2. Course Introduction Welcome!  Introductions  Ice Breaker  Housekeeping  Agenda  Course Materials  PMDP courses

3. Course Introduction Housekeeping  Ground Rules – Be on time – Listen to and show respect for the opinions of others – Avolid side-conversations – Cell Phones off  Breaks  Lunch  Facilities

4. Course Introduction Course-Agenda  Course Introduction  Module 1: Budget Development  Module 2: Understanding Financial Reporting  Course Summary

5. Course Introduction Professional Management Development Program (PMDP)  M-100: The Essentials of Community Association Management  M-201: Facilities Management  M-202: Association Communication  M-203: Community Leadership  M-204: Community Governance  M-205: Risk Management  M-206: Financial Management

6. Course Introduction Course Materials  Pre-session Assignments  Participant Guide – 2 Modules: Financial Management Bidding and Contracts – Activities  Course Evaluation & Exam forms

7. Course Introduction Importance of Course  A budget is a financial plan for managing community association.  Budget establishes: – What services community provides – When they will be done – How they will be done

8. Introduction to Module 1: Budget Development

9. Budget Development Focus  Developing a community association budget

10. Budget Development Module 1 Objectives: 1.Identify the elements of Duty of Care. 2.Identify and explain the elements associated with Duty of Loyalty. 3.Identify a budget line item and its level of service based on the association’s obligations, its needs, and owner expectations. 4.Develop budget line items using zero-base budgeting and a comparison to historical trends. 5.Apply zero-base budgeting to calculate current replacement costs.

11. Budget Development Module 1 Objectives, cont.: 6.Determine whether current replacement costs are adequately funded. 7.Apply zero-base budgeting to calculate the cost of performing a service in- house versus outsourcing a position. 8.Reconcile budget revenues and expenses. 9.Obtain approval for an association’s operating and replacement fund budgets.

12. Budget Development Optional Pre-Reading Three chapters from M-100 available to review basic concepts:  Chapter 5: Budgets and Reserves  Chapter 6: Section on Assessment  Chapter 7: Report Funding & Financial Statements

13. Lesson 1: Fiduciary Duties

14. Fiduciary Duties Lesson 1 Objectives:  Identify the elements of Duty of Care  Identify and explain the elements associated with Duty of Loyalty

15. Fiduciary D uties Board members are bound by state law to:  Act within their authority  Exercise due care  Act in good faith  Act with ordinary care that they believe to be in the best interests of the association

16. Fiduciary Duties Fiduciary duties include:  Duty of Care  Duty of Loyalty

17. Fiduciary Duties The three main functions of the Board of Directors is: 1.Policy making body 2.Approval body 3.Oversight body

18. Fiduciary Duties The Duty of Care:  Requires a director to act in a reasonable and informed manner when participating in the Board’s decisions and its oversight of the day to day management of the community.

19. Fiduciary Duties Elements of Duty of Care:  Attend board meetings regularly  Serve on a committee  Exercise independent judgment  Act in the best interest of the corporation and its members  Obtain adequate information  Rely on experts  Delegate authority to act

20. Duty of Care Act Serve Delegate Authority Independent Judgment Attend Obtain information Rely on Experts

21. Fiduciary Duties The Duty of Loyalty requires the Director to exercise power in good faith and in the best interest of the community rather than the Director’s own interest or the interest of another person or entity.

22. Fiduciary Duties Duty of Loyalty relates to:  Conflict of Interest  Corporate Opportunity  Confidentiality

23. Lesson 2: Developing Line Items

24. Developing Line Items Lesson 2 Objective:  Identify a budget line item and its level of service based on the association’s obligations, its needs, and owner expectations

25. Developing Line Items No two community associations:  Are identical  Face exactly the same situation from one year to the next

26. Developing Line Items Assess and weigh the set of factors that determine:  Whether an item is included in an association budget.  And if so, the level of service to provide.

27. Developing Line Items Distinguish between:  Association Obligation  Association Need  Owners Expectation

28. Developing Line Items Two types of budget line items: 1-Mandatory: Requirements the community is obligated to meet. 2-Discretionary: Items are based on owner, board, and committee desires, but the association is not obligated to fund.

29. Developing Line Items When to identify the level of service?  When a variation in the level of service is possible.  A change in obligation, need or expectation occurs.

30. Developing Line Items Need for Contingency Planning  Budget for contingencies  Accumulate operating contingency funds  Surpluses  Separate budget line items Rule of thumb for level of accumulated funds— 2-5 % = minimum 10-15% = very good

31. Developing Line Items Activity #1: Level of Service for an Association Budget Line Item Purpose: To practice identifying a level of service by balancing obligation, need, and expectation.

