1. DeLeon & Stang, CPAs and Advisors Allen P. DeLeon, CPA allen@deleonandstang.com 301-948-9825 Financial Literacy for Community Associations

2. Outline  What financial information should we be focusing on and how often?  How to read financial statements.  Reserve studies – Are they important and how often should they be done?  Budgets – What do they mean, are they necessary?  Contingency Funds – How are they used, why are they important?  Delinquencies – What can be done? Should we budget for them?

3. What financial information should we be focused on and how often?  Budget   Meeting Minutes  What was discussed  Is it part of budget or will it cause variance?

4. What financial information should we be focused on and how often? (CONTINUED)  Monthly Manager’s reports or monthly account reports  What were the expenditures  Were they budgeted  Were they over or under budget  Are there collection issues  Audit Report  An audit report is showing history so if we are waiting for the audit to discover a problem it could be too late.  One area to focus on with the audit is how many adjustments the auditor has to make and for how much.  If the auditor is making adjustments it indicates that the accounting reports/management report are not accurate.

5. What financial Information should we be focused on and how often? (CONTINUED)  Audit Report (CONTINUED)  Also, audits should show activity in the reserve fund separate from the operating fund. Understand whether or not one “fund” owes the other “fund” money. Is so, this could indicate that reserves are not fully funded.  Other reports  Treasurer should review bank reconciliation every month and understand any old (greater than 60 days) outstanding items.  Delinquency reports should be reviewed every month by the board with verification that actions are taken in accordance with collection policy.

6. Questions

7. How to read financial statement  Budget variance reports  Cash position  Audit report

8. Questions

9. Reserve studies  Are they important?  In a word “YES”  Is it required?  Check your By-Laws and also check state and county laws. In VA the law has been changed to require reserve studies and this supersedes the By-Laws.  Will a study give the reserve balance goal over some period of time?  What does a study cost and how long is it good for?  Without a study, is there a rule of thumb reserve balance goal?

10. Reserve funds In general, what is the purpose of a reserve fund?  By definition what is the difference between replacement, capital and contingency funds? Should they be separated and when should/cam they be used?  If a $5,000 insurance deductible is needed, which fund should it come from?  If reserve money is used for snow removal or to cut down a damaged tree, is that a loan that needs to be repaid from the next year budget?  If there is money left over from another budget account at the end of the year, should it be added to the reserve fund? Can it be used wherever the BOD wants?

11. Special assessments  What are the guidelines for deciding whether to draw from a reserve fund or special assessment for an unbudgeted expense? Other reserve comments I’ve heard from residents and even from board members:  Why should I contribute to reserves – I won’t live here when that item needs to be replaced?  From a board member – if we reduce or eliminate the reserves we can lower the assessments and everyone will love us (this is a lawsuit waiting to happen).

12. Questions

13. Budgets What do they mean? Are they necessary?  Are they necessary – in a word “yes”.  Most by-laws require the creation of an annual budget.  The budget should be the most important financial document created by the board. It is as good as the time that is spent creating it.  The budget, if done properly, sets the plan for the upcoming year and establishes the amount of assessments that will be charged to each member.

14. Budgets (CONTINUED)  With the proper foresight, there should be no unforeseen items not covered by the budget.  What about: – Large snowfalls – Unexpected repairs  To the extent these items do occur, the creation and proper use of a contingency fund will ensure no big disruption to the financial standing of the Association.

15. Questions

16. Contingency funds How are they used  In a perfect world, everyone pays their assessment on time and there are no variances to any expense.  Has this ever happened for anyone??  We recommend that each association create and fund (over time) a contingency fund to cover unforeseen items.  Unusual snowfall (remember the 80 inches we had 2 years ago)  Water leaks (not covered by insurance)  $5,000 insurance deductibles  Other examples / samples

17. Contingency funds (CONTINUED)  Contingency funds should not be used for extras that were not budgeted for (planting flowers, tree trimming, etc.)  We recommend a contingency fund equal to 8 to 10% of annual assessments.  You don’t have to get to the full funding level in one year.

18. Questions

19. Delinquencies  Create a strong and simple collection policy. Some associations have collection policies where liens are filed if someone is 60 days delinquent.  Be sure there is foreclosure action in your policy.  As a board commit that there will be no exceptions related to your collection policy (even in tough times).  Even with a strong collection policy you will have delinquencies, especially in economic times like we have now.  We do recommend that, based on a review of history and consideration of where the economy is, associations budget some amount for bad debts.

20. Delinquencies (CONTINUED)  It is the only way to try and bring some consistency to your budget if you do face increasing delinquencies.  Consider publicizing delinquencies, not necessarily individual names but that they are increasing in general.  Residents will hate the idea that they are paying their own assessments plus a portion of those who are not paying and they may help “police” collections.

21. Delinquencies (CONTINUED) Brainstorm other creative ideas:  Withhold pool passes (many do this).  Have cars towed (I knew one association that did this – it got people’s attention but I would tread lightly here).  More financial failures for an association occur because of a lack of collections than cost overruns (by far).

22. QUESTIONS

23. Allen p. DeLeon, CPA allen@deleonandstang.com 301-948-9825@deleonandstang.com