Drafting Your Budget in Today’s Economy

By Marcy Kravit, CMCA, AMS, PCAM, CFCAM / Published January 2022

Even in the best of economic times, managers and board members are responsible and held accountable to scrutinize, dissect, and assimilate the many challenges that the budget process presents. This process, even in the best of times, can become overwhelming. 

     This past year, the budget process was even more intimidating than ever. As we are all aware, the operating budget includes recurring expenses such as payroll, taxes, utilities, insurance, and day-to-day maintenance and operations. 

     The cost of payroll, insurance, and fuel continues to rise; however, these are expenses that somehow, some way, must be figured and factored into the budget. 

• Where in a budget is there room for the fat to be trimmed?
• Should an association obtain a new property appraisal?
• Can the association risk insuring for a lesser property replacement value or a larger insurance deductible? Can an association afford to reduce the number of trash pickups?
• Should an association cancel or cut back on the valet service?
• Should the association reduce the number of employees and remove the pool attendant?
• Can it reduce landscaping services and mowing to once a month?
• Should it place cosmetic elevator upgrades on hold?
• Can the maintenance staff get certified and service the pool in-house?
• Should the association consider installing photocells and motion sensors?
• Has the association factored in increases for all items according to the consumer price index (CPI) percentage?

     This past budget season, many of these questions were addressed and asked at budget meetings across the state. It is customary to ensure that the associations have adequate funding to cover two months of expenses. 

     Due to the pandemic and inflation, many owners may not be paying their assessments and may be headed toward foreclosure. We can all agree that this past year’s budget process required an examination, evaluation, and assessment of its own. It was a lesson in practicalities, reality checks, analysis, and determination on which services to maintain and which ones to eliminate. It was devastating for all, and most fixed costs were scrutinized. 

     The consumption of items, additional janitorial/sanitizing supplies, and projected costs such as insurance, utilities, repairs, and maintenance were measured, analyzed, and compared to the previous year’s expenses. 

     Some of the expenses which required review included the following: administration, management fees, maintenance, insurance, taxes, garbage collection, pest control, utilities for common areas, and reserves for capital expenditures and deferred maintenance. 

     Competitive bidding and notifying vendors that services were going to be reviewed and contracts renegotiated may have created a bit of frenzy among some service providers. 

     Several managers and boards of directors asked many questions like the following:

• Was there any new expenditure for any of the line items in the operational budget that would benefit the community?
• What long-term or capital projects needed to be addressed immediately?
• When was the last reserve study conducted?
• When was the last structural, electrical, and mechanical inspection performed on the building?
• Has an energy audit been performed?
• Are changes in services needed that may require an increase or decrease in the contract amount?
• How and why was each line item established?
• Does the annual assessment need to be raised because of an increase in delinquencies and cost of living?
• Do we need to eliminate any staff positions?

     Evaluating conservation, energy efficiency, and cost-cutting measures may provide creative ways to save in certain areas. 

     Boards and managers were tasked with differentiating between discretionary and non-discretionary expenses. Many were taking a closer look at some past repairs that incurred expenses and figuring whether they could have been addressed in-house, or did they actually require outsourcing? It is management’s job to make recommendations regarding prioritizing projects and freeing up money to maximize cash flow. 

     Calculating unforeseen repairs based on previous repairs and replacements was used as a gauge to measure estimated costs. Older buildings projected reoccurring repairs such as plumbing, structural repairs, and electrical repairs to be assessed for the unforeseen and unanticipated expenses.

     Mary Molina Macfie is a licensed community association manager and serves on many boards. She is a Weston City Commissioner, board president, a director on the SE FL Chapter of the Community Associations Institute board, and a homeowner leader. She is one of the 20 Florida Legislative Alliance delegates who writes, fights, and pushes legislative bills in Florida, and she was recently appointed to serve on the Broward County Condominium Structural Issue Committee by Steve Geller, the mayor of Broward County, immediately following the Surfside tragedy. I sat down with her to ask her some important questions regarding budgets and the inflation issues community associations are facing today. 

     Question: What advice can you give to a community association boards of directors to prepare for their 2022 budget?

     Answer: Take a good look at the previous year’s budget while keeping in mind what’s taking place currently in the economy, inflation, cost of living, and utilities, and clearly define your community ‘s wants and needs. Work on being as accurate as possible with your line items. Funding too little will leave you a shortfall; too much will leave the residents possibly in financial distress. 

