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Slide 1: (Title Slide) Module 6: Operating and Capital Budgets
Welcome to the Public Housing Authority Financial Management Training. This session provides
information on the purpose and HUD’s requirements in the development and establishment of operating budgets. This session also discusses best practices in the development and uses of operating a budget and how a PHA’s capital activity and capital budget impact the PHA’s operating budget.
Slide 2: Module 6 Topics
This session starts with a brief description of the purpose of an operating budget and HUD’s requirements for the public housing operating budget. The session will then move to best practices of PHAs when
developing and implementing an operating budget, such as the need for a budget policy, steps in preparing an operating budget and items that should be submitted with an operating budget.
Finally, the session will transition to the relationship between the operating and capital budgets.
Slide 3: (Section Break) Purpose of the Operating Budget
This section “Purpose of the Operating Budget” provides information on the reason and need for a well-developed operating budget.
Slide 4: What is an Operating Budget?
An operating budget is a realistic forecast of the next fiscal year’s operating results and is a combination of known and estimated income and expenses for the future year.
An approved operating budget:
• Shows management’s priorities and expected goals and outcomes through various line items; • Provides authority to incur expenses; and
• Acts as a control and monitoring device (so that actual financial performance can be compared to the budget).
The definition of an operating budget is understood by most. However, how does an operating budget complete these tasks?
For example, if a PHA budgeted $200,000 in tenant rent, how does this show management’s priorities, expected goals and authority to incur expenses? If this is the only information provided, then the budget does not.
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• When several other pieces of important information is provided, then all parties understand the goal and expectations of the Board and senior management for the following year that are included in the $200,000 tenant rent budget figure, initially provided. This information includes: (1) the expected occupancy rate should be no less than 95% for the year, (2) the long-term vacant units are to be put back on-line and (3) funding has been authorized to provide for contracts to fund the work needed to fix and lease the long-term vacant units.
• Once these facts are understood, the budget then becomes a control and monitoring tool. The following questions will guide monitoring of the budget:
o What is the occupancy rate?
o Has the contract been approved and at what cost? o Is the contractor on schedule?
The power of an operating budget is in its development.
Slide 5: Why Prepare an Operating Budget?
Why should you prepare an operating budget? The first and most obvious answer is because HUD requires it. Specifically, HUD requires PHAs to prepare an operating budget for the public housing program and that the operating budget must be approved by the PHA’s Board.
Although HUD does not require any other HUD programs to have an approved operating budget, PHAs are strongly encouraged to prepare operating budgets for all HUD and non-HUD programs that are
administered by the PHA (for example, Housing Choice Voucher, Rural Development, etc.).
The second and more important reason for preparing an operating budget is because the operating budget: • Helps ensure that the PHA remains financially healthy;
• Serves as a tool to monitor and project the future financial performance of the PHA’s projects and programs; and
• Helps the PHA allocate resources appropriately and highlight the areas that need improvement.
Slide 6: (Section Break) Public Housing Operating Budget & HUD Requirements
This section “Public Housing Operating Budget and HUD requirements” provides HUD’s requirements surrounding the development and presentation of an operating budget.
Slide 7: Public Housing Operating Budget Requirements
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Secondly, the budget must be reviewed and approved by the Board of Commissioners by resolution. Only the budget resolution needs to be submitted to the local field office. Except in cases of non-performance, budgets are not subject to HUD approval.
Slide 8: Public Housing Operating Budget Requirements (continued)
The operating budget must include reasonable estimates for all revenue and expenses under the Operating Fund and Capital Fund Programs that directly or indirectly support the operations of the project;
• The concept of all revenue would include such items as operating subsidy, dwelling rents, Capital Fund grants used to support operations, and all other project revenue. If the PHA will use operating reserves to support operations or another project is expected to transfer operating reserves to support the project, these amounts should also be shown on the budget. In other words, the budget should show all resources that will be used to support operations.
• The concept of all expenses would include such items as direct administrative costs, utilities, maintenance, security, general expenses, and non-routine or capital expenses to be paid with Operating Subsidy funds.
Slide 9: Public Housing Operating Budget Requirements (continued)
As previously discussed, the operating budget must reflect expected transfers and anticipated uses of excess cash and include Capital Funds that will be used to support operations. Specifically, the following Capital Fund budget line items or CFP BLI should be reflected on the PHA’s operating budget:
• Operations (BLI 1406),
• Management improvements (BLI 1408), and
• Administration (BLI 1410) (normally shown on a CFP operational budget).
Finally, the operating budget must be easily reconciled to HUD’s Financial Data Schedule.
