Best Practices Financial Operations PDF

REPORT #4 Financial Operations  best practices R e p o r t # 4 Financial Operations Published by the Foundation for Community Association Research Acknowledgements Panel Members F. James Ahlberg, cpa Gayle Cagianut, cpa Mark Cantey, cpa Gil Cross, cpm, cmca ® Jerome...

REPORT #4 Financial Operations  best practices R e p o r t # 4 Financial Operations Published by the Foundation for Community Association Research Acknowledgements Panel Members F. James Ahlberg, cpa Gayle Cagianut, cpa Mark Cantey, cpa Gil Cross, cpm, cmca ® Jerome Fien, cpa, rma, psa Howard Goldklang, cpa George Hukriede, rs™, cpa Bill Owens, cpa Gary Porter, cpa Linda J. Schiff Ed Thomas, cmca , ams , pcam ® ® ® R. Honey Wheeler, cmca ® Copyright and Use Permission © Copyright 2014. Foundation for Community Association Research. 6402 Arlington Blvd., Suite 500 Falls Church, VA 22042 Readers are encouraged to download and reproduce the Best Practices Reports for community association managers, board members, individual homeowners, and community association-related industry profession- als without permission of the Foundation for Community Association Research provided the following terms are met: this document must be reproduced in its entirety including the use permission statement; and this document may not be added to, modified, amended, or otherwise altered from the original as presented here. Readers and users agree not to sell copies of this document or otherwise seek compensation for its distribution. “This document is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, account- ing, or other professional services. If legal or expert advice is required, the services of a competent professional should be sought.”—From a Declaration of Principles, jointly adopted by a Committee of the American Bar Association and a Committee of Publishers. ISBN 978-0-941301-65-7 2  F i n a n c i a l o p e ra t i o n s best practices Community Associations Institute (CAI) and the Foundation for Community Association Research are dedi- cated to conducting research and acting as a clearinghouse for information on innovations and best practices in community association creation and management. What are Best Practices? The Foundation for Community Association Research is proud to offer function-specific Best Practices Reports in the community association industry. The Foundation has devel- oped best practices in select topic areas using a variety of sources, including, but not limited to, recommendations from industry experts and various industry-related publica- tions. The outcomes of the Best Practices project include: documented criteria for function-specific best practices; case studies of community associations that have demonstrated success; and the development of a showcase on community excellence. The benefits of benchmarking and developing best practices include: improv- ing quality; setting high performance targets; helping to overcome the disbelief that stretched goals are possible; strengthening cost positions; developing innovative approaches to operating and managing practices; accelerating culture change by making an organization look outward rather than focusing inward; and bringing accountability to the organization because it is an ongoing process for measuring performance and ensuring improvement relative to the leaders in the field. The Foundation’s entire catalog Best Practices Reports is available at www.cairf.org as a free download and for sale in CAI’s bookstore. 3 Section one Overview and Introduction Financial Operations It is CAI’s purpose to foster vibrant, responsive, competent community associations that promote harmony, a sense of community, and responsible leadership. Given that the fiscal health of the association has a direct impact on every member of the community, proper management of financial operations is an important element of building better communi- ties. While the responsibility for an association’s finances rests with the board, there are numerous areas where advice should be sought from qualified financial professionals. The board of directors, particularly the treasurer, is ultimately responsible for asso- ciation’s funds and may not abdicate their fiduciary responsibility. Given the reality that community association boards are made up of diverse individuals with varied degrees of financial knowledge, below are basic guidelines that should be followed to ensure sound financial operations. Banking Maintain the association’s funds, including the replacement fund (commonly called reserves) and operating fund, in separate accounts in the association’s name and ensure that the board has direct access to the account. Maintain an operating cash balance of approximately two months expenses. Reconcile the association’s bank statements and investments monthly (or at least quarterly) with the statements going directly to the board member reviewing them. The board member charged with reviewing the bank statements should not be responsible for payment of bills and/or signing checks. Require the full board to review copies of bank statements and investments on a quarterly basis. Require at least two board members’ signatures to gain access to reserves. Require at least two authorized signatures on all checks over a predetermined amount as established by the board of directors. Planning Establish a long-term financial plan for the association’s assets (cash, accounts receiv- able, replacement fund, investments, etc.) that is reviewed and revised annually. Develop written, board-approved investment policies and procedures. Commission a reserve study and/or update current reserve study at least every three years and review the report annually. Prepare a long-term operating budget covering the next three to five years. Include reasonable reserves for future major repairs and replacement of common facilities in assessments as determined by the association’s most recent reserve study. 