Improving Financial Stability in Your Community Association

Community associations offer residents an enriched living experience, with amenities such as pools, fitness centers, spas, golf courses, and riding trails. Being part of a managed association often fosters shared interests among neighbors, creating a strong sense of community and maintaining high aesthetic standards.

However, whether you're part of a high-rise in New York, an active adult community in Phoenix, or a gated neighborhood in Dallas, financial stability is crucial. A well-managed budget and ample reserves are essential to maintain property values and enhance residents' lifestyles. Without financial health, it's challenging for the board to manage maintenance, invest in capital improvements, or organize community programs effectively.

Ensuring your community's financial health requires diligence and prudent decisions. Here are some strategies to prevent budget-related pitfalls and safeguard your community's future.

1. Start with a solid budget

A robust budget is the foundation of your community's financial health. It's important to stay committed to the budget to simplify future planning. Utilizing effective tracking tools and expertise can make this process smoother.

Proper budgeting is essential for financial stability. Boards should thoroughly evaluate financial data rather than apply incremental increases from the previous year. Conducting a detailed review, updating reserve studies every five years, and funding reserves according to study recommendations are vital practices. Some communities face challenges when they rely on reserve funds to address budget shortfalls, only to find themselves short on funds for major expenses.

Maintain sufficient working capital; typically, having one to two months' worth of operating expenses as liquid assets is advisable, based on community size. Forward-thinking communities plan five to ten years ahead, anticipating upcoming expenses like stucco repairs, roofing, or renovations, ensuring adequate reserve funding over time.

2. Communicate clearly and consistently to residents

Strong communication with residents can make a significant difference when financial challenges arise. An example involved a condominium in Charlotte, North Carolina, which had to address a costly façade issue. Despite receiving only a fraction of the needed funds from a lawsuit, the community stood out by maintaining transparency. By inviting banks to speak to homeowners, detailing expenses, and providing comprehensive updates through newsletters and budget packets, they successfully navigated a potentially difficult situation.

3. Seek out additional savings

Understand your financial inflow and outflow, and strive to maximize your resources:

- Invest in energy-efficient lighting and appliances to lower long-term utility bills.

- Explore savings through deregulated utilities by purchasing from brokers.

- Research grants available for improvements, especially those focused on energy conservation.

- If you partner with a property management company, inquire about their connections with insurance brokers and banks to secure better terms and rates for your association.

- Work with vendors to ensure you get the best value and service.

4. Implement Internal Controls

Establishing robust internal controls is crucial for preventing financial misappropriation. For instance, ensure the person responsible for recording receipts is different from the one handling deposits.

Strong internal controls are a defense against theft and fraud, particularly concerning bank accounts. Limit access to these accounts to only authorized personnel.

5. Triple-check insurance coverage

Beyond basic property or casualty insurance, ensure your association is protected against lawsuits by having appropriate coverage, including an umbrella policy if necessary. Directors and officers liability coverage is essential to protect board members, as is any mandated worker’s compensation coverage.

State requirements can vary, so consult with an experienced agent familiar with similar communities and legalities. Board members are responsible for adequately insuring community assets; be transparent about community features during policy reviews. Annually review insurance policies and update coverage to reflect any property improvements or changes.

6. Invest your reserve funds carefully

Investing reserve funds wisely is key to financial growth. Avoid risky investments such as corporate bonds, municipal bonds, or stocks, opting instead for safer financial instruments.

7. Audit, audit, audit

Regular audits provide clarity on your financial standing. For smaller associations, a "review" might be a cost-effective alternative to a full audit. Audits not only verify accuracy but also protect the board and management from financial discrepancies or accusations.

Following these guidelines and conducting annual audits as mandated by governing documents ensure accountability and transparency, safeguarding the financial future of your association.

Building financial stability in your community involves more than budgeting. Through transparent communication, strategic cost-saving, effective control measures, careful investment, and regular audits, your community can achieve long-term financial health. For further guidance on financial planning for your community, consider seeking additional resources.