Becker & Poliakoff

“Budgeting Challenges” – FLCAJ Magazine

“Budgeting Challenges” – FLCAJ Magazine

Come gather ‘round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you is worth savin’
And you better start swimmin’ or you’ll sink like a stone
For the times they are a-changin’
“The Times They Are A-Changin” (Bob Dylan, 1963)

The old Bob Dylan song is certainly appropriate to today’s community association industry. Hurricanes, floods, insurance rates, and new laws have combined to form what could be called the “perfect storm” to devastate association budgets, and in particular condominium and cooperative budgets.

While the “perfect storm” applies in some respects to homeowner associations, this article will focus on condominium and cooperative associations and how your association can face these changes and adapt while attempting to control skyrocketing assessment increases.

A brief recap of how we got here follows:

  • 2017—Start of a slew of named hurricanes impacting Florida (Irma, Michael, Ian, Helen, Milton)
  • 2021—Champlain Towers South collapse
  • 2022—New laws establish milestone inspections in Florida
  • 2022—New laws establish structural integrity reserve study (SIRS)
  • 2026—New laws mandate full funding of all structural reserve components (owners can no longer waive funding of these structural reserves).

The perfect storm started with the insurance industry. In the wake of the billions and billions of dollars in damages due to hurricanes, many companies left the Florida market completely, Those that remained significantly raised their rates and in many cases required community associations to pay for new roofs just to renew their insurance policies. Once the milestone inspections and SIRS laws went into effect, some carriers began requiring any required structural repairs to be completed and are requesting association budgets, in order to review reserve funding, as part of the renewal process.

The perfect storm continued with the new laws requiring milestone inspections and SIRS funding and came to a head with the requirement that SIRS components be fully funded in the 2025 budget, with no option of the owners waiving SIRS reserve components.

Combining all of the above, many associations are facing special assessments in the tens of thousands or even hundreds of thousands of dollars. Some associations have levied  several special assessments of this amount for required repairs and maintenance. What steps, if any, can an association take at this point in an attempt to control costs, keep budget increases to a minimum, and properly fund reserves to hopefully preclude similar special assessments in the future?

Budgeting

Budgeting should be a year-round process for the association, its board members, and manager. Planning for the next year’s budget should begin in January of the current year. The vast majority of associations I have been involved with start thinking about next year’s budget in October or November, usually at the behest of a frantic manager who has been trying to get the board to deal with the new budget since July.

Boards should consult with their managers regarding numerous ways to efficiently cut costs without affecting services. Energy surveys, lighting upgrades, variable frequency drives, effective use of timers, review of insurance policies, and aggressive collection of past due accounts are some methods to cut costs without affecting services, and in most cases they actually increase services and efficiency of operations. Finding new revenue streams may also help, such as newsletter advertising, event sponsorships, leasing common areas, etc.

Vendor contracts should be reviewed annually to negotiate better rates and keep increases in check. Vendors with a long-term relationship with the community are more prone to negotiating cost increases and assisting the association in maintaining quality services.

If the association does not have a building that is fully hurricane protected with shutters or impact windows, significant insurance savings may be realized by having the entire building outfitted with hurricane shutters or impact windows. Requiring all owners to install hurricane shutters or impact windows can be accomplished in several ways—an amendment to your declaration or by following certain statutory requirements to do so. If your building does not have this complete exterior hurricane protection, check with your association attorney as to the association’s options to implement such mandatory protection to reduce your insurance premiums.

As assessments and special assessments have increased, so have delinquent assessments. While boards can be and are sympathetic to owners with legitimate problems in paying such increases, the board’s duty to the rest of the owners requires the board to aggressively pursue past due assessments. There are ways to assist owners with legitimate issues; but generally an aggressive pursuit of assessments is a necessity in today’s community association world. New laws require the association to take certain actions before turning over a unit to the attorney for collections. An association should have a written policy with deadlines and procedures. Collecting past due assessments on a willy-nilly basis will usually have a significant impact on your budget, requiring increases in assessments for all owners. Talk with your association attorney to establish such a policy, and then enforce the policy.

