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Course Introduction
Welcome! Introductions Ice Breaker Housekeeping Agenda Course Materials PMDP courses
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
Course Introduction
Course-Agenda Course Introduction Module 1: Budget Development Module 2: Understanding Financial
Reporting Course Summary
Course Introduction
Professional Management Development Program (PMDP)M-100: The Essentials of Community Association ManagementM-201: Facilities ManagementM-202: Association CommunicationM-203: Community LeadershipM-204: Community GovernanceM-205: Risk Management M-206: Financial ManagementM-206: Financial Management
Course Introduction
Course Materials Pre-session Assignments Participant Guide–2 Modules:
• Financial Management• Bidding and Contracts
–Activities Course Evaluation & Exam forms
Course IntroductionImportance 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
Introduction to Module 1: Budget Development
Budget Development
Focus Developing a
community association budget
Budget DevelopmentModule 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.
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.
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
Lesson 1: Fiduciary Duties
Fiduciary Duties
Lesson 1 Objectives: Identify the elements of
Duty of Care
Identify and explain the elements associated with Duty of Loyalty
Fiduciary Duties
Board members are bound by state law to:Act within their authorityExercise due careAct in good faith Act with ordinary care that they believe to be in the best interests of the association
Fiduciary Duties
Fiduciary duties include: Duty of Care
Duty of Loyalty
Fiduciary Duties
The three main functions of the Board of Directors is:1.Policy making body2.Approval body3.Oversight body
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.
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
Duty of Care
Act
Serve
Delegate Authority
Independent JudgmentAttend
Obtain information
Rely on Experts
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.
Fiduciary Duties
Duty of Loyalty relates to: Conflict of Interest
Corporate Opportunity
Confidentiality
Lesson 2: Developing Line Items
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
Developing Line Items
No two community associations: Are identical Face exactly the same situation
from one year to the next
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.
Developing Line Items
Distinguish between: Association Obligation Association Need Owners Expectation
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, andcommittee desires, but the association is not obligated to fund.
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.
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
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.
Lesson 3: Historical Trend & Zero-base
Budgeting
Historical Trend & Zero-base Budgeting
Lesson 3 Objective: Develop budget line items using
zero-base budgeting and a comparison to historical trends.
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
Historical Trend & Zero-base Budgeting
Historical trend–Estimates line items based on
past trends–Easier to use by itself
Historical Trend Budgeting Process:
What When WhyHow
Historical Trend & Zero-base Budgeting
Historical Trend & Zero-base Budgeting
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
Zero-Base Budgeting Process What When Why How
Historical Trend & Zero-base Budgeting
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
Historical Trend & Zero-base Budgeting
Zero-Base Budgeting Process Steps1. Identify each cost component for the line item2. Determine the basis for estimating each cost
component3. Calculate the zero-base estimate of the
expense 4. Compare the zero-base item with the historical
trend for the item5. Investigate and resolve any significant
discrepancies 6. Adjust the estimated expense for any
anticipated increase in prices 7. Recommend a budget line item
Information you need: Basis for estimating individual
budget line items Association assets Asset lifetimes
Historical Trend & Zero-base Budgeting
Basis for estimating individual line items include:Rate Quantity TimeNumber of Entities
Historical Trend & Zero-base Budgeting
Historical Trend & Zero-base Budgeting
CostAreas
Description
R Rate: Expected rate and the unit of measurement to which it applies
Q Quantity: The expected quantity of the cost component
T Time: Time period
N Number: Number of entities
Formula Zero-base Estimate = R x Q x T x N
Sources of Information for Budget DevelopmentManagement CompanyUtility CompaniesLocal contractors and consultants Reserve study, engineersState agenciesCommunity Associations InstituteTrade associations
Historical Trend & Zero-base Budgeting
Sources of Information on Association AssetsInventory and analysis sheetsManufacturer’s information warranty statementsOriginal as-built drawingsNew product information
Historical Trend & Zero-base Budgeting
Sources of Information on Assets LifetimesPublications from CAIOther trade associationsLocal contractorsConsultantsState agenciesReserve study professionals, engineersIRS Certified Public Accountants
Historical Trend & Zero-base Budgeting
Historical Trend & Zero-base Budgeting
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
Historical Trend & Zero-base Budgeting
Basic Instructions for Small-Group Work:Choose a leaderChoose a timekeeperChoose a recorder
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
Lesson 4: Replacement Reserves
Replacement Reserves
Lesson 4 Objectives: Apply zero-base budgeting to
calculate current replacement costs.
Determine whether current replacement costs are adequately funded.
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
Replacement Reserves
Two Parts of a Reserve Study1.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.
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.
Replacement Reserves
The four primary funding strategies:–Baseline funding–Full funding –Threshold funding–Statutory funding
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.
Replacement Reserves
Investment Concepts Safety Liquidity Yield Laddering
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).
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.
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.
Lesson 5: Personnel Cost
Personnel Cost
Lesson 5 Objective Apply zero-base budgeting to
calculate the cost of performing a service in-house versus outsourcing a position.
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.
Personnel Cost
Use Zero-based budgeting to inform employee: Total cost of position to community associationTotal compensation versus take-home pay
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
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.
Personnel Cost
Workers’ compensation insuranceRate varies by employee classification.States establish the requirement and the amount of coverage necessary.In most states, commercial insurers provide the actual coverage.
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)
Lesson 6: Reconciling Revenues & Expenses
Reconciling Revenues & Expenses
Lesson 6 Objectives:• Reconcile budget revenues and
expenses.• Obtain approval for an association’s
operating and replacement fund budgets.
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
Reconciling Revenues & Expenses
Strategies for reconciling revenues and expensesIdentify 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.
Reconciling Revenues & Expenses
Basic Instructions for Small-Group Work:Choose a leaderChoose a timekeeperChoose a recorder
Reconciling Revenues & Expenses
Activity #4: Reconcile Budget Revenues and Expenses
Purpose: To practice reconciling budget
revenues and expenses.
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.
Reconciling Revenues & Expenses
Activity #5: Develop Strategies for Obtaining Budget Approval
Purpose: To strategize ways to obtain budget approval in difficult situations.
Module Summary
Module 1 Focus:Development of a community
association budget from identification of budget items and their level of service through budget approval.
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.
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.
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?
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