The Budgeting Process: Operating vs Reserve Expenditures

Written by David T. Schwindt, CPA RS PRA Published: 08 September 2005

Homeowner’s associations budget for future expenditures in two very different processes. The operating budget process generally involves analyzing the prior year actual expenses and adjusting for changes in the coming year. The reserve budget is prepared by performing a reserve study and funding the replacement reserve bank account by the computed required reserve assessment.

Theoretically, aside from generally accepted accounting principles and tax issues, it would not matter which budget contains specific budget line items as long as the association is assessing for all future repairs, maintenance, and operating expenses. However, due to the manner in which budget line items are derived, many associations find that differentiating the type of budget line item is helpful.

Operating Budgets generally include expenses that are incurred annually. The rationale behind this guideline is due to the fact that if a specific expense is incurred annually, it will most likely be included in the current year list of expenses and will most likely be analyzed in the preparation of the subsequent years’ budgets.

Reserve Budgets generally include expenses that are incurred every “nth” year, say every 3rd, 5th, 10th year and so on. The reason for this guideline is twofold. The association, via computing the reserve fund contribution is in effect saving for the eventual disbursement of funds for major repairs and replacements such as painting and is saving a prorata amount every year for that purpose. Secondly, the association would be more likely to miss an expense item on the operating budget if it was incurred every “nth” year because it may not be on the current list of expenses when analyzing the operating budget thus increasing the likelihood of not including the budget line item in either budget.