Open Board Meeting - 16 September 2010

September's open board meeting had a little bit of drama but, overall, was very quiet, much like August's meeting. The board's treasurer was absent.

Homeowner Forum

There were only three homeowners present for this portion of the meeting during which only one spoke, and that homeowner directed her comments/questions at me. She was particularly concerned with some of the comments I made in regard to a parking permit that was pending issue. Here is some background:

Prior to the August meeting I met with a homeowner to verify his information in connection with issuing a parking permit. During the course of the visit, the homeowner suggested that the association consider issuing a second parking permit to homes in the community. At first I was reticent since parking is always such a touchy subject. However, the homeowner suggested that the cost of the second permit be much higher than the first, something on the order of 3 to 5 times as high. This would discourage people from buying a second permit just because they could afford it (alleviating my concerns about over-parking) and also provide some much needed revenue to the association. I told the homeowner that the idea sounded good to me and that I would take it up with the rest of the board.

At the August meeting, I raised the idea of issuing a second permit to people who were willing to pay $500 or even $1,000 for a yearly permit. I said that because the association had only issued approximately half of it's allotment of 25 permits, the issuance of (what I expected to be) one or two "secondary" permits was something that should be considered in light of the extra money that could be brought in with minimal impact to the parking situation. The idea was quickly rejected by the remaining board members.

Now, back to September's meeting. The homeowner at the meeting had several concerns about this, but they all seemed to revolve around 2 points:

1. That when I spoke to the homeowner again after the board meeting, I would portray the remaining board members in a bad light, e.g. "I really wanted to do this thing, but those mean, old board members just wouldn't go for it."
   
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2. How could I think that this was a good idea? And more to the point, what qualifies me, as a non-resident member of the association and board, to proclaim this a good idea, e.g. why would I care if parking goes to hell in a hand basket subsequent to the adoption of such a policy.

To the first point I replied that I had not spoken with the homeowner again. Since he had intimated to me that he had raised the idea previously to no avail, I didn't feel it necessary to contact him to tell him that nothing was going to change. I further replied, though, that if I did contact him, I would not hesitate to tell him that I liked the idea, but the rest of the board did not. Furthermore, I cannot control what a homeowner thinks about the association's policies and/or the individual members who vote for or against them. I would have (to the best of my ability) related to the homeowner what happened at the meeting, and he would have been free to draw his own conclusion(s).

(I should add, at this point, that the remaining board members came to my defense, explaining that they would have acted similarly when talking with the homeowner who suggested the idea of issuing a second permit. That is, they, too, would have politely listened to the homeowner and brought the issue to the board, i.e. it is generally the M.O. of board members in such situations not to argue with a homeowner. I thanked them for speaking up but made clear to the homeowner at the meeting that I did think that the idea had merit.)

To the second point, I explained that I do not make decisions for the association; the board does. The very reason that five people sit on the board and not one is to prevent one person from instituting whatever policy he or she deems to be a good idea. Sometimes the members of the board agree; sometimes they don't. There is nothing wrong with that disagreement, though. That is just the way things work. I thought issuing a second permit was a good idea; the rest of the board disagreed; and the issue was dropped. (I wish that I had specifically addressed the canard that being a non-resident member somehow diminishes me or the work I do as a board member, but it didn't seem the place, nor does this. I will likely address it in a future post, though.)

Open Board Meeting

The highlights of the meeting are covered in the bullet points that follow. Some points require further explanation/analysis which I will get into in later posts.

• Minutes from the 19 August 2010 meeting were unanimously approved with one change: the approval of the architectural change requested by a homeowner was unanimously carried. (I do not intend to obtain a new copy of the minutes to reflect this change, so the "draft" minutes posted will have to suffice unless someone else obtains the final minutes and provides them.)
• A number of landscaping proposals totaling $563.00 were approved.
• The issue of the rabbit fencing in the tot lot was raised. During the summer there hadn't been any problems, but now apparently kids are using it to give themselves a boost to jump over the fence. The board is looking into adding curved extensions to the top of the fence that would prevent climbing over the fence.
• The board approved the purchase of a temporary speed bump to be placed just inside the Belflora entrance gate as well as two stop signs to be added at two points within the community. If the temporary speed bump alleviates the speeding at the entrance, it will likely be made permanent.
  