     Question: As a Broward County Condominium Structural Issue Committee member, what measures do you think associations should take going forward to prevent structural damages and be fiscally responsible?

     Answer: Maintenance, maintenance, and maintenance. Don’t find yourself on the defense. Practice strong preventive maintenance while creating a strong financial foundation. Turn to experts in the appropriate field and work towards meeting their recommendations. 

     Question: How does inflation affect your role in decision making, spending, and saving?

     Answer: I wear many hats. That does not change. What does change are the associations “needs” and “wants,” which need to become more clearly defined. Project commitments must become prioritized. A needed (safety) project will trump all other projects unless the funds can accommodate the “wants” as well. The “want” only projects will wait until material and labor become more affordable. Projects may take longer, knowing we will only take on one project at a time instead of several simultaneously.

     Question: What changes do you see happening that will affect community associations?

     Answer: I see the continuation of high costs for insurance, stricter oversight in condominiums, and less restrictions for homeowners. I am hopeful we will see “home rule” for associations. In addition, we may see a deeper emphasis on education and training. 

     With the recent Surfside tragedy, many are looking at the costly impact of their aging infrastructure, such as private roads, parking lots, ponds, front entrance gate equipment, private lakes, irrigation, swimming pools, clubhouses, sports facilities, and other amenities that cost to maintain over time. 

     If the property had been well maintained and a preventive maintenance plan was in place, discretionary expenses foregoing cosmetic-aesthetic projects were considered. Contingencies and miscellaneous expenses were projected. Putting off and placing those items such as new computers and technology expenses were reconsidered. 

     Were pay increases going to be considered for 2022, or were bonus incentives and initiatives going to be considered? Many looked to their CPAs for consultations and recommendations. 

     Items and services such as 24/7 valet, security, fresh flowers in the lobby, number of times annuals were changed out, landscape extras, office expenses, training, software, equipment purchases, holiday decorations, and the number of personnel were re-evaluated. 

     Many owners are on a fixed income and have been hit hard by the economy. With insurance, food, and gasoline costs rising, many are finding it much more challenging to pay their maintenance fees. The increase in delinquencies and foreclosures will have a significant impact on the budget process. 

     Many properties include a bad debt line-item expense. However, trying to estimate and calculate bad debt has been a difficult undertaking. Although many owners received the stimulus money, at this point those funds may have already run out. 

     Several communities had found that they were required to raise their fees to cover the increases. Previously, some had waived collecting reserves or opted to partially fund reserves. 

     In years past, many associations explored ways to improve and increase revenue. Some investigated installing ATM machines, cell phone towers, or vending machines; renting space; imposing late fees or processing fees; charging for social events or programs; and more. Evaluating the level of services and amenities of the association required the board and management to be practical and vigilant.

     Overall, most communities were sensitive to the economic climate and owners’ situations. Many have tried to work with their owners. Boards are recognizing that these are difficult times and that management must work harder in negotiating with vendors and evaluating contracts and services. 

     The manager may make his or her recommendations for the association’s budget, but ultimately it is the board that must review, ask questions, and perform its due diligence in drafting a realistic budget as part of its fiduciary duty to the association. 

     Drafting a budget in an uncertain economic climate is a complicated and difficult task. Inflation has led to rising costs that we have not seen in over a decade. Managers and board members must ultimately create a fiscally sound annual budget to be prepared for the rising costs to provide some stability in operating the association effectively. It is important that all work together as a team to have a solid financial plan in place to operate the association in a business-like manner. 

     The members elect the board members to fulfill the duties and responsibilities for the operations of the association for the best interest of all. As such they have the duty to budget and assess members for the required expenses.   

     Looking at future needs, examining past expenditures, and planning for cost-of-living increases is the basis and common-sense approach for dealing with the economy, and in these difficult times will assist and benefit all in the development of a comprehensive budget.

Marcy Kravit, CMCA, AMS, PCAM, CFCAM

Director of Community Association Relations

     Marcy Kravit has 20-plus years’ experience managing community associations in South Florida. She has established a reputation as being passionate about service, driven by challenges, and undeterred by obstacles. Marcy is committed to providing five-star service and educating others in raising the level of professionalism in the industry. She works for Hotwire as director of community association relations. Marcy has earned every higher education credential offered by CAI and is recognized by Florida Community Association Professionals (FCAP) as a CFCAM. Marcy is a contributing writer to the Florida Community Association Journal (FLCAJ) and serves FCAP as their Education Program Director.