By Bennie van Dyk, Senior Operations Manager: Community Schemes Management – MidCity Property Services
Preparing and implementing a well-structured budget is one of the most important responsibilities of scheme executives in a community scheme. A financially sound budget ensures that the scheme has sufficient funds to meet all obligations throughout the financial year. One of the biggest mistakes owners or scheme executives can make is focusing solely on the percentage levy increase when discussing the budget in meetings.
The budget should be compiled early in the 11th month of the financial year. This allows scheme executives to base projections on 10 months of actual expenditure and accurately forecast the expected costs for the year. It also provides sufficient time to workshop the draft budget, ensuring the final budget is approved in month 12 for implementation on the first day of the new financial year. Implementing the new budget on the first day of the financial year is crucial. Failing to do so means the required contributions for 12 months’ expenses must be recovered over 11 months or less, which leads to a higher contribution percentage increase. The Sectional Titles Schemes Management Act (STSMA) permits scheme executives to implement a levy increase at the start of the financial year, provided it does not exceed 10%. Delaying this increase until the Annual General Meeting, typically held four months into the financial year, can significantly impact the required levy increase.
How often do we get to a meeting where the approval of the budget is one of the agenda points, and when the discussion of the budget commences, the first words are – ‘We cannot implement such a big levy increase.’ This is said without even going into the details of the budget. Or, without reviewing the budget in detail, the owners simply resolve that a zero-percent increase should be implemented without discussing the provisions of the budget. The above scenarios lead to the scheme not being able to meet its obligations over time, as its obligations are dictated by inflation as well as increases by service providers and local authorities. The scheme executives then make use of the scheme’s reserves, and eventually, no funds are available for proper maintenance. This results in short payments being made on municipal accounts, as the scheme’s cash flow does not allow for full payments. Owners, although illegally, delay levy payments due to maintenance not being done. And this becomes a vicious downward spiral for the scheme, which ends up with the owners being forced to pay a special levy or face the scheme being placed under administration.
Scheme executives should discuss each provision in the budget, compare it to the previous year’s expenses, and assess whether the proposed increase for each item is realistic. Municipal costs typically range between 30% and 50% of a sectional title scheme’s expenses if the scheme does not source its utilities, such as electricity, water, and sanitation recovery. Therefore, it makes no sense to approve a zero-percent increase when we know that electricity costs have risen by an average of 13% to 18% annually over the past few years. In a sectional title scheme, one must also ensure that the reserve fund complies with the provisions of the Sectional Titles Schemes Management Act (STSMA) and the Community Schemes Ombud Service Act (CSOSA). The reserve fund should not fall below 25% of the operational expenditure of the previous financial year. If it does, the scheme faces an automatic 15% levy increase, as these Acts require that 15% of the operational budget be allocated to the reserve fund until it meets the minimum 25% threshold.
At MidCity, we prepare best-practice budgets for our clients, ensuring that each scheme can meet its financial obligations for the upcoming financial year based on the previous year’s expenses while complying with the provisions of the relevant Acts.
This draft budget is provided to scheme executives during the last month of the financial year for approval. Scheme executives must then exercise due diligence when reviewing and discussing the draft budget. The designated property portfolio manager is well-equipped to assist them in this process.
If you have any questions regarding budgets and their approval, please contact us at MidCity Property Services – Your Property Partner for Life.