• The board reviewed the association's financial statements and noted that the association is currently running almost $26,000 under budget. This is still less than the amount of outstanding debt that the association is owed by delinquent homeowners, though. Statements for the month of August were approved.
• The board reviewed the delinquency report and found that a number of homeowners have not yet paid the special assessment that was due 1 September. There is optimism that most will pay, though, based on the fact that regular assessments due 1 September were paid.
• The board approved the 2010 reserve study and the budget for 2011. The budget included an increase in the regular assessment of $11 per month. (I will write more about these soon.)
• The board discussed the proposed bylaws amendments. I spoke up saying that I was in favor of all but the change to eliminate cumulative voting. I felt that there is a minority of homeowners who have the best interests of the association in mind but who for one reason or another are unwilling or unable to attend the meetings. I said that I was aware of the possible dangers of cumulative voting but that I felt the probability of those occurring was low. The board president felt that the elimination of cumulative voting would bring us in line with most corporations and every governmental process of holding elections. I reiterated that I understood the rationale, but that I was still not in favor of the amendment.
  
  It was at this point that a "sort of" vote was held. Of the four members present, two voted "aye", I voted "no", and one abstained (admitting to not having read the changes). This should mean that the measure was defeated, having failed to garner a majority of votes. However, at this point, the property manager suggested that the issue be tabled until all five members are present, and the board president agreed to table the issue. I'm not sure of the legality of these actions, but I was not inclined to make a federal case out of it (I expected to be the sole "no" vote against four "ayes").

The meeting was adjourned at approximately 7:50pm.

Analysis/opinion of proposed bylaw amendments

I summarized the proposed bylaw amendments in my previous post, and by and large I agree with them. I would have preferred that the board discuss the amendments prior to involving legal counsel to write said amendments since it would have allowed any changes to be made without incurring a second pass through counsel and thus, a second expense, but that battle was lost a long time ago.

As I said, I agree with all of the proposed changes except two. I understand the rationale for each of them, but neither sits well with me.

Replacement of resigning directors

This isn't actually a change from the way resigning directors are currently replaced within the association. What led me to pick on this amendment, in particular, was the addition of the clause allowing a resigning director to participate in the selection of his/her successor. The addition of that clause made me uneasy. At first reading, it made no sense. Why would a resigning director be allowed to influence future board actions (via participating in the process of selecting a successor)?

As I tried to understand exactly why it is that this amendment makes me uneasy, I realized that my issue isn't so much that the resigning director is participating in the selection of his/her successor as much as that the new director is being elected via a different means than was his/her predecessor. That is, a position, duly filled by the members and now vacated, is being filled by the board.

Ultimately, though, that board, including the resigning director, was elected by the members. Viewed in that light, the board is acting with the membership's (tacit though it may be) approval to replace the resigning director. This course of action actually makes sense, since a full-blown election to fill the vacated position can be both costly and time-consuming, and none of this interferes with the board's ability to consult with the membership or the membership's right to recall any or all of the directors.

In the end, the amendment still doesn't sit well with me, but I don't believe I can articulate any substantive arguments against it.

Use of cumulative voting

This amendment didn't agree with me from the moment I heard the association's president announce it upon presenting the proposed changes to the board. Admittedly, my initial reaction was that this amendment was proposed as a means for the board president to enable himself to exert greater influence over future elections, and while that may not have been his intent, I believe it will be the end result.

