Solving Your Budget Puzzle

The budget process, when done properly, is fairly complicated and takes a considerable amount of time. Anyone can take last year’s expenses or expenses year-to-date, add an inflation factor and say, “Here’s my budget.” But that’s not the proper way to do it. Neither is a reliance on accounting tricks. 

The purpose of a budget is simple. It’s a way for a board to set the income and expenses for the coming year and to predict any increases in maintenance or common charges. Because he or she has the figures for income and expenses readily available, the managing agent usually prepares this. The manager also has access to the financial software to print reports and examine past budgets. (In a self-managed building, the treasurer would follow a similar process.) 

We start preparing the budget at this time of year – in the first or second week of October – and we submit that to the treasurer by the end of the month. That draft would then be reviewed by the treasurer and/or board and be approved sometime in November. The four key elements to consider are: the operating budget, the capital budget, the reserve fund, and the city’s tax abatement. Today we’ll look at the first of these four elements; tomorrow we’ll examine the other three.

An operating budget is composed of two parts: income and expenses. The income side includes common charges/maintenance and also such guaranteed revenue as money from garages, storage bins, and gyms. You would not include transfer taxes, alteration fees, or items that are uncertain or should go into the reserves. On the expense side, there are such major factors as staff payroll, real estate taxes, oil, gas, and (in a cooperative) mortgage interest. Eighty percent of those factors are fixed.

You should take into account the year-to-date expenses. You should look at every single check that was issued and ask, “Is this a recurring expense? Is this something out of the ordinary? Was this a one-time catastrophe?” On the other side, you must ask, “What’s coming up next year?” You have to examine the past three years of expenses to try to get a running average and forecast the coming year’s taxes. To do that, we consult with tax certiorari attorneys who make tax challenges for the building. 

Next, you take your income and your expenses, and you arrive at a bottom line, which will indicate if you need to raise maintenance or common charges. The way real estate taxes have been going, it’s pretty certain that most buildings will need an increase. This is not the time for wishful thinking. 

(Coming tomorrow: the capital budget; the reserve fund; the city’s tax abatement.) 

Michael Wolfe is president of Midboro Management.