Avoiding chronic underbudgeting

Why the same budget keeps falling behind

Most budgets do not fail in one dramatic year. They fail by being copied forward. Incremental budgeting, starting from last year's budget and adjusting it by a few points, is faster to prepare and easier to delegate to whoever is doing the spreadsheet this year, but it also carries forward every line nobody has re-checked in years. A landscaping contract renewed at the same number for five years, a utility line never compared to actual usage, a reserve contribution picked once and never revisited: none of these looks like a decision. Each one looks like nothing happened, which is exactly the problem.

Industry data reported by a national reserve-study firm describes most of the associations it studies as underfunded relative to their components, the highest share that firm says it has recorded, and it attributes the increase in part to rising construction costs and closer attention to reserves since the 2021 partial collapse of Champlain Towers South in Surfside, Florida.

"the budgeting process starts from a base of zero, with no reference being made to the prior period's budget or actual performance" versus "the budget is prepared by taking the current period's budget or actual performance as a base, with incremental amounts then being added for the new budget period."

Source: Comparing budgeting techniques (Incremental v ZBB), Association of Chartered Certified Accountants

Underfunded does not mean not fully funded

A reserve study produces a percent funded figure, the ratio of the actual reserve balance to the fully funded balance. It is easy to treat any number short of 100 percent as a failure. It is not. Full funding, threshold funding (keeping the balance above a set floor), and baseline funding (never letting the balance fall below zero) are three distinct, legitimate policy choices a board can adopt, not three grades of correctness.

What turns any of those three into chronic underbudgeting is not the target itself, it is not having chosen one on purpose. If your association's reserve contribution has never been tied to a stated policy, full, threshold, or baseline, that absence of a decision is the underbudgeting, whatever the percent funded number happens to say this year.

Where a surplus quietly leaks into a shortfall

An association that files a standard corporate tax return can shelter excess membership income from federal tax for a given year under IRS Revenue Ruling 70-604, but only two things qualify: refunding the excess to members, or carrying it forward against next year's assessments. Moving it into reserves as a capital contribution does not qualify, and the election requires a membership vote each year it is used.

Treating year-end surplus as extra money the board can quietly redirect later, without a documented refund-or-carryover decision, is a common way underbudgeting hides behind what looks like a healthy bank balance. A surplus that is never formally accounted for tends to get spent piecemeal instead of applied where the budget actually needs it.

The habit that catches drift early

Three checks catch a budget that is quietly falling behind, before it becomes a special assessment:

Compare last year's budget to what the association actually spent, line by line, not just to last year's budget number. A gap between assumed and actual cost is the earliest signal of drift. Second, pick a handful of stale lines each year and rebuild them from zero rather than adjusting them by a percentage, to test whether the number still holds up when it has to be justified from scratch. Third, hold the budget discussion before the vote, not at it, so directors have time to question a line and change it rather than rubber-stamping whatever was carried forward.