Slide 10: (Section Break) Budget Policy & Operating Budget Supporting Materials
This section discusses the need for a PHA budget policy, items typically in a PHA budget policy and supporting material which should be part of an operating budget package.
Slide 11: Budget Policy
All PHAs should have a budget policy and associated procedures in order to ensure the all of HUD’s
requirements surrounding the budget process are met and to help ensure that the PHA remains financially healthy.
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• What programs are required to have an operating budget? HUD only requires that public housing projects have a budget. However, the Board should establish as a rule that all programs should have a budget.
• Who is to be involved in the budget process? This portion of the policy hopefully prevents the operating budget being prepared solely by finance or the Executive Director. A well-developed operating budget needs input from other staff, such as: program directors, procurement, project managers and maintenance leads.
• Who is expected to provide information? This section of the policy discusses two distinct items. – The first item is amounts or dollar figures. For this item, finance and program and project
managers need to develop separate information. For example, finance is in a better position to provide insurance expense data because the finance department will know the cost and cost allocations, but a project manager is in a much better position to formulate amounts associated with such items as office and maintenance material and maintenance contracts for the upcoming year.
– The second item is the consideration of any changes to the current service delivery model and new initiatives. For example, in order to develop accurate salary and benefit
information, decisions needs to be made on hiring, pay raises, bonuses and possible changes to employee benefit packages. All management staff have a role in this process, including those who formulate questions and those who provide the answers. Will the PHA hire a lawn service to cut grass? If the answer is yes, then a contract cost estimate must be developed, which might also impact the salary and benefit estimates.
• What is the general time frame / schedule for the annual adoption of the budget? Depending on the size of the PHA, preparing an operating budget may be a three to four-month process.
• The requirement for Board approval before the start of the fiscal year. This is a HUD requirement. The schedule developed should provide time for the Board to properly review the budget, which could lead to needed changes prior to adoption.
Slide 12: Budget Policy (continued)
Best practices for a budget policy include the following items:
• PHA decision to allow a non-balanced budget (net loss) and if so to what extent.
• Limitations on a PHA’s ability to incur costs beyond the approved budget, unless in cases of emergencies. This topic will be discussed in more detail later in this module.
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• The last item that could be included in a budget policy is the need for Board approval to create new positions, hire new staff and back fill positions. As an expense item, salary and benefits for staff at most PHAs is the largest expense item, and this portion of the policy helps to control these costs. For small PHAs, a change of one or two positions can have a financially material impact. Board approval of whether or not the Executive Director can create and hire for a new position, or approve the back-filling of a position may be crucial to maintaining expenses at an expected level.
Slide 13: Budget Policy – Revisions
During the year, the PHA’s operating budget will need to be revised due to a variety of reasons. As a general statement, a budget revision is required when either the approved budgeted expense line level limits are not sufficient (i.e., the projected expense will be lower than what is needed) or actual revenue is much less than what was budgeted.
Except for emergency spending, a PHA does not have authority to spend more than what is in the approved budget. In the case of an emergency, the PHA can spend more than the budgeted amount but the PHA must revise the operating budget as soon as possible to reflect the costs associated with the emergency. Anytime the PHA needs to increase or decrease approved spending limits, a budget revision is needed.
There is normally no need for a budget revision for a revenue item. The exception is when the PHA has decided that in the case of lower than projected revenue, a budget revision is needed to lower budgeted expenses. Or, in the case of higher than projected revenue, a budget revision is needed to allow for additional spending.
Best practices suggest that budget revisions are required for the use of reserves and changes above the initially budgeted amount in revenue associated with transfers of monies (i.e., CFP to operations, project to project, etc.).
Regardless of the amount, the budget should be revised for transactions that will materially impact the financial feasibility or considerably alter the services or expected results of the project or program. For example, a budget revision should be approved for a much lower than expected HAP funding level which will require the PHA to stop issuing any vouchers, using most or all of its program reserves, and possibly being in a shortfall position. Such a policy helps ensure that everyone understands the current financial condition of the program.
Slide 14: Budget Policy – Revisions (continued)
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Slide 15: Budget Policy – Revisions (continued)
In this example, we assume a budget was approved by the board at the line item level and for the amounts as shown on the slide. If this budget was approved, the PHA is not authorized to incur costs above each individual line item. This means that administrative salaries are capped at $100,000 and travel is capped at $5,000.
To provide some flexibility, the PHA’s budget policy should address whether a budget revision is needed for costs incurred above the budget line item, sub-total, or, total level.
