It’s the 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. Some managers paint a black-and-white portrait of the budgetary process. “Realistically, doing a co-op or a condo budget means you figure out what your expenses are,” says David Amster, president of PLI Management. “Your income has to match those. If that means an increase (in maintenance) is necessary, an increase is necessary. If it means a large increase is necessary, then a large increase is necessary.”
But it isn’t always quite so simple. A lot depends on the attitudes of those on the board. “The problem is there are two major categories of board members: those who are in the property short-term and those who intend to live there indefinitely,” explains Alvin Wasserman, director of asset management at Fairfield Properties. “If you get a board with a short-term mentality, where they figure they’re going to be out in two or three years, they’ll tend to make decisions that are not for the long-term good of the community. Everybody gets hurt. If you have people who are in it for the long haul, they might be more careful and understand that you can’t run up a budget deficit and not pay it. You have to live within your means.”
The High Cost of Wishful Thinking
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? “It depends on where you are in the stage of a project,” Wasserman says. “If you’ve completed a major project on your pipes, for example, then it wouldn’t be unreasonable to reduce the cost for that budget to what ordinary repairs and maintenance would be instead of the extraordinary work that you’ve been doing. That’s more than fair. But if you have expenses that you know are going to be a certain dollar amount, and then you under-budget intentionally just so you don’t have to have a maintenance increase, you’re not doing the right thing.”
Budget projections should be based on hard data from the manager, adds Delorme. “When I prepare a budget,” she 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. We go through that general ledger. If they see they spent, for example, $50,000 in legal, I say, ‘Look and see the legal expenses. This person has settled. We don’t have that money. That’s why I lowered it to $20,000 instead of leaving it at $50,000.’”
The Bottom Line Is the Bottom Line
All managers agree that unrealistic projections carry consequences. The board may avoid raising maintenance, 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 Wasserman, “and if you continue to budget that way, it will deplete them over time. Ultimately, you have expenses that you cannot forego. You have to pay utilities. You have to pay your underlying mortgage or any debt that you have. You have to pay your staff. No matter what, you have to pay your taxes.” He adds, “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.”