The SEC's website has a fairly straightforward explanation of cumulative voting. Using the example from the SEC's website, each member of the association has one share in the association, and when an election occurs, each member has one vote per share per board vacancy. (1 share x 5 vacancies = 5 votes.) Under current association governance, i.e. cumulative voting, a member may cast any number of votes for any number of candidates so long as the total number of votes cast by that member does not exceed the allotted 5 votes. Under the proposed governance, i.e. statutory or straight voting, each member still has five votes; however, a member may not cast more than one vote for any single candidate.

In this newsletter from the Davis-Stirling newsletter archive, the author lists some of the pros and cons of cumulative voting. He describes how cumulative voting is used to give homeowners a voice in association governance while a developer still has control of said association. He further opines that cumulative voting is not necessary once the developer is out of the picture and can even be detrimental to the management of the association. This latter opinion is premised on the idea that cumulative voting can lead to the election of "disruptive, fringe, and single-issue candidates" that can be "almost impossible ... to remove." Furthermore, a "conventional voting system" requires candidates to "seek a broader base of support" which presumably leads to the election of "more moderate, business-like candidates."

While I'm not going to dispute the notion that cumulative voting can lead to the election of dysfunctional candidates, I do not believe that it has been responsible for it, in this association, yet. In fact, while I have no proof, I believe my election this past year to be a positive result of cumulative voting. (By the way, I think that last sentence should serve as proof that the labeling of candidates as "disruptive, fringe, and single-issue" is very subjective. Furthermore, "disruptive" does have its place.)

So, let me bring this home. It is my opinion that the removal of the cumulative voting option is not necessary and may be detrimental in the particular case of Park Lane, and here is why (all of which is entirely my opinion):

1. The majority of the members within Park Lane are largely oblivious or indifferent to the issues surrounding the management of the association beyond their narrow, specific problems/needs/desires (e.g. speeding, parking, landscaping, noise).
2. The majority of those members that do take an interest in association matters are predisposed to vote for the candidates who will cater to those desires.
3. The candidates, and subsequent directors, willing to cater to those desires have done so at the expense of the long-term health of the association, particularly financially.
4. In spite of this decline in the long-term health of the association, the majority of members will continue to vote for those same candidates because of a lack of transparency on the board's part and/or the aforementioned obliviousness and/or indifference on the members' part.

While I will admit to being a disruptive member of the board, I do not believe that my tenure can be described as dysfunctional. If anything, I believe it has had a net positive effect on the association. That is, the board is taking association finances far more seriously and acting to preserve them more vigorously than they have since I last served on the board. Furthermore, there is no specific problem that is currently being created by the use of cumulative voting. At this time and for this particular association, I believe that the move to statutory voting is a "solution" in search of a problem.

Proposed bylaw amendments

I mentioned in my last post that the association's president presented a set of amendments to the association's bylaws following last month's meeting. Here is a synopsis of the proposed changes:

• Section 4.01:
  
  • References to the Declarant have been removed.
  • The requirements for serving on the board are that the candidate be a member of the association and in good standing.
• Section 4.02
  
  • Two directors will be elected in even numbered years, and three directors will be elected in odd numbered years. All will serve two year terms (with the exception of directors elected in the first year after this amendment's adoption).
  • Terms limits are explicitly enjoined.
• Section 4.03
  
  • The need for and job of a Nominating Committee is removed.
  • Any member in good standing may be nominated by him/herself or anyone else.
• Section 4.04
  
  • References to the Declarant have been removed.
  • The use of cumulative voting is forbidden/removed.
• Section 4.05
  
  • Current rules for removal of a director are removed.
  • The board may, by majority vote, remove a director that it has appointed or declare vacant the office of a director who is of unsound mind, convicted of a felony, absent for three consecutive meetings, or no longer a member of the association. The board may replace this director. Members may replace this director if the board fails to do so.
  • Members may remove a board member by simple majority vote of an established quorum. Members may replace this board member.
  • A director may resign at any time, and that vacancy may be filled by the board. If resignation is to take effect in the future, the resigning director may participate in the appointment of the new director. Members may fill the empty board position if the board fails to do so.