Without a policy that addresses this matter, a budget revision is required at the line item level of the budget that was approved by the Board.
A PHA’s policy could allow for flexibility at the sub-total level, meaning that if the PHA does not incur costs above $170,000 (in this example), the PHA can have costs overages in detail line items up to the sub-total amount.
A PHA policy could allow for full flexibility at the total budget level. While ease of administration of the budget revision process must be considered, too much flexibility is problematic, as this can lead to improper or excessive spending. For example, if utility expenses are much lower due to a warm winter, does this mean the Executive Director has the authority to incur more costs in travel and training or hire a new position?
PHAs also should consider adding the use of a dollar amount or percentage variance and total / sub-total concept. For example, the policy could state “The board approves authorization for the PHA to incur costs up $500 or 5% of the budgeted line item, as long as the PHA does not incur costs above the sub-total limit.” Again, without some type of policy that addresses this matter, a budget revision is required at the line item level.
Slide 16: Items Submitted with Operating Budget
To ensure that the PHA’s priorities, goals, authorizations and limits of the operating budget are understood by all, other schedules and documents should be provided with the budget and should be part of the PHA’s official budget package that is provided to the Board for approval.
The other schedules and documents are listed below and we will discuss them in turn: • Budget Justification and Assumptions,
• Supporting Schedules and Calculations, which include: – The Schedule of Positions and Salaries;
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Slide 17: 1. Budget Justification and Assumptions
The Budget Justification and Assumptions document provides explanations and notes for the budgeted line items, including the basic calculations and assumptions used to determine the line item amount. The document is used to facilitate the discussion of the budget between the project manager, the Executive Director, PHA’s Finance staff and the Board and helps document the budget process and expectations.
Slide 18: 1. Budget Justification and Assumptions – Example
Here we show some examples of a budget justification and assumptions for two different budget line items and shows how much information a few sentences can add to a budget line item amount.
Example 1: CFP for Operations (Budget Line Item or BLI 1406) Historically, the PHA budgets 20% of the CFP grant to be used to support project operations, specifically BLI 1406. No CFP funds have been budgeted as the expected loss could be absorbed with operating reserves and inter-project transfers; leaving 100% of the CFP funds available for modernization and other capital projects.
Notice how the addition of these two sentences provides the PHA’s intent and expectations as follows: 1. The PHA has purposely decided to no longer budget CFP for Operations as a revenue source for the
project to maximize the amount of funds the PHA has for modernization of the units.
2. This change will result in the project incurring a net loss and the net loss is acknowledged and accepted.
Example 2: Training and Travel – Training and associated travel costs have been increased by $2,400 per person (Administrative and Maintenance staff) which aligns to the PHA’s goal to further invest in staff skills. Again, notice that with the addition of a sentence, the intent of training and travel funds is communicated. In this case, the intent is to train all staff, including maintenance. In other words, the training dollars are not meant for just the Executive Director.
Slide 19: 2. Schedule of Positions and Salaries
For most PHAs, the category of salaries and related employee benefits is the largest cost of the
organization. Therefore, much care must be taken to ensure that each position is properly reflected in the budget. The schedule of positions and salaries lists each position and the costs related to the individual project/program for which the position is expected to perform the duties.
The schedule is created for positions not employees. Employees are staff that are currently employed, while a position reflects an employment position that may or may not be currently filled.
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When preparing the schedule, remember to reflect positions and not current employees. When possible, add employee costs for open positions that will be filled and remove employee costs for positions that will become vacant and not back-filled. Make sure the PHA’s cost allocation plan is updated for the next year as this will help ensure that actual cost of shared staff will be the same as budgeted.
Finally, it should be noted that the individual salary and benefit data is sensitive information. Most schedules list position title. However, in a small PHA, it is easy to still identify an individual based on the position title. Large PHAs will typically group positions, meaning the schedule would show 10 -
Maintenance Technicians - Class I instead of listing 10 separate rows. Keep in mind that Board members have the right to see individual salary and benefit information. However, this information typically would be provided in a closed session and Board members should be reminded that the salary information should not be disclosed to outside parties, without proper approval and authorizations.
Slide 20: 2. Schedule of Positions and Salaries – Example
This table provides an example of a partial schedule of positions and salaries (that is, the administrative salaries for a PHA). Maintenance positions are not shown.
The first column named “Administrative Positions” lists all the different individual PHA positions by title. The second column named “Total Salary Base, OT & Standby” shows the expected base salary with expected overtime, which is typically based on current salary and any known upcoming raises to salaries. The third column (0% Increase) is used to authorize pay raises. In this example, the decision was no pay raises for the upcoming year.