4  F i n a n c i a l o p e ra t i o n s Disclosure Provide homeowners with reasonably detailed summaries of budget and reserve information on an annual basis, with further information readily available. Request financial statements from the manager or accountant at least quarterly. (Please note: some associations may opt to view these statements more frequently. Further, state law may dictate the frequency with which financial statements must be prepared.) Inform homeowners that the annual financial statement, which is prepared in accor- dance with the basis of accounting used by the association, is available for review by owners and prospective purchasers within the time frame established by the associa- tion or specified in applicable statutes and governing documents. This report may be a review, a compilation, or an audit. If possible, a copy of this report should be sent to all members of the association. If copies are not sent to members, the board should publicize, through the association’s newsletter, that copies are available upon request. Policies/Record Keeping Develop a written, board-approved collection policy for enforcing owners’ assess- ment obligations. Be sure to follow applicable state statutes regarding development and enforcement of the policy. Establish that the board must approve all write-offs of delinquencies in a timely manner. Solicit competitive bids for services and require board authorization for all expendi- tures over a predetermined amount. Request timely updates and reports from the association’s manager and accountant. Keep detailed meeting minutes paying close attention to all fiscal matters. Conduct payroll audits to ensure all employees are legitimate and paperwork is cur- rent and complete. Require approval of invoices, by a board member other than the check signers, prior to payment. Establish and maintain a policy regarding archiving the association’s permanent financial records. Budgeting Assign budget items in the month during which the expenses are expected to be incurred rather than dividing total yearly expenses by 12 (for each month of the year). Require board approval for checks in payment of non-budgeted, non-recurring expenses in excess of an established limit. Compare income statement with the budget on a periodic basis (at least quarterly). 5 Budgetary Responsibilities A community association’s governing documents and management contracts will define formal roles and responsibilities in the budget process. These roles should be commu- nicated in a constructive manner to all involved to ensure that appropriate expectations exist. Below is an outline of the responsibilities of volunteers and professional staff typi- cally charged with developing community association budgets. Board of Directors Most boards of directors are responsible for establishing, approving, and monitoring the community’s budget. Although they have the power to establish a budget, most will delegate preparation authority to their manager or accountant. When directors review a proposed budget, they should consider the following: State statutes and requirements established in the association’s governing documents. Owners’ needs and expectations (the balance between mandatory and discretionary items). Committee and owner feedback. The need to reconcile income and expenses, otherwise known as balancing the bud- get. Financial forecasts (e.g. budgets) and analyses of past financial activities prepared by the manager or accountant. Capital budget and reserve study requirements. If the board has the power to approve the budget, the manager should provide all owners with a summary copy of the proposed budget before the board officially adopts it. Owner input is a key component of the budgeting process. Owner input regard- ing the budget leads to less animosity over budget priorities and the opportunity for increased resident involvement in other aspects of the community—thus, building a sense of community. Treasurer The treasurer is usually charged with the responsibility for the preparation and review of the draft budget. He or she typically delegates the initial preparation of the budget to the manager or accountant. If applicable, the treasurer will then review the draft of the budget with the association’s finance committee. The treasurer should consult all committee chairs and invite owners to comment on the budget to ensure support. Owner participation and support is especially important where a vote of owners is required for any of the following: a large required increase in assessments, special assessments, major improvements, or funding reserves. Again, funding of reserves should be based on the results of a reserve study. (For more information on reserve studies, please consult Best Practices Report #1: Reserve Studies/Management.) The treasurer usually presents the proposed budget to the owners in some forum as agreed upon by the board. It may be presented at an open community meeting or sent to the owners with a request for feedback by a specific date. Frequently, community-­ 6  F i n a n c i a l o p e ra t i o n s governing documents require that an open meeting be held before the board adopts a budget. Owners Some states and some community documents require that the budget be passed by a vote of the owners. The preceding section explains the value of owner involvement in reviewing the proposed budget—even when the board is responsible for final adoption. Manager The manager’s formal budget responsibilities are usually enumerated in the manage- ment contract. Even if precise responsibilities are not specified in writing, the board may expect the manager to: Prepare a draft budget. Review the draft with the treasurer, finance committee (if one exists), and the board. Revise the draft budget after changes are made. Mail a summary of the proposed budget to owners prior to approval. Mail copies of the completed budget to all owners and have copies on hand for prospective owners. Managers should not be expected to perform services outside of their contractual agreements. Thus, a community association should review their current management contract to determine the manager’s level of involvement in the budget process. Any desired changes in the services should be reviewed and negotiated. 