Open Board Meeting - 19 August 2010

August's regular board meeting was uneventful, as these meetings go. Here are (some of) the highlights:

• Reserves are headed in a positive direction. The board has been doing its best to spend money out of the association's operating budget where possible to avoid depleting the reserves. The CD which held the bulk of the reserve monies rolled over recently, and the association received approximately $2,000 in interest. The board's vice president was able to secure a 2% rate for the new account.
  
  Reserve contributions continue as budgeted. I suggested that we look into making up January's contribution (which was missed) since we appear to be doing better financially. This will most likely need to be brought up again next month.
  
  
• The board approved a large number of landscaping items including turf replacement, installation of new hedges, and the like.
  
  
• Various items around the pool need work/repair/replacement: tile(s) on the bathroom roof need replacing; bathrooms need new timers for the lights; new drains are being considered in a couple of areas to keep run-off (specifically, the chlorine in it) from killing the landscape.
  
  
• The issue of speeding was raised, and the board is looking into installing a temporary speed bump at or near the Belflora entrance gate. If successful, the speed bump would be replaced with something permanent.
  
  
• The board president presented the other board members with proposed amendments to the bylaws. The reason given for the changes was to remove the possibility of cumulative voting in board elections; however, there are other changes as well. The proposed amendments will be on the September agenda, presumably for a board vote, after which, if successful, the amendments will be presented to the membership where they require a majority vote to be passed.
  
  [I have not had time to review the proposed amendments, yet. I plan to do so in the near future and will write about it once I have, though. Any member who wishes to write about the proposed changes and have their writing posted on this site should submit their writing to me by email. I would prefer not to publish anything anonymously; however I will consider any requests to do so.]
  

Minutes posted

Minutes from May, June, and July's regular board meetings are now posted.

Note that the password has been updated to match the new resident gate code.

Assessments and Dues

At the regular board of directors' meeting in May, the board discussed the state of the association's finances as well as how to resolve the loan from the reserves that was taken by the previous board. (I've previously beaten this subject to death here, here, and here.) The result of this discussion was a decision to raise the monthly assessment from $109 to $120. The intent was to have this increase take effect on July 1 of this year. If implemented by July 1, the increased revenue would have allowed the association to repay the loan from the reserves by February of 2011. However, due to requirements for notification and the need to update our budget to reflect the increased income and other changes like the cancellation of the street sweeper, this change was not implemented in time.

At the June meeting, the board treasurer and I were absent, and it appears that the remainder of the board decided not to pursue the dues increase nor approve the financial statements until our return. At the July meeting (held last week), the board reviewed the association's finances. With the 1 year term of the loan from the reserves coming to an end, the board either needs to repay the loan or extend its term. The board voted unanimously at the July meeting to levy a one-time special assessment of $60 to be due on September 1, subject to the same requirements previously mentioned.

This assessment, if paid by every homeowner, would add up to $9,540 and would pay all but $460 of the loan from the reserves. Based on the delinquency rate in regular dues, though, the association is likely to actually receive between $8,000 and $8,500 of this money. The remainder will have to be made up out of the current year's operating budget, but given the year-to-date expenses and the remaining budget, there is good reason to believe that the loan will be entirely repaid at the end of the year.

For now, there will be no increase in regular monthly dues; however, I believe that it is almost a certainty that monthly dues will be increased to $120 beginning on January 1, 2011. The budget for 2011 will likely be created around the September/October time frame, and I'll know more then.

Ultra Vires: The Revisiting

The association's attorney recently clarified the authority of individual members of the association's board to expend association funds prior to approval of a majority of the members of the board. In response to this clarification, I sent the following email, in response to a previous email that I had sent, to the homeowner who originally inquired as to the status of his/her petition for a veto of the rules.

On the advice of legal counsel, it appears that I was wrong in accusing our board president of an ultra vires act in contacting our attorney and expending association funds without the prior approval of a majority of the board. According to counsel, it is sufficient that the board review and approve expenditures (even after the fact).

