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OPERATING BUDGET,
RESERVES ARE DETERMINED BY BOARD by Nancy Hartmann
Q:
When I bought my condominium, I received financial information concerning
the operating budget and reserves. Can you explain what information
is contained in these statements? Who or what determines whether
a cost will be in the operating budget or the reserves?
A: Each
year, every member of a community association should receive information
that explains the financial condition of the association. These documents
generally include:
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an operating budget for the
coming year (pro forma), a summary of the association's reserves a Balance
Sheet. The balance sheet contains two major areas of financial information.
This statement has data on the association assets (what is owned) and liabilities
(what is owed).
-
Reserve classifications are
listed on the balance sheet. The total for the reserve items is shown as
a liability since this capital is held "in reserve." It is available
for the repair, replacement, restoration or maintenance of each major common
area component. The purpose of the reserve funds is to provide adequate
funding to date for the ongoing preservation and protection of the association's
buildings and hardscape.
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A pro forma operating budget
contains data on anticipated expenses for the coming year. This budget
is based on historical costs and expected cost adjustments.
Operating costs are generally
short-term events that occur during one-to-four month intervals. For example,
water, electricity and routine landscape maintenance services are typical
operating expenses. These items require frequent payment and are connected
with the operation of the association. The term reserves is used to describe
the capital allocated for the preservation of the association's major common
area components.
Costs associated with reserves
are generally much greater than operating costs and occur less frequently.
For example, major painting programs and roof repair and replacement are
typical reserve items. Reserve elements often are not scheduled on
less than a two-year cycle.
Many reserve components have
useful lives of 10 to 15 years or more. The test for a reserve classification
for many associations is whether the component's preservation cost will
exceed $1,000.00 and if the component has a useful life of one year or
more. Each cost associated with running a community association is
classified as either an operating expense or a reserve expenditure.
Operating expenses occur
on a short-term basis (often monthly) and reserves are long term (usually
measured in years). The pro forma operating budget lets members know
what to expect during the coming year in terms of operating expenses.
The reserve summary gives
each member a picture of the available capital specifically designated
for the preservation and protection of the association's common area assets.
Decisions for structuring
the budget, including reserves, are made by the association's board of
directors. Guidelines are published by the California Department
of Real Estate to help with the budgeting process.
If you have an interest in
the budget process, you may attend a scheduled meeting of the board of
directors and bring your questions or comments to the board at that time.
Nancy Hartmann of Hartmann
Inc. is a member of the Community Associations Institute (CAI). Readers
can visit the CAI Website at www.cai-sd.org and get their condominium questions
answered by calling the Community Associations Institute at (619) 299-1376,
by e-mailing sdcai@aol.com or by sending questions to Condominiums, Homes,
San Diego Union-Tribune, P.O. Box 120191, San Diego, CA 92112-0191
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