This past year, many condominium associations enjoyed a double dose of good fortune: a milder winter with less snow removal and salting, resulting in a little extra money left in the coffers by spring. The question then becomes: What to do with those funds—what is the best way to ensure they are put to the best use possible?
As anyone with a household budget knows, there are always plenty of needs waiting to be filled by a few extra dollars. For most communities, “there are surpluses in some accounts and deficits in others,” says David A. Levy, CPA, based in Brookline, Massachusetts. If there is $10,000 left over from the snow plow contract, that money will not be held back and put into next year’s snow plow fund. Instead, it likely will be used to help ease expenses for unit owners in the months and budget year to come.
“Generally speaking, many associations have taken and re-evaluated their budgets to assist owners in keeping fees where they were last year,” says Lou Gargiulo, CEO and founder of the New Hampshire-based firm Great North Property Management. “With the economy the way it is and with people hurting, it feels like that’s the most important and best thing to do.”
He adds, “Other associations have used it for deferred maintenance to keep costs down, while others have deferred doing anything with the surplus until the end of 2012 to wait and see where it will be needed for 2013.”
“The operating budget,” says Mark Love, CPA, of Love, Jarominski & Raymond, LLP, in Worcester, Massachusetts, “is a management tool.” Creating one is both “an art and a science,” he says. In 2011, who would have assumed we would have had that much snow and in 2012, that little snow?”
The goal for association budgets is simply to break even. Boards and management “didn’t additionally assess unit owners when they got too much snow nor do they return it when there is too little snow,” says Love. “Unless it’s of some extraordinary nature, the surplus generally gets used to subsidize something over-budget. Or unit owners can vote to transfer the money to the reserve fund. In fact, many financial statements contain standard footnote language that explain that any excess dollars are to be retained for the succeeding year.”
Whether the dollars are used to pay for a shortfall in this year’s budget or set aside to mitigate costs the following year, the savings come back to the unit owners in the form of fewer assessments or fees that are reduced or held steady for the following year.
For residents, though, examining the financial statements provided by the board and management should be a habit, not a rarity. If residents realize that they are being charged $1,000 a month in fees but the association has an enormous operating surplus each year, “then maybe the association you should only be charging me $500 a month,” says Love. Making sure that the numbers are not that far out of line is why creating the budget each year can be and should be—such a time-consuming endeavor.
Flatten the Spikes
In an association, annual budgets generally include an operating portion and a capital portion, used for major repairs and replacements. According to Levy, some associations this year will turn their surpluses over to an operating reserve account, which provides some cushion for unexpected operating expenses that arise during the year—if fuel costs unexpectedly increase, for example. “Or when insurance prices were so volatile, surpluses were put into reserve with the intent to flatten out spikes,” Levy says.
Putting surplus dollars into the capital reserve fund also will ensure that no unexpected assessments will crop up for unit owners, something that benefits not only their pocketbooks in the short term but ensure that capital needs through the association are met in the long term.
With the arrival of fall, boards and managers are moving beyond those surplus dollars to begin planning for 2013. And as good as 2012 may have been for snow removal savings, associations unfortunately cannot count on that good luck repeating itself in the year to come. That is why budget planning can be so difficult and time-consuming. Boards, managers and accountants must look at a broad range of factors and conditions when planning the budget—all with the goal of breaking even.
“There are multiple ways of budgeting,” says Levy. There is the method of looking at the previous year’s budget and adding or subtracting a certain percentage across the board. Ideally, though, “every year’s budget should be based on new information collected, as if starting fresh,” Levy says. “You should do your due diligence in getting contracts looked at and reviewed.” The problem, he adds, is that a lot of self-managed boards do not have the time to do those kinds of reviews.
Love suggests that budgeters will want to look at their 2012 budget, their 2012 actual and take a quick look at their 2011 budget as well. And you want to look at what some of the predictions are for the coming year. “There could be an extraordinary number of hurricanes predicted or a terrible winter forecast for 2013,” he says.
And some things are easier to plan for than others, Love says. “The lights will still be on, the pool will still open at the same time, so some things are more easily budget-able than others.”
Gargiulo agrees that a careful examination of past and current budgets as well as contracts is integral to a successful budgeting process. “Don’t just say everything is going up five percent,” he says. He suggests procuring bids from contractors and then estimating costs before presenting to the board on what the best estimates would be. Capital projects in need of completion that year should also be added to the estimates as well as estimates for what needs to be set aside for the reserve fund.
“We also look at what the current trends will be,” Gargiulo adds. “What are we seeing in the insurance field? Increases? When you have a company as large as ours, we’re able to say what the trends are in each year of expenses.” Right now, for example, he is seeing an insurance market where premiums are increasing. “And we’re seeing values in energy conservation,” which can help save associations money down the road.
Look for Savings
Levy agrees that utilities have great potential for budgetary savings. Being efficient and having energy audits for the common areas can help associations reduce costs for long-term savings. Other successful associations have looked at ways to change operational procedures, too. “Just because the landscaping budget always has included $1,000 a year for new plantings, do you necessarily need that?”
The associations that are most successful at budgeting “look at each line item on an annual basis,” Gargiulo says. “They communicate with various vendors who are a major part of the budget, rebidding on certain critical contracts when necessary. And they look at line items throughout the year.”
That constant vigilance is key, Levy says. “The annual budget is the single most important thing the board can approve,” he adds. So examining each line each year is always worth it in the long run.
This year, those eagle-eyes are being applied to snow removal as boards and associations plan their 2013 budgets. “We live in New England and no one knows the weather,” Levy says. He believes prices will be higher and suggests securing quotes from multiple vendors in order to keep costs down.
As difficult as budgeting can be, Love believes today’s boards are up to the challenge. Associations “now function like they’re small businesses,” says Love. “Boards are well-educated and well-experienced and have gotten stronger in a positive way.” That level of experience and expertise can help them work smoothly and cohesively with management and other outside experts to craft polished and professional budgets that benefit the entire community.
When windfalls happen, it helps to be in a position to take the best advantage of them possible. With proper planning and an understanding of options are out there, budget surpluses can make a difference not only in the current budget year but in the years to come.
Liz Lent is a freelance writer and a frequent contributor to New England Condominium.