I would like to use this opportunity to extend my sincerest apologies to Mr. Crowder for the accusation. My reading and interpretation of our governing documents and the law was incorrect.

For the record, I am sincere in that apology. It was and is still my understanding, as I explained previously, that the expenditure of association funds is the exclusive province of the board of directors. Based on that same research, I further believed that our governing documents and the law precluded any one member (or a minority of the board, for that matter) from expending association funds prior to the approval of a majority of the board. According to counsel, it is this latter belief that is in error. As long as the board conducts reviews and approves of such expenditures, there is no illegality in its or its members actions. I was wrong; I admit it; and I apologized to the affected party for my incorrect accusation.

So, where does this leave what I had said previously:

As such, I will be voting "no" on the approval of the financial statements for the months of March, April, and any other month in which I find such expenses so as not to give credibility to these illegal acts after the fact. Members of the association should be questioning not only why such expenditures are taking place but why other board members are approving them.

Finally, let me be clear that I do not necessarily object to these expenditures but rather the lack of authority with which these expenditures are taking place. The board, in approving expenditures after the fact, would be acting as a "rubber stamp" for one (two, in the case of reserve expenditures) of its board members and would essentially be vesting its fiduciary duties entirely in that member (or members). [...]

In accordance with what I had previously written, I did vote "no" on the approval of March's and April's financial statements. I have mixed feelings about what to do with regard to future votes, however. The method of spending that the board has adopted is not illegal, per the association's attorney. In spite of that, I still feel that it lacks transparency, not only for the remaining board members who are only finding out about expenditures via individual review of the financial statements each month, but also for members of the association who wish to track expenditures and who do not have such ready access to the financial statements. Furthermore, I don't believe it is necessitated by the association's circumstances or in the best interest(s) of the association. With the proper allowances for "emergency" expenditures (which could be accomplished via an "action without meeting" even though probably not legally required), I see no reason that the board cannot at least discuss, if not approve, expenditures prior to their undertaking.

Aside from the lack of transparency, the current procedure has a number of other drawbacks. There is apparently (currently) no limit to the amount of money that can be spent by a board member prior to its (dis)approval by the board. There is no opportunity for discussion about the best use of association funds, e.g. if the cost is truly necessary or if bids should be solicited to find a better price. There is little, if any, opportunity for the board to reverse any expenses of which it disapproves. It is these issues in addition to the lack of transparency that give rise to my ambivalence about how best to vote on the approval of future financial statements.

Voting "no" at the last meeting was easy because I believed that a "yes" vote was aiding an illegal act. Now that that basis is gone, the reason to vote "no" would be because I disagree (in spite of the legal advice) with the method, not the expenditures themselves. (Disagreement with the expenditure(s) themselves would render this ambivalence moot.) There is a good argument to be made, I think, that the method of expenditure is not in the best interest(s) of the association, but a "principled" stand like that is admittedly somewhat pedantic and not likely to be well received. Another option is to vote "yes" when I don't take exception to the expenditures themselves, but this would give tacit approval to the method of expenditure. The final option is to "abstain" from the vote. This would avoid the tacit approval of the method of expenditure but may also open me up to claims of breach of fiduciary duty by refusing to vote on the matter.

Needless to say, I have not yet reached a conclusion.

Unauthorized expenditures

During the past few months, it has come to my attention that our board president and/or other board members have been expending association funds without the approval of the association's board of directors. This first came to my attention back in March when the president admitted that he had consulted an attorney regarding the special meeting that was requested to veto the rules. This action (the consultation with an attorney) was never authorized by the board. I wrote at the time, and still believe, that this constitutes an ultra vires act by the board's president. In light of this evidence, I combed March's financial statements prior to April's open board meeting. If you follow that previous link or review April's meeting minutes, you'll see that the approval of March's financial statements was tabled by the board until "internal board matters could be discussed during executive session". (The board's president was notably and unfortunately absent from April's meeting.) The motion to table the approval was made by me, and the "internal board matters" concerned the issue of association funds being expended without the authority of the board.