Reserve Funding

Arguably reserve funding is the real reason for the entire financial mess now facing community associations in Florida. Until the law was changed in 2022 to go into effect in 2025 (or 2026, if properly waived), condominium and cooperative owners could be given the option to partially fund or waive the reserve funding required by statute. While boards were required to prepare budgets with full reserve funding, the owners could be given the option to reduce or waive reserve funding with a proper membership vote. Reserve funding was usually a big-ticket item, and in order to keep assessments from increasing, or only slightly increasing many boards gave the owners the opportunity to reduce or waive reserves. To keep their assessments from rising, most owners gladly approved such a reduction or waiver year after year after year. When the time came for the required item to be performed, such as reroofing or painting, a special assessment was passed to pay for the required maintenance. A popular refrain from board members for years was, “We have not raised assessments in three, four, five, or six years.” When I asked one older owner why they always waived reserves instead of just properly funding them, his reply was, “I don’t buy green bananas.”

That all changed in 2022, and these changes will be effective in 2025 or 2026. SIRS components will have to be fully funded in 2026 and cannot be waived by the membership. Based on the history of the vast numbers of associations that have routinely reduced or waived reserves over the years, this will lead to significant increases in reserve funding of the budget for most condominium and cooperative associations in Florida. What, if anything, can an association do to try to mitigate this effect on its owners?

One option many associations are using is pooled reserves. Pooled reserves versus straight-line reserves are an entire article unto itself. Most associations are familiar with the standard straight-line reserves. Pooled reserves are a system where you reserve the amount for each year based on what is expected to be expended that year. Pooled reserves also allow a board to use any funds from the pool to pay for any of the items in the pool. This process may reduce reserve assessments for some years, especially the early, initial years, but if there is an unexpected expense from the pooled funds (for example, if your roof needs to be replaced in 10 years instead of 20), you will have to replenish the pool the following year, taking into account the renewed term before the roof has to be replaced again. Pooled reserve schedules should be prepared by a reserve specialist or your accountant, not the association, association manager, or management company. If you do use pooled reserves, you will need to have separate pools for SIRS and non-SIRS components. The association should discuss this with its association attorney before implementing it. The association will also want to discuss with its association attorney the procedures required to move current reserves, whether straight line or pooled, into any new pooled reserve accounts.

Another way you may be able to reduce reserve assessments is by using any excess special assessment funds to fund reserves. Any excess special assessment funds either have to be returned to the owners or be used to offset future assessments. If your association has excess special assessment funds, consult your association attorney to see how these may be used to offset future reserve assessments.

Unfortunately, the time has passed for gradually increasing reserve assessments so that any future reserve funding is less than initially anticipated. Many associations began that path in 2023.

Conclusion

Begin your budgeting process in January by planning out and conducting energy surveys, reviewing vendor contracts, considering energy saving devices, reviewing insurance policies, and evaluating other items as may be suggested by management. Aggressively collect past due assessments year-round in accordance with the association collection policy.

Review your reserve schedule with your reserve specialist and see if pooled reserves will work for your association. Consult with your association attorney before moving any current reserves into any new pooled reserve accounts.

The line it is drawn
The curse it is cast
The slow one now
Will later be fast
As the present now
Will later be past
The order is rapidly fadin’
And the first one now will later be last
For the times they are a-changin’
Bob Dylan
The Times They Are A-Changin’ lyrics © Universal Music Publishing Group 

To read the original FLCAJ article, please click here.

Howard J. Perl is a member of Becker’s Community Association practice and has been involved in all aspects of community association law, including transactional, collections, mediation, arbitration, construction defects and litigation. He is Florida Bar Board Certified in Condominium & Planned Development Law and is certified by the State of Florida as a facilitator for continuing education credit courses for Community Association Managers.