As surely as kids dread the back-to-school season every fall, so too must co-op boards face the budget season. A building really has only one shot at establishing income for the whole next year, and while many of you may be far from novices when it comes to preparing a budget, this year has some unique surprises in store for all of us. Determining the optimal level of maintenance income is really a balancing act between various - and sometimes conflicting - goals. To further complicate matters, the effects of a volatile stock market and the widespread evaporation of huge amounts of financial wealth has some shareholders and unit owners acutely concerned about preserving and enhancing the perceived value of their units - and thus more sensitive to any changes in maintenance charges or assessments. They are seeking stability and consistency at a time when real estate taxes and insurance costs and other building expenses loom on the sidelines ready to stir up our game.
Normally, a board would begin to compile an operating budget by utilizing historical data from past years. By simply adding a moderate inflation adjustment for rising costs and then fine-tuning for any unexpected variances between the current year's budget and actual results, the numbers would pretty much fall in line. While accounting professionals like to think that they employ much more sophisticated budget-preparing methods, in truth they would begin in the exact same manner. However (get ready for the sophisticated part), while past history is a valid tool for beginning the budget process, your board and accounting professionals need to be cognizant of other factors which can cause changes in some budgetary items and defy all previous trends. Recent examples of such include the doubling of cost in heating fuel and the resurgence of revenue generated by flip taxes (charges levied when a unit changes hands). It's crucial for your board to conduct a thorough investigation of all of the components comprising your building's operating budget. While many if not most items will require little contemplation and continue to be in line with past costs, this process will force you to intentionally examine each item, and not just focus on those which were prior hot-spots. An important part of your examination should include discerning what outside factors might affect each cost, and based upon their current status, quantifying any projected effects. Another important exercise is the updating of your long-term capital budget, and if necessary, revising the provision for capital project reserves that should be a standard part of any operating budget.
While all this information is no doubt extremely enlightening and thought-provoking, the true crux of this article is to give you a heads-up on new variables that have come into play and which will almost certainly affect everyone's upcoming budget considerations. Even though a little over a year has passed since the terrorist attack on our city, our lives continue to be influenced by this event. As a board member, you may have already witnessed some of the detrimental financial ramifications of this event when renewing your building's insurance policies. Previously, insurance companies were not overly concerned with the possibility of having to replace an entire building. As most structures (of common-interest ownership) in New York City are not made of flammable material, the basic walls would generally survive a fire and negate the need to rebuild from scratch. Now that total destruction is within the realm of possibility, commensurate and significant increases in insurance premiums have ensued.
Unfortunately, these increases are not limited to just property and casualty policies, but also include related coverage, such as workmen's compensation insurance. One extreme example is a building that saw their premiums more than double from $120,000 to $270,000 last year, then shoot up to $410,000 this year. While the co-op was able to sufficiently reduce costs in other areas so that only a moderate maintenance increase was needed last year to absorb the additional cost, the board was forced to implement a 6 percent surcharge assessment for this year's balance to accommodate the new premiums. In all likelihood, a major maintenance increase will be needed by January.
One mitigating factor for assessing your own relative exposure is to consider that this building had had a number of previous insurance claims that contributed to the premium hikes. Nevertheless, as the cost of insurance previously ranged anywhere from 2 to 7 percent of total annual expenses, with the proportionate cost decreasing as the size of the co-op increased, the potential magnitude of any increase - even relative to the budget taken as a whole - should warrant special budget attention.