The prevailing economic climate has given rise to concerns for us all, especially co-op and condo boards currently in the process of budget preparation. The natural course of action would seem to be to review past budget-related decisions and apply them to present-time decision-making. But what happens when the premises of previous decisions are no longer valid? In light of recent events, what budget-related issues must boards grapple with that they may never have had to consider before?
Make the Time and Do It Right
Boards should always set aside time to focus deliberately and exclusively on the coming year’s project budget. The budgeting process should commence early in the third quarter, before the final quarter of the property’s fiscal year (for most properties operating on a calendar year, the budget process should have started in September). A series of special meetings should be called for this purpose at which all board members and individuals involved in the budget process should be present, especially the president, treasurer, and finance committee/budget committee chairperson. Since the starting point of most budget meetings is a review of the preliminary projected budget prepared by management, it is important that both the managing agent and the management company’s finance professional who prepared the proposed budget also be in attendance. Generally, there is no reason for the co-op or condo’s legal counsel to be present unless there is specific law-related budget issue to be addressed. Nor is it essential for the co-op or condo’s outside accountant to be at the meetings, since the accountant will have a chance to review the budget in the course of preparing the year-end audited financial statement.
Experience dictates the wisdom of budgeting conservatively. This means budgeting expenses at realistic levels, not budgeting income that is uncertain, and providing a line item of one to two percent of annual expenses for contingencies. This contingency line item can be used to cover unforeseen expenses or–if it is not needed–it can be saved in the working capital fund for future expense fluctuations. Too many boards reduce projections arbitrarily in the hope of producing a balanced budget with no increases, only to find their buildings operating at a deficit. Trying to catch up after deficit periods is very difficult; it is much better to budget a small surplus that will be available for the future. When budgeting, the main objective should be to maintain the services desired by shareholders and unit owners at affordable levels. In general, most owners understand that the cost of living increases with time and recognize the need for periodic reasonable increases in annual maintenance and common charges.
During budget preparation, data that includes last year’s budget and the current year’s year-to-date actual income and expense numbers must be assembled and reviewed in light of projected income and expense increases or decreases and other factors that are expected to impact the budget. Normal operating expenses should be dealt with on an item-by-item basis, and should be separated from capital or special items that cannot be paid from operating income. Also, the managing agent or a knowledgeable board member should present the property’s various service contracts, discuss any increases or additional charges that are anticipated in the coming year, and inform the budget decision-makers of the contracts’ expiration dates and how entering into renewal or new contracts will affect the budget.