32. Lesson 3: Historical Trend & Zero-base Budgeting

33. Historical Trend & Zero- base Budgeting Lesson 3 Objective:  Develop budget line items using zero-base budgeting and a comparison to historical trends.

34. Historical Trend & Zero- base Budgeting What is the difference?  Historical = estimates line items based on past trends  Zero-base = starts from zero and justifies every amount added to line item

35. Historical Trend & Zero- base Budgeting  Historical trend – Estimates line items based on past trends – Easier to use by itself

36. Historical Trend Budgeting Process:  What  When  Why  How Historical Trend & Zero- base Budgeting

37.  Zero-base – Verifies the need for a budget line item – Starts with zero and justifies every cost source added to the line item – Meets owner expectations

38. Zero-Base Budgeting Process  What  When  Why  How Historical Trend & Zero- base Budgeting

39. Zero base budgeting ensures:  The association is charged only for their utilities  No “fluff” in large dollar line items like landscape  Pet projects are not being funded  On-site employees aren’t being paid more than the worth of the services Historical Trend & Zero- base Budgeting

40. Zero-Base Budgeting Process Steps 1.Identify each cost component for the line item 2.Determine the basis for estimating each cost component 3.Calculate the zero-base estimate of the expense 4.Compare the zero-base item with the historical trend for the item 5.Investigate and resolve any significant discrepancies 6.Adjust the estimated expense for any anticipated increase in prices 7.Recommend a budget line item

41. Information you need:  Basis for estimating individual budget line items  Association assets  Asset lifetimes Historical Trend & Zero- base Budgeting

42. Basis for estimating individual line items include:  Rate  Quantity  Time  Number of Entities Historical Trend & Zero- base Budgeting

43. Cost Areas Description RRate: Expected rate and the unit of measurement to which it applies QQuantity: The expected quantity of the cost component TTime: Time period NNumber: Number of entities FormulaZero-base Estimate = R x Q x T x N

44. Sources of Information for Budget Development  Management Company  Utility Companies  Local contractors and consultants  Reserve study, engineers  State agencies  Community Associations Institute  Trade associations Historical Trend & Zero- base Budgeting

45. Sources of Information on Association Assets  Inventory and analysis sheets  Manufacturer’s information warranty statements  Original as-built drawings  New product information Historical Trend & Zero- base Budgeting

46. Sources of Information on Assets Lifetimes  Publications from CAI  Other trade associations  Local contractors  Consultants  State agencies  Reserve study professionals, engineers  IRS  Certified Public Accountants Historical Trend & Zero- base Budgeting

47. Activity #2a: Develop a Utility Line Item—Example Purpose:  To apply the procedure for developing budget line items  To identify the sources of association costs for water usage

48. Historical Trend & Zero-base Budgeting Basic Instructions for Small- Group Work:  Choose a leader  Choose a timekeeper  Choose a recorder

49. Historical Trend & Zero-base Budgeting Activity #2b: Develop a Utility Line Item— Group Work Purpose:  Develop a zero-base line item  Compare a zero-base line item to the historical trend to see if there is a potential for efficiency and savings

50. Lesson 4: Replacement Reserves

51. Replacement Reserves Lesson 4 Objectives:  Apply zero-base budgeting to calculate current replacement costs.  Determine whether current replacement costs are adequately funded.

52. Replacement Reserves Why fund replacement reserves?  The association needs a plan  Regular periodic assessments are most equitable  Loans usually cause a unit owner to pay for the asset twice

53. Replacement Reserves Two Parts of a Reserve Study 1.The information about the physical status and repair/replacement cost of the major common-area components the association is obligated to maintain. 2.Analysis of association’s reserves, income, and expenses.

54. Replacement Reserves Reserve Specialist (RS):  CAI established the Reserve Specialist designation to help identify qualified reserve study providers.  The Reserve Specialist Code of Ethics is online and in the Resource Section of this guide.

55. Replacement Reserves The four primary funding strategies: – Baseline funding – Full funding – Threshold funding – Statutory funding

56. Replacement Reserves The concept of basic investment principles:  The board of directors, supported with the advice of the community association manager, has a fiduciary responsibility to all unit owners to make sure reserve funds are invested properly.

