HOA Budget Transparency

        …the budgeting process should begin and end with the homeowners. 

In Arizona and across the nation, there have been numerous complaints about the lack of financial transparency in private community governments, often referred to as Home Owner Associations or Community Associations.  Complaints about HOAs were so widespread in Colorado, the state began tracking them last year.  Topping the list was a lack of transparency.

However, in Arizona, the political winds blow from a different direction.  In 2011, a bill that would have required more transparency among homeowner associations was defeated shortly after it began.  The reason according to Paul Boyer, spokesman for the House majority, was that the information is already available through the HOAs.  Theoretically that may be true, but in many planned communities, trying to get that information may be problematic.

Communication helps create transparency

Transparency is the full, accurate and timely disclosure of information.  Unless the board of directors and management promote a culture of transparent communications, they will fuel the ‘rumor mill’ and never develop the necessary level of trust and confidence in their efforts.  Through communication we share, inform, educate, motivate, and more importantly, listen.  It is through this pattern of communication that we begin to develop a mutual understanding.

The case for transparency

            Transparency is not optional.  It is a mandate in Arizona Revised Statute 33-1805, Association Financial and Other Records.  …”all financial and other records of the association shall be made reasonably available for examination by any member or any person designated by the member in writing as the member’s representative”.  Only a few listed narrow and specific items may be withheld from disclosure.

            Transparency reduces homeowner concerns about fraud.  The news media and the internet frequently report about embezzlement on the part of boards and management.  Two of several 2012 examples reported on Google:

            Headline: Northwest Empire Community Management has money missing from 3 homeowner associations.  June 13, 2012 Google. Members of more than 30 local homeowner associations have lost $1.5 million to $2 million worth of their monthly dues entrusted to the company they had hired to help manage their affairs, according to clients of the firm and their lawyers.

                Headline:  No Restitution for HOAs After Million-dollar Theft.   May 12, 2012Google. As the management company defendant heads to prison for stealing more than $1 million from more than a dozen homeowners associations, no plans are in the works to get restitution for the HOAs because the defendant’s funds are depleted, the prosecutor said.  The defendant pleaded guilty last week to theft, money laundering and misapplication of fiduciary property, and was sentenced to 35 years in prison on each count.

Absence of Regulatory Oversight. 

The HOA, a private corporate government model, has no local or state oversight. Except for a limited number of state statutes, there is no over-arching ‘constitution’ to limit their powers.  There are no education or experience requirements for board members or management.  The HOA board members simultaneously occupy the legislative, judicial and executive branches of this private government model.  Disputes with homeowners are often resolved with the board acting as accuser, prosecutor, judge and jury, a system that is often referred to as privatized justice.

A Best Practices Model for Budget Transparency

            Budget drafting and performance-to-budget reporting should be a primary concern of all planned community residents.  It is the resident’s money that funds the operation of the association. Transparency requires homeowner input early in the budget development process and monthly reporting to the homeowners by the Board of Directors on performance-to-budget.

The best practices model of budget drafting suggests that transparency can be best be achieved by:

(1)  Appointing a Budget Committee of a representative number of homeowners to survey the community on:

• what changes they would like to see incorporated into the annual operating budget, and
• do they have any new cost-saving ideas or revenue generating ideas?

(2)  The Budget Committee, together with the Finance Committee, should develop a draft of the proposed budget with input from committees for presentation to the Board of Directors.

(3)  The final and crucial part of the process is for the Board of Directors to communicate to the homeowners in advance of the HOA Annual Meeting, what the budget does and does not provide for in terms of current year services and reserve funds for future replacements.  Not communicating, or communicating the wrong expectation, is a formula for unhappy homeowners. 

A few HOA’s follow the best practices model but most do not.  Why not?  Is transparency just not part of your culture or are there things you do not want to disclose?

Monthly Budget Report to the Members:

To achieve optimum transparency, the following is a type of monthly budget summary that the homeowners should expect to receive:

Comparative results:

Two comparable HOAs a few miles apart treat budget transparency differently with different outcomes.

HOA 1 essentially follows the best practices model.  They report budget variance results monthly in their newsletter and at fiscal year-end show a modest positive variance to budget.  In 2012, their assessment increases have been zero for the past five years with only a modest increase the coming year.  Their reserve account is funded at an ‘acceptable’ level.  Instead of just spending money they make a concerted effort to find cost savings.

HOA 2 does not follow the best practices model.  They do not report any budget variance information to the homeowners.  Their assessments have increased for the past several years.  It was reported that in 2011, 42% of the budget line items were over budget by 20% or $1,000.  Similarly, their reserve account is funded at an ‘acceptable’ level.  Without budget variance reporting, homeowners do not, and will not know how the budget is being managed or mismanaged.

Concluding coments:

            A few HOA’s follow the best practices model but most do not.  An analysis shows that HOAs that do not provide residents with monthly budget variance reports are more likely to spend beyond their approved budget. The result typically is wasteful spending and it is the unsuspecting homeowner to pays the price in special assessments and higher dues.

            A combination of the lack of business education, non-profit sector experience and common sense often leads to arbitrary and capricious decisions, and a breach of the director’s fiduciary responsibility.Transparency requires everything that is done be shared with all members equally and be in the best interests of the entire community.  How does governance and management in your association measure up to this standard?