Condo Association Budget Season Tips: How to Cut Costs and Increase your Reserves
One of the most important duties of the community association treasurer is to take the lead on reviewing and approving the annual budget. This annual duty is quite possibly the most important function of the treasurer. Typically, the draft recommended budget is initially prepared by the management company and then it is provided to the board for review and adjustment. The board then makes the final determinations on what the exact numbers should be in the budget. At this point, the budget is sent to all the homeowners and then there is a vote to adopt the new budget for the following fiscal year at an upcoming board meeting.
Normally, the management company recommends an annual increase in the amount of 3% to 5% simply to keep up inflation and perhaps a higher percent increase depending on various other factors. And then the board must grapple with the notion of raising the assessments. In some cases, the board rejects the recommended increase due to the board’s discomfort with displeasing homeowners who don’t want to pay higher assessments. This is regardless of what should be done as dictated by fiduciary responsibilities of the board of directors.
These typical scenarios cover the usual protocol for many communities. However, what if there is a way to cut costs and increase the reserve contributions without having to raise assessments? This would provide financial relief for the homeowners and earn many kudos from the homeowners as well.
So, let’s discuss the best ways to cut costs for community associations:
- Renegotiate the waste removal agreement or switch to a new company. This is one of the easiest and best ways to cut costs. In some cases, associations can save thousands of dollars a year by doing this.
- Install LED bulbs or install new LED type fixtures. This will require an upfront investment but the payback for this is typically 1 to 2 years and usually results in a significant savings in the electric bill
- Rebid insurance or switch to a new broker/carrier. Insurance costs are typically one of the highest line items in the budget and this is one of the best ways to save thousands of dollars a year.
- Rebid contract services such as janitorial, snow removal and landscaping services. Although it is easier to stay with the current vendors, it is in the association’s best interest to rebid these services on a regular basis. In some cases, the board doesn’t want to part ways with a current vendor such as the janitor because they have been with the association for a very long time and there is an emotional attachment. However, if the association is truly determined to cut costs and do what is best for the homeowners and association, then there needs to be decisions made based on facts instead of emotions.
- Switch management companies. This involves a lot of time and effort by the board. To properly vet a new management company takes several weeks and many hours of effort. Perhaps this is the reason why so many boards stay with management companies that are not performing at an appropriate level.
This might very well be the best way to cut costs especially if the current management company is not properly suited for your type of community and if there isn’t an effective working relationship between the board and the management company. All management companies are not equal. There are tremendous differences between one management company and the next. Some are geared for onsite management while others are narrowly focused on management of smaller communities. Some excel at managing HOA’s out in the suburbs and some are better at onsite management of high rises along the Chicago Lakefront. When you have the right fit between a management company, the board and the type of community, there is a higher level of collaboration, teamwork and effectiveness which results in a better focus on cost cutting.
Lower performing management companies tend to charge less money for their monthly fees and then make up the shortfall in their profits in opaque ways. For example, they charge vendors annual fees to get on their bid lists and charge associations fees that are not typically disclosed in the management contracts. This results in unforeseen expenses by the association and results in higher assessment levels to cover these non-disclosed expenses.
In fact, the number of complaints filed by board members and reported in the news confirms that this is an unfortunate growing trend within the industry.
On the flip side, by switching to a higher quality company, there is a higher likelihood of better transparency of how the management company charges for ala carte services and how they obtain bids and handles large scale projects. This is one of the most important ways to cut costs and to ensure that the association does not overspend on large scale capital projects.
In summary, there are many ways to cut association costs. This involves the board members doing what is best for the association and in some cases, it involves changing vendor partners. In most cases, a high performing management company will take the lead in providing the recommended cost cutting measures. In other cases, the board will need to switch management companies to benefit from a more effective management company that focuses on cutting costs and not just spending money.