The next sets of columns show what program or project is associated with the salary. In some cases, the salary is spread among multiple programs and projects, indicating that the position is shared. The position supports multiple programs and projects.
Employee benefits, while not shown, are handled in the same manner.
The Schedule of Positions and Salaries supports the budget process and aids in the review of proper staffing levels and comparison of salaries.
Slide 21: 3. Calculations Supporting Other Major Revenue and Expense Items
There is a budget concept of “not all budget line items are created equal”. This means that certain line items are much more material than others. It is important when developing the budget that this concept be kept in mind.
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were determined, including assumptions used. For example, there would be tabs that would show how operating subsidy, tenant rent, utilities and HAP revenue and expense were calculated. For the sample items just discussed they would typically warrant a separate and distinct calculation because they are major line items of the budget.
However not all budget line items warrant detailed support. For example, if the audit contract was awarded for five years at a fixed cost of $8,000 per year, there is no other information needed to support this budget line item.
To aid in the review of the budget, some PHAs will mark each budget line item with a code. The code aids the reviewer by informing how the line item amount was determined and if other support is available for review.
For example
• A budget line item marked with “Calc.” would mean a supporting calculation has been developed to establish the amount and that the reviewer should also examine the supporting calculation.
• A budget line item marked with “TB”, short for trial balance, would mean that historical data was used as the basis for the amount (i.e., prior year and current year trial balance and the Financial Data Schedule). This method is used for immaterial amounts where there is no expected change from prior years. PHAs normally include inflation factor on these estimates.
• A budget line item marked “PM” would indicate that a property /or program manager developed the estimate; historical data may no longer be valid; and there is some basic information on how the amount was determined, usually as part of the budget justification and assumptions document or as part of the schedule of new initiative and non-routine expenses.
Slide 22: 4. Calculations Supporting Other Major Revenue and Expense Items - Examples
Here we show two tables that serve as examples of the concepts we just discussed. The first table shows different budget line items marked with different codes, identifying how the budget amount was
determined. For example, Line Item 94100 – Labor and 94500- Employee Maintenance reflect the code “Calc”. This would indicate that a supporting calculation is available that provides details of the amount. In this case, the calculation would likely be in the Schedule of Position and Salaries.
The second table shows an example of a supporting calculation for net rental revenue. In this example, an estimate of average monthly rent per unit and occupancy rate was determined that serves as the basis of the estimate.
This same example of the calculation of net tenant rental revenue, also shows the best practice of calculating “Gross Potential Rent” and “Vacancy Loss”.
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• “Vacancy Loss” is the difference between the “Gross Potential Rent” and “Net Rental Revenue” and represent the amount of revenue lost due to the unoccupied units.
Calculating and showing vacancy loss is considered a best practice because it frames the occupancy discussion in terms of dollars lost. In other words, and in this example, the PHA is budgeted to lose over $55,000 dollars in revenue due to unoccupied units, which equates to a full-time staff position, or additional contract support, etc.
Also note how the calculations show the goals of management for the year, not just in terms of dollars but in expected occupancy rate. Project 001, Project 002 and Project 003 are expected to achieve an occupancy rate of no less than 95%, 90% and 98% respectively.
Slide 23: 4. Schedule of Non-Routine Expenses and Initiatives
A schedule of non-routine expenses and initiatives document supports specific line items and again conveys expectations and outcomes to all involved in the budget process. In most cases, this schedule is used to highlight specific items or approvals that are part of an overall budget line item.
The schedule is meant to list all non-routine and capitalized “operational” costs that will be incurred during the fiscal year of the project or program, such as:
• All “minor” capital items that support operations (such as a printer, desk, copier, lawn mower, drill) whether funded by operations or Capital Funds. Larger or major capital activity should not be budgeted on the project’s operating budget;
• Costs related to the extraordinary maintenance (if possible to determine); and
• Estimated one-time expenses, such as hiring a contractor for a short period of time in the following year to help with unit turnaround.
Slide 24: 4. Schedule of New Initiatives and Non-Routine Expenses – Example
The table shown provides an example of a schedule of new initiatives and non-routine expenses as submitted by a property manager for approval for the upcoming budget year.
Row 1 – Expressly requests that the project would be approved for a purchase of a chain saw to trim bushes and trees.
Row 2 – Shows the request and justification for a $5,000 Jet Router to handle sewer back-ups.
On the project’s operating budget, normally rows 1 and 2 would be part of the same budget line item such as “Minor equipment” or included in the line “Maintenance materials”.
