How Does The Association Operating Budget Work At a COA (Condo Owners Association)/HOA (Home Owners Association)? What Are Regular Assessments?
An Association creates an operating budget that projects the money needed to fund:
- Operating expenses
- Reserves for repair and replacement of the common elements the COA/HOA is responsible.
Associations are required to have an annual operating budget in most states.
Budgeting usually starts by assessing any changes in the Association’s financial position and cost structure, compared to the prior year.
Budgets are generally adopted by the board rather than by a vote of the owners, with the budget process dictated by the association’s governing documents.
Even when the governing documents give the board the right to adopt a budget, a vote of the owners may be required if the budget requires a significant increase in regular assessments. Usually, this occurs when regular assessments (non-emergency) increase 20% or more.
Budgets are typically distributed as part of the annual report.
Regular assessments (also known as Association dues) are what owners are required to pay to fund the Association’s operation. If a budget has been properly prepared, regular assessments will cover the operating budget. Most governing documents allow the board to establish the COA/HOA dues without an owner vote.
To anticipate costs for future repairs and replacements COAs and HOAs use Reserve studies and Reserve funding planning. These help ensure the best physical and financial interests of the community and are required by law in many states.
Reserve funds tie to the budget and act as a saving account to repair and replace major items such as roofs or pavement in common areas that may not need immediate attention. With proper Reserve fund planning, an association calculates and sets aside Reserve funds just like saving for college or retirement.
Without special assessments or loans, each association requires different amounts of money to repair and replace maintenance tasks on schedule. To understand the amount of money required, they will typically commission a Reserve Study. With the Reserve Study, the Association can more precisely determine how much and when funds are needed for repairs and replacements.
Association dues commonly include a percentage dedicated to the Reserve Fund.