Budget Season Is No Time for Wishful Thinking

It’s budget season. The time of year when boards confer with their managers, look to the past as a guide to the future, then make hard fiscal choices. This is not the time to indulge in wishful thinking.

All managers agree that unrealistic projections carry consequences. The board may avoid raising monthly maintenance or common charges, but it is only putting off the inevitable. If it doesn’t raise it two percent this year, then it will have to go up by four percent next year. And six percent the following year.

“It will come out of your savings or your reserves,” says Alvin Wasserman, director of asset management at Fairfield Properties. “And if you continue to budget that way, it will deplete them over time. Ultimately, you have expenses that you cannot forego. You can slice it and dice it any way you want. You could call it by different names. You could put it on different budget lines. So what? The bottom line is the bottom line. If you need an increase and you make-believe you don’t, you’re doing a disservice to the community.”

If your board has a good managing agent, it will usually leave most of the fiscal planning up to him or her. And, says Steve Greenbaum, director of management at Mark Greenberg Real Estate, 85 percent of the budget is fixed: labor (union contracts have regular wage increases and fixed benefit payments); fuel and utilities (many have saved on costs by going from oil to gas); water and sewer rates; real estate taxes (you can challenge these but not take an adjustment until you’ve won); underlying mortgage payments; and insurance premiums. Greenbaum also points to the rising costs of “unfunded mandates” – the local laws and other requirements that seemingly grow every year. These are hard to anticipate, but necessary to fund.

So with the manager preparing the budget, and those fixed costs cutting into a board’s flexibility, what are its members supposed to do? The board’s chief role in budget-making, asserts Pamela Delorme, a principal in Delkap Management, is in its decisions regarding fiscal projections. She notes that the board might have budgeted for a very cold winter, and then it turned out milder than expected, so the property didn’t need as much fuel. Consequently, the board can safely project a lower amount for the coming year.

But boards can also make unrealistic projections. We spent $50,000 last year on plumbing, the board may say, and things are getting better, so let’s estimate that plumbing costs are going to be $30,000 next year. But how did the board arrive at that figure?

Budget projections should be based on hard data from the manager. “When I prepare a budget,” Delorme says, “I give them the actual last year’s budget, the projected year-end, the anticipated budget for the following year, and the recommended budget for the following year, with all kinds of footnotes. I give them some of the backup to be able to see where I’m coming from, because I give them a general ledger, which shows them the actual expenses.”