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If these items are approved, then the project is expected to purchase these items and complete these tasks. Row 3, “Hire 1 Maintenance Staff” shows the request by the property manager for one additional
maintenance staff. If approved, this item would be placed on the schedule of positions and salary and removed from the schedule of new initiative and non-routine expenses. The item is shown here to illustrate how a PHA can use one form when asking people to put together the list of non-typical items requested for a project.
Row 6, which is crossed out, was deemed improper for inclusion in the operating budget as this work is to be completed with capital grants.
Slide 25: (Section Break) Steps in Preparing an Operating Budget
This section discusses the steps in preparing an operating budget.
Slide 26: Budget Planning Steps
The diagram shows the six steps in the budget planning process, and we will discuss each in turn.
Slide 27: Step 1 – Define the Objectives
The first step in the budget planning process is to define the objectives for the upcoming year. The objectives should be determined and communicated prior to the start of the preparation of the budgets. PHA Management should ask: What are the Board’s and senior management's goals? The objectives and strategic goals that should be communicated include such items as:
• New or changes in initiatives
• Types and extent of services to be provided • Target occupancy / utilization rates
• Profit margin to be generated • Use of funds for specific purposes
• Determination of an adequate safety net • Security needs
• Maintenance needs • Capital needs, Etc.
As part of this process, the PHA should discuss if there should be major changes to the programs’ service delivery model. Examples include:
• Change of staffing levels (adding new position, termination of positions, changes in position roles, etc.);
• Reduction or elimination of services that are not effective;
• Increase in funding for existing contracts or new contracts for services that are normally provided in-house (unit turnaround activity); and/or
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Slide 28: Step 2 – Determine Project Income
Step 2 in the process is to determine the estimated project income. Some revenue estimates are better determined by accounting or finance and others are better determined by project and program managers. For example, accounting or finance will usually provide revenue estimates for grants such as operating subsidy and interest income and can provide better estimates of other available funding such as the amount of Capital fund grants that can be used to support operations, reserve levels and eligible transfer. Project and program managers will usually provide estimates of revenue for items they control such as tenant rents, other tenant charges, fraud income, and FSS forfeitures.
In some cases, such as HCV funding, both finance and program managers may need to help develop the revenue estimate.
Slide 29: Step 3 – Determine Project Expenses
The third step in the process is to develop program and project expense estimates. Estimates of expenses for the following year should include:
• Update and review of the budget support schedules, such as the schedule of positions and salaries; • Analysis of current and prior year(s) reported expenses;
• Determination of the impact of the new objectives and identified goals;
• Determination of how current initiatives / policy changes will impact the upcoming budget (e.g., energy performance contracts, vacancy reduction efforts, changes to utility allowance schedules, etc.)
• Review of contract costs and determine estimated future costs, and
• Contact with utility companies to determine whether utility rates are increasing.
Like revenue, some expense estimates are better determined by accounting or finance and other expense estimates are better determined by project and program managers.
For example, accounting or finance will usually provide expense estimates for salary and labor costs, employee benefits, insurance costs, and certain contracts like audit.
Project and program managers will usually provide estimates of expenses over items they control such as maintenance material and contracts, utilities, office supplies and management and bookkeeping fees. In some cases, like protective or tenant services, both areas may need to help develop the estimate.
Slide 30: Step 4 – Finalize the Budget
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• Large cash disbursement items, such as payroll and property insurance, should be analyzed to verify that there is sufficient cash balance at the time of payment and the budget should be allocated to the months in which the revenue and expense is expected to occur as certain activity and costs are seasonal or are scheduled.
• Depending on the circumstances, a project or program budget does not have to “break even”. If a draft budget is in a deficit position, then senior management should consider covering the deficit through reserves, eligible transfers or other available funding sources. If the budget cannot sustain a deficit, costs need to be reduced; long-term revenue streams need to be identified or an asset repositioning strategy needs to be considered. This discussion of deficit assumes that revenue and expense estimates are accurate and are in line with the objectives and goals of the PHA.
• Upon the receipt of all project and program budgets, the senior management, including project and program managers, should review the budgets for consistency between the projects and programs, for reasonableness, and to verify that objectives have been met. If the PHA has multiple projects, budgets between projects can be compared to other projects by analyzing the project’s per unit month (PUM) cost to identify outliers.
Slide 31: Step 5 – Approve the Budget
At this point the budget is finalized and can be taken to the board for approval, which will allow for the PHA to incur costs as prescribed and takes us to step 6 which is Use of the Budget.