7 Section two Accounting Practices & Financial Statements Accounting Practices There are two commonly used bases of accounting, the accrual basis of accounting which is required by Generally Accepted Accounting Principles (GAAP), and the cash basis of accounting which is considered to be an Other Comprehensive Basis of Accounting (OCBOA). OCBOA is not in accordance with GAAP, which is most often used by com- munity associations. Accounting Basis Used for Financial Statements An association’s financial statements will reflect one of the following accounting bases (as determined by the board with input from both the association’s manager and accountant): Cash Basis—Cash basis accounting is similar to a checkbook. It records income when deposited and expenses when paid. The cash basis may not accurately reflect the association’s true financial condition—it simply shows the result of cash transactions. Outstanding assessments and unpaid expenses, if any, are missing in this method, which distorts an association’s financial health. Modified Cash Basis—The modified cash basis is the cash basis with some aspects of the accrual basis. Under the modified cash basis some accounts, such as assessment income, are maintained using the accrual method. There can be degrees of modified cash basis. Accrual Basis—Accrual basis accounting records income when earned and expenses when incurred. The statements are more useful for comparing the results of the budget to the actual activity. There are variances with the cash basis because transactions take place at different times. For instance, if an association makes a late payment at the end of a fiscal year, the financials would reflect it with 11 payments in one year and 13 pay- ments in the next. With the accrual method, all 12 payments would be in the current year regardless of when the bill was paid. The accrual basis allows the association to gain the most accurate picture of its financial health. Generally Accepted Accounting Principles GAAP accounting provides uniformity among financial statements from different com- munity associations. GAAP requires the use of accrual accounting for annual reports (see accrual basis explanation above). GAAP requires the following set of year-end financial statements for community associations: Balance Sheet—A summary of a community’s financial position at a specific point in time. The three major components of a balance sheet are: Assets—Items owed to or owned by an association. Liabilities—The association’s debts to third parties. Members’ equity—The owners’ interest in the association’s remaining assets after pro- viding for the discharge of its liabilities. It may also be negative and called the members’ deficit if its liabilities exceed its assets. Note: This is called fund balance under the fund method of reporting. 8  F i n a n c i a l o p e ra t i o n s Statement of Income and Expense (or Revenue and Expense)—Represents the oper- ating activities for a given period of time, usually one year, ending on the same date as the balance sheet. Statement of Changes in Members’ Equity (or Fund Balances)—Reconciles the beginning and ending members’ equity with results of operations for the period. Statement of Cash Flows—Reconciles an association’s operating, investing, and financing activities from the basis of accounting used (generally the accrual basis) to a cash basis to reflect what caused the changes in the cash balance during the year. Notes to Financial Statements—Footnotes that provide additional information to help the reader understand the association’s financial situation. The notes may describe the type of association and its characteristics, provide information about the association’s reserve and investment polices, tax filing status and debts, explain the purpose and time period of special assessments, describe significant commitments and possible events that could have a financial impact on the association (e.g., pending lawsuits), and explain related party transactions. Financial Statements and Reports Year-end financial statements help determine and outline a community association’s fiscal health. Experts suggest that a Certified Public Accountant (CPA) specializing in community associations prepare these statements. Audit An audit is an examination of an organization’s accounting records and procedures by an independent certified public accountant for the purpose of verifying the fairness of the presentation of financial statements. An association’s governing documents and/or state statutes may require an annual audit. However, in the absence of a state mandate, exter- nal verification of the accuracy and completeness of the association’s financial records is a sound business practice. The audit should include, but is not limited to, the following: confirmation of selected transactions and balances with outside parties (such as banks and contractors); a physical inspection of records; a trace of transactions to supporting documentation and authorization by someone within the association; and review of the association’s legal documents and minutes. After the audit is complete, the CPA will prepare an opinion report that details one of the following four outcomes: 1. The auditor issues an unqualified or clean opinion that states that the financial state- ments are presented fairly in all material respects. 2. The auditor issues a qualified opinion that says the statements, with certain reserva- tions, are fairly presented. 3. The auditor disclaims his/her ability to issue an opinion. 