Budgeting During Economic Unrest
By Floyd Ozeck, CPA
Issue 8 2008

As many of you have experienced, the annual ritual of budget preparation encompasses many different facets, yet this year another set of circumstances will have to be included in the equation.  One method that an Association utilizes in preparing their budget, is to take last year’s budget and increase each line item by some percentage resembling the increase in the cost of living or rate of inflation.  This method may provide the Association with enough funds to operate with during the year but provides little in the way of a management tool to guide the association throughout the year.  While reviewing the actual versus budget amounts, one would observe many deviations among line items which would make it very difficult for the Board of Directors to know where they are, what was done, what they really have left to spend and what still has to be accomplished. Another budgetary method would be what we have heard for many years from governmental officials, “zero base budgeting.”  In this process, every line item is compiled from scratch.  The needs of the association for the forthcoming year are reviewed in detail, needed projects are included and prioritized, while past accomplishments are eliminated.  Before finalizing the budget, bids and contracts for each project or service should be received and executed.  Having this information in hand, the Board of Directors can compile their budget with the satisfaction of knowing where they are going and what they aim to accomplish.  Any budget deviation during the year will assist the Board of Directors in determining if they can fulfill their mission or if modifications, positive or negative will have to be made.  Whichever method the association chooses to use they must now take into consideration the current state of the economy.

Many goods and services that an association utilizes will be adversely affected by what is happening outside the Association so let’s take a look at what to expect. 

As we all know, the price of a barrel of oil has been increasing at an unprecedented rate.  This increase will undoubtedly affect an association’s current roofing and paving projects which are oil-based products.  It may also affect the cost of landscaping and snow removal where gasoline is a major cost to your vendors.  On a long-term basis, capital reserves will have to be adjusted to reflect these additional costs to roofing and paving material so that the necessary funds will be available to accomplish the association’s long-term goals.  On a short-term basis, the association will have to communicate with their vendors to make sure that agreed upon contracts will be fulfilled at the quoted price.  Utility costs should be reflective of rate increases or have some cushion built in for potential rate increases that are before the regulators.

Another economic condition that should be factored into your short and long-term outlook is the disparity between interest income rates and interest expense rates.  While the feds have lowered the interest rates that the banks charge one another, we are still seeing interest rates on loans increasing due to tight credit.  Associations that did not have enough funds in their reserves to handle their major replacement projects may have to borrow funds to get the work done which will only increase the cost of the project.  Other associations that have conscientiously set aside reserves to address their major replacement needs may now have to recompute their cash flow projections since the lower interest income earned on their investments will result in anticipated income not being there when needed.

Due to higher utilities, mortgage payments, cost of food and the potential for unemployment,  many unit owners may not be able to afford their common fees, let alone any special assessment.   Some owners may even be faced with foreclosure.  Associations must now take into consideration the possibility of not collecting all the fees due them.  By not providing for this potential loss of revenue, the association may find it very difficult to meet its financial obligations.  Associations should first of all stay on top of all delinquencies and should also budget for the potential loss of revenue.

During the past year we have seen, throughout the country, many weather related catastrophes.  These conditions have put a strain on insurance company’s reserves.  Usually when reserves are diminished you will see an increase in insurance premiums.  So before finalizing your budget, try to make sure that your insurance premiums are in place.  If policies expire during the year and it is too early to obtain quotes you may want to discuss with your insurance agent the possibility of having your policies coincide with your budget year.

So as you prepare for next year’s budget, review each line item and see how the current economic conditions will affect the cost associated with it.  If you are over cautious and have funds left over at year end, you can always transfer it to your reserve.  But if you’re not cautious enough, you may not be able to take corrective measures later on.  The economy may not allow it.

Floyd Ozeck, CPA is the owner of an accounting firm based in Hamden,CT.  He serves clients throughout the State of Connecticut.  Floyd is a frequent speaker at CAI-CT education programs.