Q&A with Jeff Heidings, Siren Management.
The budgeting season is upon us. To make sense of the process, Habitat editorial director Tom Soter sat down with Jeff Heidings, president of Siren Management and a 25-year veteran accountant, to discuss what a board should know about budgeting.
You’ve been a CPA as well as a manager. With budget season approaching, how does a board prepare a budget?
In my experience, we [the manager] and/or the co-op or condo CPA prepare the budgets. I’ve rarely ever encountered a board itself that prepares the budget. Usually, it’s the managing agent who does the initial preparation and presentation, and goes through it with the board. Or, in some cases, accountant.
Go through the steps of how you do that.
A budget is set up on the same structure as a financial statement: all the revenue sources and then all the line-item expenses. And we start with expenses and go through every line item. If it’s a union building, we still start with the current payroll structures, and then, of course, factor in any contract increases that come along in the budget year. You know, utilities, common area electric, things like that, are based on a three-year average with factors taken into consideration, including: Is there a rate increase? Is oil very high? Is Con Ed going to surcharge for the price of oil? Does it look flat?
You deal with current events when it comes to those kind of things. We generally always query several fuel companies and get their forecast for the upcoming season. If it’s gas, we have to seek information from the utility, look at trend support and get an idea from several sources and kind of take an average.
Fuel prices went up so much a few years ago, then they went down. Is it hard to make a prediction?
Fuel companies will always hedge; they’ll say this is where we are today, this is where we expect to be, they’ll always disclaim an accurate prediction based on a world event, but you can’t budget that way. If you want to put in a two-, three-percent hedge, fine, but you can’t worry about a Middle East war spiking prices. Generally speaking, I go with an average of what fuel companies tell me they’re looking at for the season. We don’t lock rates, we don’t buy future contracts on oil, we never recommend it. People that did it got hurt very badly in the past couple years when they bought very high and then the market collapsed, so it’s like playing the stock market. It’s not something I would recommend doing with your co-op or condo funds, trying to guess where the market might be going.
Water and sewer expenses, more or less, are very easy to target. You take your average last couple of years’ prior consumption and what the city’s current rate is – you usually know what the rate is by the next fiscal year – and you factor that in. The trend has been double-digit increases every year. I would always figure in a six or seven percent increase in water since New York City’s always raised it 13, 14, 10 percent in the last three years.
Your AV [assessed valuation of your property] gets published in January, so what a lot of people do in the budget, if they really think there’s going to be a shocking change – mainly on the upside, of course – they put together a budget and just take a peek in early January before they release it on the AV to see if the city did anything drastic. Otherwise, you can kind of have a feel talking to the tax cert attorneys – they have a sense of where AVs are going to be. And of course, you have to read the news and have an idea of what the city has in mind and what they need to do in their budget in the next year as far as rates go.
So, those are fixed costs that you’ve gone through. What are the others?
Insurance. You’re either in the middle of an insurance year and you have a feel for where the market has been in the last year or two, or you talk to the insurance broker who handles the co-op or condo’s portfolio and see if they think there are any shocks coming ahead in pricing or if the industry is pretty stable. Management expenses, of course, you know. Professional fees, more or less, are within easy grasp from year to year. G&A [general administrative expenses] is also usually the lowest line item in the budget anyway: the telephone, and certain filing fees, and membership fees (like the Council of New York Cooperatives & Condominiums, and Habitat).
And then there’s repair and maintenance. Unless it had a very aberrational year, any aging building should generally see a slight increase in its repair and maintenance budget from year to year, because things will break down, ultimately. You stick to your trends and know your building, talk to your super, so you know what he feels. You find out if he feels any systems are susceptible to any larger repairs in the upcoming year, and you put your budget in.
What is the board’s role?
The thing is, you bring it and you present it to your board, line by line, you walk them through it, and if the president, or the treasurer, has any questions, they will bring them to you.
What sort of questions do they usually ask?
“Can we get a better price on our insurance?” and “How do we get our real estate taxes down?” “Do we want to add a lot more cushion in case?” Some buildings like to be extra-conservative, and say, “Well, let’s put in five to ten percent more for repairs, just in case, so we don’t, in a worst-case scenario, have to go into our reserves to augment maintenance.”
How involved should a board be? Is that the extent of the involvement that you’ve described?
That’s a very high level of involvement, because you’re basically going to your client, the owner of your building, and presenting them with the information they need to approve the budget as submitted, or to modify it, or tweak it a bit. That becomes their obligation under the bylaws to pass a budget, to establish a budget every year, and, of course, it’s passed along to management (within the management agreement or the management’s role in running the building), to produce a budget to go over with the board of directors.
You produce a budget in December, or earlier?
Most buildings that are on the calendar year have their budget discussions in November so that they can resolve where they’re going and give their shareholders at least 30 days’ notice of such. There are maintenance and common charge increases, from year to year, generally speaking, and shareholders and unit-owners like to have 30 days’ notice that something’s coming along. After ten months, you have enough information to prepare a budget, so I think November is a very popular budget time.
What is the biggest misconception about the budgeting process? Is there one?
Some boards like to hide their heads in the sand if the budget reflects that maintenance or common charges are vastly understated or vastly under the level they should be to cover expenses. Boards will sometimes be in denial and say, “Well, it must be management’s fault that we’re so far behind, there must be a reason other than the fact that expenses have eclipsed revenues in our case.” They won’t look back and see that maybe our average increase was only one percent or two percent when the rest of the industry was going up three to four percent, and now the chickens have come home to roost.
The budgeting process is a very important. You actually learn a lot about your building as you’re doing your budget, because the budget process refocuses your attention on line-by-line items and awakens you sometimes to things that may have gone unnoticed. It’s all about crunching the dollars. You have to run a co-op or condo like a business.