4. The auditor issues an adverse or negative opinion. Clearly, a community association should strive for a clean opinion or, if necessary, a qualified opinion. The third scenario—a disclaimer—usually occurs when the client organization or the circumstances surrounding the audit restrict the CPA’s ability to col- lect sufficient evidence to form an opinion. An adverse opinion is issued when evidence 9 indicates that the financial statements do not fairly reflect the association’s financial position or operating results. Financial experts recommend that a CPA familiar with community associations per- form an audit annually, minimally every other year. It is important to note that some state statutes require that community associations be audited on a specific timetable. Review A review is less thorough than an audit, thus a less costly analysis of an association’s financial activities. It provides the board with some assurance that the financial state- ments are consistent with typical trends without the detailed examination obtained in an audit. In a review, the CPA interviews management personnel and others involved in the association’s accounting process in order to assess the association’s financial procedures. The reviewer compares the actual amounts with the association’s prior year line items and looks for trends or irregularities. The review provides a significantly lower level of assurance than an audit does. The report states that the CPA is not aware of any material or significant changes that should be made to the financial statements in order for them to conform with GAAP or OCBOA. Compilation A compilation is a presentation of financial statements prepared by an accountant, not necessarily a CPA, but does not provide any level of assurance regarding the financial statements. Compilations should also be prepared in accordance with GAAP or OCBOA. Through a compilation, the association asks an accountant to prepare its year-end state- ments based on the information that the board or manager provides. The accountant does not make any representation about the accuracy and completeness of the financial statements. However, if he/she becomes aware that the statements are incorrect, he/she is obligated to disclose that fact. Reading Financial Statements Financial statements are produced for two primary reasons: To provide their internal and external users with the economic information needed to make appropriate decisions on behalf of the community association. To enable the community association board and manager to control the association’s financial operations. warning signs to look for when reviewing financials A steady decline in the amount of cash Absence of a reserve study. on hand. The failure to resolve any differences Significant and/or unexplained differ- between bank statements and the finan- ences between actual and budgeted cial statements in a timely manner. figures for items. Untimely generated, or missing, finan- An increase in the amount of owners’ cial statements. assessments owed to the community. Financial statements not prepared using Unusually large legal expenses—unless GAAP. reason is disclosed. 10  F i n a n c i a l o p e ra t i o n s Section three Assessments, Taxes, and Investments Assessment Collection The association declaration and state law give associations the authority to collect assess- ments. It is not unusual for a board to be responsible for hundreds of thousands of dollars in assessment fees. Given their fiduciary responsibility, association boards must collect assessments in a timely, systematic manner. Each association should adopt, by resolution, the procedures for the collection of payments (dues or assessment fees). The policy should be distributed to all members and uniformly enforced. Communication of the association’s budget is critical to assessment collection because those members who understand the asso- ciation’s financial position are more likely to pay their dues on time. Characteristics of an Effective Collection Policy An effective collection policy should: 1. Be established by a formal resolution of the board that: a. Specifies the problem to be solved (e.g., collection of delinquent fees); b. Delineates the procedures to be followed; c. Designates the circumstances under which the procedures are required or permitted. 2. Specify only actions that are within the power of the community association and its board. 3. Set a firm due date for assessments. 4. Outline the steps to be taken by the person(s) responsible for collecting assessments when a payment is late with a specific timeline for each step of the process. take note All members of the association must have proper advance notice of the due date for assessments. Be certain to uniformly apply collection policies to all owners. Be sure that whatever steps taken to collect assessments are authorized by enabling statutes, governing documents, and fair debt collection requirements under the Federal Fair Debt Collection Practices Act. Any steps taken should be automatic and systematically increase in severity. Once an account is turned over to legal counsel, it is critical that all further communica- tion be between the association’s attorney and the delinquent owner or the owner’s attorney. The right to recover attorney fees and costs from a delinquent party should be guaran- teed by state statute or the governing documents. 11  5. Allow for discretion in special cases (the burden of requesting special consideration should be placed upon the owner). The discretionary power should be under the control of the board of directors. 6. Specify when a delinquent assessment should be referred to legal counsel (this step should be automatic once a delinquent assessment reaches a specific age or amount). 7. Provide for the collection of any costs associated with collecting delinquent assessments. Federal Income Tax Filing Responsibilities The following are general federal income tax filing responsibilities for community associa- tions: 1. All associations must file a federal income tax return every year. The lack of taxable income does not eliminate the need to file, and filing a tax return does not neces- sarily mean that the association owes the government money. 2. A community association is generally required to file its federal income tax return as a corporation using Form 1120, but may elect to file as a homeowners association using Form 1120H, if it meets certain requirements. The association should consult its tax professional regarding this choice because tax rates are different. 3. A community association’s federal tax return is due the fifteenth day of the third month after the end of the tax year. It is possible to obtain up to a six-month extension of time in which to file a return. If an association needs an extension, it must file an extension request form and pay any expected tax due by the original filing deadline. 