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
Management
M-201: Facilities Management
M-202: Association Communication
M-203: Community Leadership
M-204: Community Governance
M-205: Risk Management
M-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 Introduction
Importance 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 Development
Module 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 associations 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 associations 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 authority
Exercise due care
Act 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 body
2.Approval body
3.Oversight body

Fiduciary Duties
The Duty of Care:
Requires a director to act in a
reasonable and informed manner
when participating in the
Boards
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
Attend

Serve

Independent
Judgment

Delegate
Authority

Act

Obtain
information

Relyon
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
Directors 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
associations
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, and
committee 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
Ruleofthumbforlevelofaccumulatedfunds
25%=minimum
1015%=verygood

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 & Zerobase Budgeting

Lesson 3 Objective:
Develop budget line items using
zero-base budgeting and a
comparison to historical trends.

Historical Trend & Zerobase 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 & Zerobase Budgeting

Historical trend
Estimates line items based on
past trends
Easier to use by itself

Historical Trend & Zerobase Budgeting

Historical Trend Budgeting Process:
What
When
Why
How

Historical Trend & Zerobase 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

Historical Trend & Zerobase Budgeting

Zero-Base Budgeting Process
What
When
Why
How

Historical Trend & Zerobase 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 arent being paid more than
the worth of the services

Historical Trend & Zero-base Budgeting

Zero-Base Budgeting Process Steps
1. Identify each cost component for the line item
2. Determine the basis for estimating each cost
component
3. Calculate the zero-base estimate of the expense
4. Compare the zero-base item with the historical
trend for the item
5. Investigate and resolve any significant
discrepancies
6. Adjust the estimated expense for any
anticipated increase in prices
7. Recommend a budget line item

Historical Trend & Zerobase Budgeting

Information you need:
Basis for estimating individual
budget line items
Association assets
Asset lifetimes

Historical Trend & Zerobase Budgeting

Basis for estimating individual line
items include:
Rate
Quantity
Time
Number of Entities

Historical Trend & Zero-base Budgeting

Cost
Areas

Description

Rate: Expected rate and the unit of

measurement to which it applies

Quantity: The expected quantity of the cost

component

Time: Time period

Number: Number of entities

Formula

Zero-base Estimate = R x Q x T x N

Historical Trend & Zerobase Budgeting

Sources of Information for Budget
Development
Management Company
Utility Companies
Local contractors and consultants
Reserve study, engineers
State agencies
Community Associations Institute
Trade associations

Historical Trend & Zerobase Budgeting

Sources of Information on Association
Assets
Inventory and analysis sheets
Manufacturers information warranty
statements
Original as-built drawings
New product information

Historical Trend & Zerobase Budgeting

Sources of Information on Assets
Lifetimes
Publications from CAI
Other trade associations
Local contractors
Consultants
State agencies
Reserve study professionals, engineers
IRS
Certified Public Accountants

Historical Trend & Zero-base

Budgeting

Activity #2a: Develop a Utility Line

ItemExample
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 SmallGroup Work:

Choose a leader
Choose a timekeeper
Choose 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 Study
1. 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 associations
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 ItemExample
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 ItemGroup 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
association
Total compensation versus takehome 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 insurance
Rate 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 employees 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 associations
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 expenses
Identify 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 leader
Choose a timekeeper
Choose 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 associations 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 associations operating
and replacement fund budgets.

Discussion and Questions?

Why is it important for a
community to budget for
unexpected conditions or losses?
Whats the difference between
historical trend budgeting and zerobase 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) 2244321 or visit the bookstore online at
www.caionline.org/bookstore.cfm