In March, I noted the following expenses that were not approved by the board and of which there are no records in the association's meeting minutes:

• $1,614.00 to Artistic Maintenance: $382.00 went to "plants at belflora park" and $1,232.00 went to "CLEAN UP BACK LOT 40" (I believe this refers to the brush behind the homes, to the North of Milano Way.)
• $2,205.60 to QPM: $1,440.00 went to "RMV & RPLC FENCE POSTS" and $765.60 went to "RPR FENCE ABV POCKET PARK". All of this money was charged to our reserve account(s).
• $247.50 to Epsten, Grinnell, & Howell: I'm not at liberty to divulge the purpose of this expenditure; however, no board member has been able to justify its necessity, and it was never approved by the board.
  

Both regular and reserve funds totaling at least $4,067.10 were expended without board approval in the month of March. In April's financial statement, I find the following unapproved expenses:

• $1091.41 to Artistic Maintenance: The entire amount went to "IRRIGATION REPAIR".
• $562.95 to Access Professional Systems (APS): $181.00 went to "ENTRY SYSTEM SVC/RPR" and $381.95 to "QTRLY MAINT SVC". I believe this second charge is probably part of a service contract; however, I don't have the minutes (since they would likely be part of an executive session) or contract to verify that.
• $797.50 to Epsten, Grinnell, & Howell: This is mostly the cost of the aforementioned consultation with legal counsel regarding the rules veto.
• $3,716.95 to QPM: $731.91 for "FENCE RPRS 220&500VENETIA", $1,570.00 for "FENCE RPR BACK 4620MILANO", and $1,494.24 for "FENCE RPRS VENTIA&BELFLRA". This entire amount was taken from the association's reserve account(s).

Unapproved regular and reserve spending for the month of April totals at least $5,866.06, excluding the $381.95 that is likely part of a contract with APS. That means that in March and April, alone, the association has paid out nearly $10,000 in unauthorized expenditures. As I alluded to earlier, I brought the issue of unauthorized expenses up to the other board members during April's executive session. As is evident from April's financial statements, though, nothing has changed.

Park Lane's bylaws, in section 4.13(e), grant the board of directors the authority to "Contract for goods and/or services in accordance with the provisions of the Planned Development Documents". Furthermore, Corporations Code 7211(a)(8) states that "...an act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the board. The articles or bylaws may not provide that a lesser vote than a majority of the directors present at a meeting is the act of the board". In light of these two statutes, it is my opinion that every one of the previously described expenditures constitutes an ultra vires act on the part(s) of the signer(s) of the checks to the vendors providing the services as they were not approved by the board of directors.

[For reference (and completeness), Corporations Code 7214 states that "any [...] instrument in writing [...] executed or entered into between any corporation and any other person, when signed by any one of the chairman of the board, the president or any vice president and by any one of the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same."

While this would appear to allow two board members (in the proper configuration) to execute a contract on behalf of the association (without approval of the board), what it is actually saying is that if the third party does not know that the two board members are acting beyond their authority, the contract cannot be invalidated due to that lack of authority. Essentially, this statute protects the third party in the absence of knowledge of the ulta vires act. In fact, this statute implies that the authority to execute contracts does not lie solely with the two signers.]

As such, I will be voting "no" on the approval of the financial statements for the months of March, April, and any other month in which I find such expenses so as not to give credibility to these illegal acts after the fact. Members of the association should be questioning not only why such expenditures are taking place but why other board members are approving them.

Finally, let me be clear that I do not necessarily object to these expenditures but rather the lack of authority with which these expenditures are taking place. The board, in approving expenditures after the fact, would be acting as a "rubber stamp" for one (two, in the case of reserve expenditures) of its board members and would essentially be vesting its fiduciary duties entirely in that member (or members). Given that two of our board members have expressed unequivocal support for Park Lane's board president, our board president has a majority to push through whatever items he so desires. One has to ask the question, then, why not follow the legally prescribed methods for spending the association's money?