4. If previous boards failed to submit tax returns for previous years, the current board is not absolved from filing a return for the current year or for any previous year that was omitted. 5. An association may be required to make quarterly payments of its estimated annual tax, depending on the tax filing method it uses. When a tax professional prepares an association’s tax return, he/she will notify the association if it needs to make estimated tax payments for the upcoming year. 6. State income tax filing requirements vary from state to state. They are not neces- sarily the same as federal requirements. Investments The purpose of this section is to provide basic information on community associations and investments—not to advise how associations should handle their investments. Investments involve the purchase of assets with monetary value for the purpose of generating additional value over time. Examples of investments include savings accounts, certificates of deposit, US Treasury securities, and stocks, which are not often recommended as an investment option for community associations. 12  F i n a n c i a l o p e ra t i o n s Investment Policies and Procedures A community association should have a written investment policy and a set of pro- cedures for ensuring that the policy is implemented. In some instances, governing documents and state statutes establish investment policies for associations. For example, certain states require that association funds can be invested only in federally insured lending institutions and government securities. Essential Investment Objectives The three essential investment objectives for community associations, in the order of their importance, are: Safety—protecting the principal (amount of original investment) from as much risk as possible. Liquidity—the ease and costs associated with converting an investment into cash or cash equivalent. Yield—the amount of return on an investment. The ultimate earnings from an investment are not necessarily the stated rate of interest. Common Investment Policies (Please note: These are only suggestions. Your association’s CPA and/or financial advi- sor should recommend investment policies to fit your community’s particular circum- stances.) Investments should be federally insured either through FDIC or the US Government. Thus, not more than $250,000 will be invested in any one financial institution so that the funds are fully protected by FDIC. Investment income must be optimized without any risk of loss to the principal (amount of the original investment). Investment maturities should meet projected cash flow needs. Common Investment Procedures (Please note: These are only suggestions. Your association’s accountant and/or financial advisor should recommend investment procedures to fit your community’s particular ­circumstances.) Management is to deposit all payments received on a daily basis. Transfers of budgeted additions to reserves are to be made on a monthly basis. Certificates of deposit, passbooks, bonds, etc., are to be under direct board con- trol—not management control. A quarterly special report of earnings on investments is to be prepared by manage- ment or the treasurer and presented at a board meeting. Investment Checks and Balances Every association needs a system of internal checks and balances to protect its invest- ments. Such checks and balances include: 13  Association boards should consult a financial advisor prior to investing. Association boards should vote to invest funds based on an approved investment policy. Two signatures should be required to withdraw funds from investment accounts. However, an exception may be made for transfers between accounts of the same association. Association managers, employees, and volunteers should be covered by fidelity insurance (insurance that protects against employee dishonesty which may lead to the theft of money, securities, or property) to protect the association from loss due to employee theft. Bid Requests/Request for Proposals Management of a community association’s resources frequently involves the use of contracts to obtain the products and services required. Given such, one component of the board’s fiduciary responsibility is to ascertain that the association is not paying too much for the products and services it receives. The most effective way to ensure com- petitive prices is through bid requests to potential contractors. A bid request or request for proposal (RFP) is an announcement that an organization is interested in receiving proposals for a particular project or service. The bid request form includes: bid specifications (detailed instructions about the products or services requested); information about the association that the contractor will need in order to prepare a bid; and, a request for information about the contractor that will help the asso- ciation evaluate the contractor’s ability to perform the work and meet the specifications. Preparing a bid request or RFP involves: gathering preliminary information; identifying potential contractors; preparing thorough and accurate bid specifications; and preparing a complete bid request or RFP. To prepare some service specifications, the association may need to draw on the technical skills and knowledge of such parties as an engineer, architect or supplier. Because of the amount of effort the bidding process requires for both the community association and the bidders, the process should be used only for significant projects or purchases and for on-going services such as lawn maintenance. The board of directors should determine the minimum size of a contract that requires competitive bidding. Simply stated, bid requests and RFPs allow the board to solicit competitive prices for products and services, thereby ensuring that the community association obtains the desired services from a quality service provider at a reasonable price. 