57. Replacement Reserves Investment Concepts  Safety  Liquidity  Yield  Laddering

58. Replacement Reserves “Suitable” investments instruments for association reserves:  Certificates of deposit (CDs)  Money market deposit accounts (savings, checking)  Money market funds  U.S. treasuries and U.S. treasury “strips” (zero coupons).

59. Replacement Reserves Activity #3a: Develop a Replacement Line Item—Example Purpose: To review a roof replacement example together as a class before working on your own in groups.

60. Replacement Reserves Activity #3b: Develop a Replacement Line Item—Group Work Purpose: To practice:  Calculating the current replacement cost for an item using zero-base budgeting.  Determining whether the current replacement cost for an item is adequately funded or not.

61. Lesson 5: Personnel Cost

62. Personnel Cost Lesson 5 Objective  Apply zero-base budgeting to calculate the cost of performing a service in-house versus outsourcing a position.

63. Personnel Cost Personnel Line Items  A fourth use of zero-base budgeting is to compare the cost of performing a service in-house with outsourcing.

64. Personnel Cost Use Zero-based budgeting to inform employee:  Total cost of position to community association  Total compensation versus take- home pay

65. Personnel Cost Base compensation = gross pay Take-home pay = gross pay - taxes - benefits Wages = pay for nonexempt (hourly) employees Salary = pay for exempt (salaried) employees

66. Personnel Cost Benefits  Determined by the employer.  Employer may require matching contributions from employee.  Benefits vary by employer and locale.  Usually a percent of gross pay or of the cost of the benefit.

67. Personnel Cost Workers’ compensation insurance  Rate varies by employee classification.  States establish the requirement and the amount of coverage necessary.  In most states, commercial insurers provide the actual coverage.

68. Personnel Cost Payroll taxes  Set by the taxing body  Employer must pay its share and withhold and forward employee’s share  State and local governments vary in terms of requiring payroll deductions—and the types of deductions required  State income tax  Federal income tax  FICA (social security)

69. Lesson 6: Reconciling Revenues & Expenses

70. Reconciling Revenues & Expenses Lesson 6 Objectives: Reconcile budget revenues and expenses. Obtain approval for an association’s operating and replacement fund budgets.

71. Reconciling Revenues & Expenses Factors that Affect Assessment  Governing Documents  Statutes in some states  Inflation  Amount and complexity of service  Age of assets  Political situations  Local situations

72. Reconciling Revenues & Expenses Strategies for reconciling revenues and expenses  Identify additional sources of revenue.  Scale down individual discretionary budget line items.  “Sell” an increase in the assessment to the board of directors.  Motivate and prepare the board to “sell” an increase in the assessment to the owners.

73. Reconciling Revenues & Expenses Basic Instructions for Small-Group Work:  Choose a leader  Choose a timekeeper  Choose a recorder

74. Reconciling Revenues & Expenses Activity #4: Reconcile Budget Revenues and Expenses Purpose: To practice reconciling budget revenues and expenses.

75. Reconciling Revenues & Expenses  Whether or not a method of reconciling revenues and expenses is appropriate depends on the specific set of circumstances.  Ignoring facts and overestimating revenues or underestimating expenses will not change the real world which must be dealt with.

76. Reconciling Revenues & Expenses Activity #5: Develop Strategies for Obtaining Budget Approval Purpose: To strategize ways to obtain budget approval in difficult situations.

77. Module Summary Module 1 Focus: Development of a community association budget from identification of budget items and their level of service through budget approval.

78. Module Summary Module 1 Objectives:  Identify the elements of Duty of Care  Identify and explain the elements associated with Duty of Loyalty  Identify a budget line item and its level of service based on the association’s obligations, its needs, and owner expectations.  Develop budget line items using zero-base budgeting and a comparison to historical trends.  Apply zero-base budgeting to calculate current replacement costs.

79. Module Summary Module 1 Objectives, cont.:  Determine whether current replacement costs are adequately funded.  Apply zero-base budgeting to calculate the cost of performing a service in-house versus outsourcing a position.  Reconcile budget revenues and expenses.  Obtain approval for an association’s operating and replacement fund budgets.

80. Discussion and Questions?  Why is it important for a community to budget for unexpected conditions or losses?  What’s the difference between historical trend budgeting and zero- base budgeting?  Why is it important for an association to fund reserves?

81. Additional Resources from CAI  CAI offers many excellent resources about financial management. For information on these products, call CAI for a bookstore catalog at (888) 224-4321 or visit the bookstore online at www.caionline.org/bookstore.cfm www.caionline.org/bookstore.cfm