Slide 32: Step 6 – Use the Budget
The budget now becomes a monitoring tool, with budget to actuals to be reviewed every month, variances analyzed, and corrective actions made as necessary.
Slide 32: Budget Preparation Responsibilities
This matrix illustrates that in creating a well-developed budget, all levels of management have roles and levels of responsibilities. For example, all levels of management help define the objectives of the budget and use the budget but in the end, it is the Board and senior management that will set the final goals and priorities for the upcoming year.
Slide 34: (Section Break) Operating and Capital Budgets
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Slide 35: Capital Budgets
Although this module focuses on operating budgets, a PHA must also consider its capital budget when developing the operating budget.
Capital Budgets are used to plan for needed capital outlays, modernization and large equipment purchases which will benefit the project for a number of years. For most PHAs, capital budgets are normally
associated with the Capital Fund grant.
However, the capital budget and operating budget are not standalone documents, there is a relationship between the operating budget and a PHA’s capital budget that needs to be taken into consideration, when developing the operating budget.
Slide 36: Relationship Between the Operating and Capital Budgets
The table shown provides examples of the relationship between a PHA’s operating and capital budgets and the possible effect on the respective budgets. Let’s discuss a few of the examples from the table:
Example 1: If there are delays in planned modernization, the delay may increase the number of work orders maintenance staff or contractors must complete during the upcoming year, resulting in a needed increase to the maintenance expense operating budget.
Example 2: If either a planned demolition, disposition or reconfigurations of units would require having units offline; these actions will normally decrease maintenance expense, as a PHA would only complete the most necessary work orders for those units.
Example 3: Completion of energy conservation efforts will normally decrease a PHA’s utility costs.
Example 4: Continued deferral of maintenance items will increase the need for capital outlays in the future. This table provides other illustrative examples and many more relationships that exist between the two budgets. The point is to understand that a review of the capital budget needs to take place at the same time as the development of the operating budget to ensure that any relationship between the two are appropriately reflected in their respective budgets.
Slide 37: End of Module
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Learning Activity 5: Preparing an Operating Budget
Slide 38: (Title Slide) Learning Activity 5: Preparing an Operating Budget
Welcome Learning Activity 5 of the Public Housing Authority Financial Management Training. The purpose of this learning activity is to help participants develop realistic budget estimates for a fictitious housing authority, and is based on material covered in Module 6.
Please note that while many of the questions ask the participant to calculate an amount, the focus of the learning activity is on the thought process needed to develop a realistic budget that captures the goals and initiatives for the upcoming year, and not the actual amounts.
Slide 39: Learning Activity 5: Preparing an Operating Budget - Background
The Anywhere Housing Authority (AHA) is preparing their operating budget for next year. You are a
member of AHA’s staff and have been asked to help formulate some of the budget figures. Specifically, you have been asked to develop budget estimates for tenant rental revenue, coin laundry receipts, snow
plowing services, and a new initiative to improve curb appeal at the PHA’s properties.
Slide 40: Learning Activity 5: Preparing an Operating Budget - Instructions
To complete this learning activity, download and print – Learning Activity 5: Preparing an Operating
Budget that can be found at the resources section of the webpage for this training.
Then read the background information for each question on pages 2 through 4 of the document and answer the associated questions. After answering the questions, return to the video for the answers and explanations.
Slide 41: End of Learning Activity 5
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Learning Activity 5: Solutions to Preparing an Operating Budget
Slide 42: (Title Slide) Learning Activity 5: Solutions to Preparing an Operating Budget
Let’s talk about the solutions to Learning Activity 5 – Preparing an Operating Budget.
Slide 43: Goal of Learning Activity 5
An operating budget is a realistic forecast of the next fiscal year’s operating results that shows
management’s priorities and expected goals and outcomes through various line items; provides authority to incur expenses; and acts as a control and monitoring device.
The goal of this learning activity is to help participants learn how to turn management’s priorities and goals into appropriate budget estimates to achieve the expected outcomes.
Slide 44: Solution to Question 1a
Question 1a: Tenant Rental Revenue - What are the key budget assumptions / targets that you need to decide to make a budget estimate for tenant rental revenue?
Answer – The key budget assumptions and targets to provide a realistic estimate for tenant rental revenue are the number of units that will be leased in the budget year (number of units and occupancy rate) and average monthly rent per unit.
Based on the information provided, there is no reason to believe that using $280 as the average per unit per month rent for the upcoming year is not accurate and therefore our budget estimate will include this data point. While the goal is to be 100% leased, it is unlikely that this could be achieved using the same business model. Even if AHA changes the approach used to turn units at East Farm Road Apartments, it is unlikely that 100% occupancy could be achieved for the full year. For most PHAs, budgeting at 100%
occupancy for the year, even if turnaround time is not an issue, is normally not an achievable target and the goal of the budget is to have reasonable estimates.