14  F i n a n c i a l o p e ra t i o n s Case Studies of Strategic Planning case study #1 The Oakridge Estates Community Association Size: 352 Planned Unit Development Location: Ventura County, California Board Size: Five (5) This association is exemplary with regards to its financial operations. The board takes an active role in the financial matters of the association and seeks professional advice from their manager, accountant, insurance agent, and reserve study professional as needed. The association encourages open communication from its members and repeatedly meets its budget expectations. Below are some specific areas of financial diligence: Review of financial statements and documents. The management company pre- pares financial statements monthly, including a balance sheet and an income statement with comparisons to the budget. Also included in the financial information are a check register and a listing of delinquent accounts, as well as copies of all bank statements and reconciliations. The board reviews this financial packet at each board meeting and discusses the items therein. Replacement fund/reserves. The association segregates replacement fund activity and operating fund activity in its financial statements. Reserve cash is also segregated from operating cash and is kept in a separate bank account. In compliance with California Civil Code, two signers are required to withdraw any cash from the reserve cash account. The board of directors approves all reserve expenditures and that approval is noted in the board meeting minutes. There is an on-site reserve study prepared at least every three years, and that study is reviewed annually by the board and adjustments are made as needed. Reserves are funded in accordance with the budget. Budget. The budget is prepared using data from the prior year with line item adjust- ments as needed. The budget is distributed to homeowners 45-60 days prior to the end of the fiscal year. The budget packet includes the information required by the California Civil Code, i.e., the delinquency policy, reserve study data, insurance information, and notice of arbitration/mediation rights. Financial stability. There is approximately five percent of annual assessments in the operating fund balance (equity). This is within the range of CAI’s recommended con- tingency amount (of two to five percent minimum) to be kept on hand for unexpected financial requirements. Income taxes. For several years, the association has filed form 1120, with the lower tax rate of 15 percent. Because the association diligently segregates operating and reserve accounts, funds reserves according to the budget, and denotes capital and non- capital reserve activity, it has qualified to file IRS Form 1120. Annual accounting. An annual report, either an audit or a review, is prepared by a CPA. That report is completed and mailed to the homeowners within 120 days of the year-end. An additional product supplied by the CPA is a management letter wherein suggestions for improvements to various financial matters are noted. The board and manager are always open to suggestions and willing to make changes necessary to improve financial transactions. 15 case study #2 Kiawah Island Community Association Size: 4115 properties Location: Kiawah Island, SC Board Size: Seven (7) Kiawah Island is a National Community Association of the Year Award (NCAYA)-­winning community in South Carolina. In addition to the board and management’s dedication to community spirit and service, they also pay particular attention to financial operations. Governing Documents. The community’s governing documents provide certain guidelines related to the association’s financial activities. Financial statements are pre- pared per the accrual basis of accounting prepared according to the fund reporting meth- od. Using the accrual method ensures observance of limitations and restrictions on the use of financial resources that the governing documents require. The association board and staff also prefer to have an annual audit conducted because it gives the members a level of confidence that is not possible with a review or compilation. When it’s all said and done, the board and the staff want their work scrutinized to the fullest extent. Bank Statements. As per the association’s Financial Controls Manual, the asso- ciation’s treasurer and controller’s assistant reconcile Kiawah Island’s bank statements monthly. This allows the association to regularly monitor its assets. The individuals responsible for reconciling the bank statements do not have check signing authority. Authorized signatories on all bank accounts are the board treasurer, the general man- ager, the controller, and the assistant general manager. Regular checking transactions require two of the aforementioned representatives’ signatures. Access to the associa- tion’s reserves accounts requires the board president’s and treasurer’s signatures. Financial Statements. Association financial statements are produced monthly to keep the board “up to speed” on operations. The financial statements are discussed every six weeks at a board meeting. Board meeting minutes are posted on the associa- tion’s Web site for membership review. Financial statements (and annual financial audits) are always available at the association office for members’ review and the financial audit is provided once per year as part of the annual meeting packet materials. Write-offs. Further, the association has a set process by which “write-offs” (delin- quencies) are approved—the controller approves accounts with a balance of less than $100, the manager approves accounts with a balance of more than $100 but less than $500, the treasurer approves accounts with a balance of more than $500 but less than $1,000, and the board must vote and approve write-offs for accounts with a balance of more than $1,000. Budgeting. Kiawah Island’s board and staff also work to develop and follow a comprehensive budget each fiscal year. Budget items are allocated to the month during which expenses occur. For example, the pool contractor provides a specific annual schedule for the coming year listing the services and personnel he is provid- ing each month and their cost. These monthly allocations are included into the annual budget because it makes sense to match expenses with