7 Strata Budget Red Flags to Watch for During Budget Preparation

A strata budget is more than a spreadsheet that determines next year's monthly fees.

It is the financial plan for operating the property.

Under BC's Strata Property Act, the strata corporation must prepare a budget for the coming fiscal year and present it for approval at the AGM. The budget includes expected operating expenses, contributions to the operating fund and Contingency Reserve Fund (CRF), each strata lot's monthly contributions, and estimated year-end balances.

But how does council know whether next year's numbers are realistic?

A good place to start is by looking for increases that are already known, or reasonably predictable, before the budget is prepared.

Where to Look for Upcoming Cost Increases

Before building next year's budget, council should review the major expenses one by one.

Look at:

• Service contracts: landscaping, cleaning, elevator maintenance, fire-system inspections, garbage collection and other recurring agreements. Check the renewal date and whether the contract includes a scheduled annual or inflation-based increase.

• Property management agreements: determine whether management fees or other charges change during the coming fiscal year.

• Insurance: check the policy renewal date and speak with the insurance broker about what is known before finalizing the budget. Strata corporation insurance is normally an annual operating expense.

• Utilities: compare the current year's actual costs with the previous year and check published rate changes where available.

• Repairs and maintenance: review what has actually been spent over the last two or three years instead of relying only on the previous budget.

• Upcoming projects: compare the depreciation report and council's maintenance plans with the proposed CRF contribution.

Council does not need to predict every dollar perfectly. The goal is to avoid budgeting an amount that council already knows is unlikely to be enough.

With that in mind, here are seven red flags worth checking before the budget goes to owners.

1. Last Year's Numbers Were Simply Copied

Prices change.

Insurance, utilities, maintenance contracts and professional services can all move from one year to the next.

Last year's budget is a useful starting point, but each major line should still be reviewed.

For example, if the landscaping contract was $18,000 last year and the agreement calls for a 4% increase at renewal, budgeting another $18,000 creates a shortfall before the fiscal year even begins.

The better question is: What will we reasonably expect to pay during the coming fiscal year?

2. Actual Results Are Being Ignored

A budget tells you what council expected to spend.

The financial statements tell you what actually happened.

If plumbing repairs were budgeted at $8,000 but actual spending has been $13,000, $15,000 and $12,000 over the last three years, another $8,000 budget deserves a closer look.

Compare each significant budget category with:

• the current year's actual spending,

• the previous year's actual spending, and

• any known changes for the coming year.

Repeatedly exceeding the same budget category can be a sign that the budget no longer reflects the property's actual operating costs.

3. Known Contract Increases Are Missing

This is one of the easiest problems to catch.

Pull out the strata's recurring contracts and create a simple list showing:

If the elevator agreement increases by 5% in January, the cleaning contract renews in April and the management agreement changes in July, those increases can be incorporated into the budget according to when they take effect.

Council should also look for contracts that are about to expire. Even when the new price is not yet known, that is a reason to obtain updated pricing rather than automatically carrying forward the old amount.

A known increase should not become a surprise three months into the new fiscal year.

4. The CRF Contribution Was Chosen Only to Keep Fees Low

The CRF is intended for expenses that occur less often than annually, such as major building repairs and replacements.

Current BC regulations require the annual CRF contribution to be at least 10% of the total amount budgeted for contributions to the operating fund, and the contribution must be determined after considering the most recent depreciation report, if one has been obtained.

But the legal minimum is not necessarily the right amount for every property.

A depreciation report looks ahead at major repair and replacement costs over a 30-year period.

If the report identifies significant work approaching in the next several years, council should be asking whether the current CRF balance and annual contributions are moving the strata toward those costs.

Keeping today's strata fees artificially low can simply move the cost into tomorrow's special levy.

5. A Previous Operating Deficit Has Disappeared From the Conversation

Sometimes the problem is not next year's expenses. It is this year's shortfall.

If actual operating costs have exceeded the money collected to operate the strata, council needs to understand what created the deficit and how it will affect the next budget.

Was it a one-time unexpected repair?

Was insurance significantly over budget?

Or are several regular expenses consistently costing more than the amounts being collected?

A recurring deficit can be an important warning that strata fees are no longer keeping pace with the actual cost of operating the property.

6. There Is No Allowance for the Unexpected

Budgets should be realistic.

Buildings have repairs. Equipment fails. Costs fluctuate.

That does not mean council should create large unexplained cushions throughout the budget. It does mean that budgeting every category to the lowest possible number can leave very little flexibility when normal variations occur.

Look at the strata's spending history.

If a maintenance category regularly fluctuates between $8,000 and $12,000, budgeting $8,000 simply because that produces a lower strata fee may not be realistic.

The objective is not perfection. It is reasonable forecasting.

7. Nobody Can Explain Why Fees Are Changing

Owners are much more likely to understand an increase when council can explain where it came from.

"The fees are going up 8%" invites frustration.

Something like this is much more useful:

"Insurance is increasing approximately $9,000, our cleaning and landscaping contracts are increasing approximately $4,500, actual repair costs have been higher than budgeted, and we are increasing the CRF contribution by $12,000 based on upcoming capital needs."

Now owners can see the financial story behind the number.

How Can an Owner See Their Own Increase?

The proposed budget distributed with the AGM notice should show each strata lot's monthly contribution to the operating fund and to the CRF. Together, those amounts form the strata fee.

That makes the proposed increase fairly easy to check.

For example:

Current monthly strata fee: $520

Proposed monthly strata fee: $558

Monthly increase: $38

Percentage increase: approximately 7.3%

A Good Budget Should Be Defensible

The goal is not to produce the lowest possible strata fee.

It is to produce a realistic financial plan that council can explain and owners can understand.

Before presenting the budget, council should be able to answer three basic questions:

What went up?

Why did it go up?

What information did we use to arrive at the new amount?

Sometimes the answer will be that expenses can remain relatively steady.

Other years may require uncomfortable adjustments.

Finding those increases before the AGM gives council an opportunity to explain them and gives owners a much clearer picture of what it actually costs to operate and maintain their property.

Next week: When the existing budget and CRF are not enough, a special levy may enter the conversation.

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