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)

44. 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)

45. 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?

46. 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?

47. 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

48. 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?

49. 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!

50. 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

51. IDAHO: No requirements noted in Idaho Statutes
HOAs:
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

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

53. Thank you!
Questions???

54. CAI and the Washington State Chapter of CAI
Working Together to Serve You
Locally and Nationally