income. For example, during the months that the pool contractor is providing services, the pool is open and income is being generated. Unbudgeted expenditures more than $2,000 must have prior board approval. Approval may be obtained either at regularly scheduled board meetings, or by mail vote, when nec- 16  F i n a n c i a l o p e ra t i o n s essary. Unanimous approval is needed for a mail vote to pass. Also, the Finance Advisory Committee is informed of such expenditures and makes their recommendations to the board prior to the meeting or mail vote. To facilitate association operations when unbudgeted expenses of a serious nature arise, the budget may contain a line item for contingencies, not to exceed the limit approved by the board. The guidelines for the use of these funds are: (1) an unantici- pated emergency, e.g., hurricane, flood, fire, etc., (2) the replacement or repair of equip- ment that either fails or is destroyed unexpectedly and is considered by the general manager to be critical to the efficient operation of the association, or (3) for the protec- tion of association property from imminent damage. The reason for this line item is that time required to obtain board approval for unbudgeted expenditures may, under certain conditions, cause significant unnecessary expense to the association, or that approval may be unattainable due to the unavailability of board members, etc. The use of this line item, within the guidelines above, is to be in the Operating Committee’s discretion only. When expenditures are made, the general manager is to seek board ratification immediately, of both the expenditure and his/her justification for the use of the contingency funds versus the regular process for advance approval of non-budgeted expenditures more than $2,000. Once approved by the board, the expense will be moved to the correct line item and/or department. The board has the authority to suspend use of the contingency line item at any time, by written notification to the general manager. Competitive bids. The general manager, at the direction of the board, is the con- tracting agent for the association. The general manager will sign all bilateral contracts. The general manager may delegate purchasing authority and the ability to sign purchase orders to various department heads. However, the general manager may not delegate authority to sign general insurance or employee benefit contracts. Where feasible, all contracts and purchase orders will be in the association’s standard format appropriate to the type of purchase. The general manager reserves the right to have the contract reviewed by legal counsel and/or insurance representatives. Whenever a form of contract or purchase order other than the association’s standard is used, appropriate review will be exercised. The general manager reserves the right to require that the standard format be used. All contracts valued annually at $25,000 or more require competitive bidding. Competition for contracts less than $25,000 is not precluded and is recommended when time and cost for obtaining quotes is reasonable. Staff is expected to perform due diligence in obtaining bids, when required. Contracts with fewer than three responses must contain a certification from the requesting manager that all available responsible bidders were sought and suitable follow up performed to get as many bids as possible, with explanations of unusual circumstances. The board must approve any sole source award, in advance. Similarly, any contract to be awarded to other than the lowest bidder must have prior approval by either the board or, for reserve projects, the Major Repair & Replacement Committee. Any contract in excess of $25,000 must either be approved in the annual budget or have specific prior board approval, except in the case of emergency or contingency pur- chases. Additional board approval is required in cases where conditions change, before or after the contract is let, which significantly affect the scope or cost of the contract (more than 20%). No service contract may be automatically renewed for more than 12 months without additional approval sought from the board. There will be no contracts between the association and one of the association’s employees, board members, com- mittee members, or their respective relatives, regardless of dollar value. 17  Long-range fiscal planning. The board directs the Finance Advisory Committee to develop a five-year fiscal plan, which includes disaster, insurance, and facilities acquisition components. The committee receives information about the capital projects proposed for the future from the Long Range Planning Committee. In their disaster planning, the committee considers financial disasters (for example, they determine what happens if revenues become reduced). Draft plans are presented to the full membership at open forums and via mailings for comments before the board approves them. case study #3 Riverbend at Leisure World Size: 231 units Location: Lansdowne, Virginia Board Size: 5 Riverbend at Leisure World is a National Community Association of the Year Award (NCAYA)-winning community in Northern Virginia. Bank Accounts. The bank accounts are all in the name of the association and are not co-mingled with any other association managed by the management company. Expenditures are made only after authorized by a purchase order signed by the on-site manager and the property manager. This process was instituted for convenience and prompt payment of bills. The managing agent reconciles the association’s bank state- ments and investments monthly. In accordance with best practices, this person does not have check signing authority. Two signatures are required for checks, and the established limit for non-budgeted, non-recurring expenses that require board approval for checks is $2,000. Financial Reporting. The association’s financial statements are prepared using the modified accrual basis of accounting because the board prefers to see income when it is earned and expenses when they are incurred. Riverbend’s board commissions an annual audit, feeling that it is their fiduciary duty to the owners to do