In the case of East Farm Road Apartments, 100% occupancy is not achievable unless a strategy is
implemented to modernize the six offline units. Our assumptions will have AHA procure the services of a firm to modernize the units and help turn any unit that is offline when the contract starts. The current budget has already overspent for this line item, so AHA will need to obtain permission from the Board (i.e. budget revision) to complete this work and then determine the appropriate fund source. Once the funding and procurement strategies are determined, AHA must also consider timing. For example, if the contract is in place near the end of November, the question becomes whether the contractor can complete the
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Our answer assumes a 95% occupancy rate. The 95% occupancy assumption reflects that it will take time to get these six units online, and represents a low occupancy rate at the beginning of the year and higher occupancy rate towards the end of the year, which would average to 95%.
Other workable solutions could be to hire temporary staff to perform the work, supplement East Farm Road Apartment’s maintenance staff with maintenance staff of other projects or some combination of all three solutions. However, if the AHA makes no changes to the current business process for turning units, then, the budget estimate developed should be at a much lower occupancy rate level, which provides a realistic forecast for tenant rental revenue but contradicts the goal of management.
Slide 45: Solution to Question 1b
Question 1b: Tenant Rental Revenue - Using your budget assumptions, calculate the gross potential rent, vacancy loss, and net tenant rent for the upcoming operating budget year?
Our answer assumes a 95% occupancy rate for the 100-unit property and an average per unit per month rent charge of $280. Based on these assumptions:
• Gross Potential Rent is $336,000 and is calculated as follows: 100 units leased 100% of the time for all 12 months at an average monthly tenant charge of $280 per unit. Stated mathematically, $280 monthly rent x 100 units x 100% occupancy x 12 months = $336,000.
• Net Tenant Rent is $319,200 and is calculated as follows: 100 units leased 95% of the time for 12 months at an average monthly tenant charge of $280 per unit. Stated mathematically, $280 monthly rent x 100 units x 95% occupancy x 12 months = $319,200.
• Vacancy Loss is a negative $16,800 and is the difference between Gross Potential Rent and Net Tenant Rent. Vacancy loss is another way to represent occupancy rate. Vacancy loss represents the loss of revenue associated with not keeping the units leased.
Reporting vacancy loss is a common practice in almost all other rental real-asset markets, because vacancy loss shows the economic loss to the owner. In the case of public housing, vacancy loss can be viewed as a loss of services that could have been used at the property – what could the PHA have done with these additional funds?
Slide 46: Solution to Question 2a
Question 2a: Coin Laundry Receipts - What are the key budget assumptions that need to be decided to budget coin laundry receipts?
Answer – The key budget assumptions relate to changes in usage and cost per load. Questions that you should ask yourself could include:
(1) Is there a reason to assume that the usage of the laundry facility will materially increase or decrease from historical usage?
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(3) Are there seasonal differences or other reasons that would dramatically affect when clothes are washed?
Slide 47: Solution to Question 2b
Question 2b: Coin Laundry Receipts - How much should be budgeted for laundry fees, both annually and per month in next year’s budget?
Answer - Based on the information provided, it is reasonable to believe that using the past year’s actual receipts of $3,600 for the upcoming year will provide a reasonable estimate. AHA is not doing anything that indicates usage of the laundry facility will change. Also, AHA is not increasing or decreasing the cost per load. These two assumptions would lead to the conclusion that coin laundry receipts will be comparable to last year.
The amount per month of expected coin laundry receipts is $300 and is determined by taking the annual budget of $3,600 and dividing by twelve months. This method assumes that tenants wash their clothes on a regular / set basis (i.e. once a week, every other week, etc.).
From a materiality standpoint, coin laundry receipts are immaterial when compared to the total revenue of the project – the amount comprises less than 1.0% of the revenue for the project. This fact is important for two reasons. First, even if the estimate is highly inaccurate, the overall budget will most likely not be impacted. Second, the example helps highlight the notion that not all line items in a budget are of equal importance. In this case, the concept would be not to spend a lot of time and effort in determining a more accurate estimate for coin laundry receipts, as time is better spent on larger (more material) line items or determining the budget impact on a new initiative.
Slide 48: Solution to Question 3a
Question 3a: Snow Plowing Services - What other information should be provided with the cost estimates to determine a budgeted amount for snow plowing?