so. The monthly financial statements are first given to the Budget and Finance Committee for detailed review at their monthly meeting. A written explanation of the statements is also pro- vided by the community manager in advance of their meeting. The Board also receives a copy in their monthly Board packet. Owners are welcomed to receive a copy of the statements upon request. Long Range Planning. Riverbend establishes a long-range fiscal plan primarily through the association’s replacement reserve study. The board will continue to update the reserve study every year themselves and every three years with the assistance and guidance of a reserve specialist. The association also has a ten year budget which proj- ects future income and expenses. Reserves. Board members control replacement reserve accounts. Two signatures are required to access the reserve accounts. The board funded the reserves this year in strict compliance with the most recent professional reserve study. They also place all interest earned back into the reserves account to offset inflation. Competitive Bids. The association normally requires soliciting three bids for proj- 18  F i n a n c i a l o p e ra t i o n s ects. The board will ask 12 firms to bid on a forthcoming concrete sealing project. Management has a contractual arrangement that the Board should approve all expendi- tures over $2,000. Write-offs. The board of directors must approve write-offs of delinquencies more than $10. 19 Additional Resources Books available from CAI Accounting for Managers, by William H. Webster, 2004. Community Association Finances, Common Sense from Common Ground: A Collection of Articles from CAI’s Award-Winning Magazine, 2005. Condos, Townhomes & Homeowners Associations: How to Make Your Investment Safer, by Patrick Hohman, 2010. Delinquencies: How Community Associations Collect Assessments, by Loura K. Sanchez, esq., and Thomas J. Hindman, esq., 2008. Member Dues: How Community Associations Collect Assessments, by Debra H. Lewin, 2005. Property Taxes & Homeowner Associations, by George R. Grasser, 2002. Reserve Funds: How & Why Community Associations Invest Assets, by Mitchell H. Frumkin, p.e., cgp, rs and Nico F. March, cfm, rrp, editors, 2009. Tips for Protecting Association Finances For more information or a CAI Press catalog, please call (888) 224-4321 (M-F, 9-6:30 ET) or visit www.caionline.org. Best Practices Reports (available at www.cairf.org): Community Harmony & Spirit Community Security Energy Efficiency Financial Operations Governance Green Communities Reserve Studies/Management Strategic Planning Transition 20 About the Foundation for Community Association Research The Foundation provides authoritative research and analysis on community association trends, issues and operations. Our mission is to inspire successful and sustainable communities. We sponsor needs-driven research that informs and enlightens all community association stakehold- ers—community association residents, homeowner volunteer leaders, community managers and other professional service providers, legisla- tors, regulators and the media. Our work is made possible by your tax-deductible contributions. Your support is essential to our research. Visit www.cairf.org or e-mail [email protected]. About Community Associations Institute (CAI) Community Associations Institute (CAI) is an international membership organization dedicated to building better communities. With more than 32,000 members, CAI works in partnership with 60 chapters, including a chapter in South Africa, as well as with housing leaders in a number of other countries, including Australia, Canada, the United Arab Emirates and the United Kingdom. CAI provides information, education and resources to the homeowner volunteers who govern communities and the professionals who support them. CAI members include association board members and other homeowner leaders, community managers, association management firms and other professionals who provide products and services to associations. CAI serves community associations and homeowners by: Advancing excellence through seminars, workshops, conferences and education programs, most of which lead to professional designations for community managers and other industry professionals. Publishing the largest collection of resources available on community association manage- ment and governance, including website content, books, guides, Common Ground™ magazine and specialized newsletters. Advocating on behalf of common-interest communities and industry professionals before legislatures, regulatory bodies and the courts. Conducting research and serving as an international clearinghouse for information, innova- tions and best practices in community association development, governance and management. We believe homeowner and condominium associations should strive to exceed the expec- tations of their residents. We work toward this goal by identifying and meeting the evolving needs of the professionals and volunteers who serve associa- tions, by being a trusted forum for the collaborative exchange of knowledge and information, and by helping our members learn, achieve and excel. Our mission is to inspire professional- ism, effective leadership and responsible citizenship—ideals reflected in associations that are preferred places to call home. Visit www.caionline.org or call (888) 224-4321. 6402 Arlington Blvd., Suite 500 Falls Church, VA 22042 www.cairf.org Developing function-specific best practices in the community association industry has been a goal of Community Associations Institute and the Foundation for Community Associa- tion Research for several years. The Foundation has developed best practices in select topic areas using a variety of sources, including, but not limited to, recommendations from industry experts and vari- ous industry-related publications. The outcomes of the Best Practices project include: Documented criteria for function-specific best practices. Case studies of community associations that have demonstrated success in specific areas. A showcase on community excellence. 6402 Arlington Blvd., Suite 500 Falls Church, VA 22042 www.cairf.org