Answer – While the contract cost estimates provide a range of possible costs, the usefulness of these amounts are limited. No information is provided that can help evaluate the amounts. For example, no information is provided as to what level of snow fall would require the contractor to plow, how quickly will each contractor respond, the number of snow plowings associated with each cost, or is there a minimum number of snow plowings that must be paid, etc.
This lack of information illustrates that budget estimates are a combination of distinct variables that must be considered and simply using historical numbers may not properly consider changes in the variables. For example, the actual cost of snow plowings last year was $4,000 which represents 20 plows at $200 a plow. There are two variables that must be considered for the budget. The first variable that needs to be
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For this learning activity, since we have no other information, we have chosen the budget estimate of $6,000, the middle cost estimate provided. In practice, we would have first tried to determine what factors and terms were used to develop each of the three cost estimates.
Slide 49: Solution to Question 3b
Question 3b: Snow Plowing Services - What are the key budget assumptions / targets that you need to decide to budget snow plowing services?
Answer – (1) Snow plowing will occur only in cold (winter) months, therefore, the costs should not be spread throughout the year, but only in the months where snow plowing would likely occur; (2) how many plowings will likely be needed; and (3) what is the cost per plowing. If the cost is associated with a variable (i.e. per hour, per inch, etc.), then this variable would need to be considered when developing a budget amount.
Slide 50: Solution to Question 3c
Question 3c: Snow Plowing Services - How much should be budgeted for snow plowing services, both annually and per month, if AHA goes forward with the decision to contract out for snow plowing services?
As stated earlier, for this learning activity, since we have no other information, we have chosen an annual budget estimate of $6,000, the middle cost estimate provided. However, our per month snow plowing estimate would not be $500 per month, which would represent that snow plowing services and costs are expected to be the same each month.
We have assumed that snow plowing services would occur usually and equally in the months of October through March. Therefore, our monthly budgets would show budgeted costs for only those six months at $1,000 in each of those months.
Budget Line Item Amount
Snow Plowing Contract per Year $6,000 (the middle cost estimate)
Snow Plowing Contract per Month $1,000 for the months of October through March (six months)
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PHA can continue to pay its vendors and staff in a timely manner. Other expenses that are usually not monthly include Payment-In-Lieu-of- Taxes (PILOT), insurance and salary and wages.
Slide 51: Solution to Question 3d
Question 3d: Snow Plowing Services - Are there other line items in the budget impacted if AHA goes forward with the decision to contract out for snow plowing services?
Answer – possibly. Most of this cost would no longer be associated with maintenance staff. While this cost switch would not result in lower salary and benefit costs associated with the normal work week;
overtime/on call/part time employee costs could possibly decrease, depending on the PHA’s current policy. Secondly, depending on the current equipment the PHA has for snow plowing, certain assets possibly could be sold. In addition, the PHA would not have to invest in the maintenance of or the purchase of snow equipment. Gas and insurance costs will be reduced.
Slide 52: Solution to Questions 4a
Question 4a: Curb Appeal - What is an approach and the budget assumption(s) needed to develop a cost estimate?
Answer – The first question that needs to be addressed is the scope of the project. Is this a large effort or a relatively small effort? The provided scope of the information in the question is vague and could be
interpreted in different ways by different people. The scope may limit the approach used to complete the work. For example, putting in small flower beds and trimming a few trees can likely be performed by staff with no real decline in other needed production (e.g., work orders). However, if a large tree needs to be removed and the stump ground, current staff will likely not be able to complete the work.
Costs will likely vary depending on what is envisioned. If the work is to be completed by project
maintenance staff, the only costs incurred would be for materials. However, this approach also means that maintenance will not be completing other work items. AHA could simply employ some part-time labor to complete the landscaping work and have the maintenance lead and property manager supervise the work. Or, the landscape work possibly may be added through a proper procurement action either to a new vendor or to the current contracted firm.
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Slide 53: Solution to Questions 4b and 4c
Question 4b: Curb Appeal - How should this initiative be presented in the budget for the Board?
Answer - Because this is a new initiative that the board is specifically interested in, there should be a brief write up in the budget assumption document that discuss the costs, the scope of work, and the line item(s) that the costs are reflected in.
Question 4c: Curb Appeal - Would the Board be able to monitor this activity through the current Board package material?
Answer – No. Most budgets and income statements do not provide sufficient detail to specifically monitor a landscaping activity. The Executive Director would have to add this detail to the Board meeting package or discuss with the board the progress made on this initiative, or both.
Slide 54: End of Learning Activity 5 Solutions