Do HOA's create moral hazard?

This past week, a letter was circulated by a homeowner (or homeowners) regarding the adoption and pending vote on a veto of Park Lane's rules and regulations. Another homeowner, in opposition to the veto, tried unsuccessfully to reply to the author(s) of the letter and instead forwarded the letter to the board of directors via email. I, personally, did not find the letter very persuasive as most of the arguments in it were ad hominem in nature. However, one of the comments made by the homeowner got me thinking about the nature of the relationship not only between individual members of the association but also between the members and the association, as a bureaucratic entity. Specifically, does the existence of an HOA create moral hazard?

Wikipedia defines moral hazard as occurring "when a party insulated from risk may behave differently than it would behave if it were fully exposed to the risk". This situation generally occurs in finance and insurance when people take risks, the costs of which are borne by others (e.g. an insurance company); however, I think it is equally applicable here. As an aside, the costs associated with these risks can sometimes be referred to as negative externalities which are defined, again by Wikipedia, as "[a cost] incurred by a party who did not agree to the action causing the cost".

Now, consider a simple example of your neighbor parking his car in front of your house or letting his dog defecate in your yard or having a loud party. Your neighbor has created a "negative externality" for you (note that this is not usually or necessarily malicious). You have a number of options to address the issue:

1. Ignore it, and hope it goes away.
   
   • Risk: The problem won't go away.
     
2. Talk to and resolve the problem with the neighbor.
   
   • Risk: You might have to step out of your "comfort zone" and/or your neighbor might be a jerk.
     
3. Call in the authorities (police, code enforcement, humane society, etc.).
   
   • Risk: If your neighbor finds out who made the complaint (possible in the case of a police visit and/or report), he'll be upset at you regardless of whether or not he is a jerk.
     
4. Retaliate with either passive or overt aggression.
   
   • Risk: Escalation may lead to more and bigger issues.
     

(In my opinion, the risks and costs of option 4 far outweigh the benefits, assuming there are any, so I'm going to rule that option out for the purpose of this discussion.)

In the absence of an HOA you bear the risks for all three of the "viable" options. Knowing this, most people will progress through these three options in the order listed, and I would wager that most issues would be resolved amicably without moving past step 2. However, consider the same situation in which an HOA is present. As with the absence of an HOA, you are fully exposed to the risks of the first two options, but in associations in which complaints are kept private (as is the case in Park Lane), you bear none of the risk(s) of pursuing option 3. Armed with this information, it is only logical to assume that people living in HOA's when confronted with issues such as this will jump directly to this option.

But, aren't HOA's supposed to protect property rights and keep people from interfering with each other? The answer is, of course, yes. This is the wrong question to be asking, though. The real problem is that when people are not fully exposed to the risks and costs of their actions, they act differently than they otherwise might (see: moral hazard). In the case of an HOA, this can lead to all sorts of petty complaints like trash cans being left out for too long, home decorations being put up too early, etc. Ultimately this serves to separate individual homeowners from each other and harm the sense of community. I've written about this before; and one of the three readers of this blog has commented on it as well; but, I digress. The problem isn't limited simply to pettiness and over-complaining. These complaints eventually lead to new and more restrictive rules placed on the membership. HOA's often extrapolate from the obscure to the common, and in solving a single, obscure problem, impose general restrictions on everyone regardless of individual situations creating a number of new problems. (All of this reeks of central planning which is, of course, an economic concept but who's shortcomings are equally applicable here.)

The imposition of these rules, I argue, though, has a more insidious and counter-intuitive effect, and that is that people will break the rules simply because they exist. HOA's, in passing rules, assume responsibility for the enforcement of said rules. Normally, a homeowner is obligated to his surrounding neighbors to be "decent" as part of an implied "social contract". When an association explicitly imposes this "decency", the homeowner is now obligated to the HOA (an impersonal, faceless bureaucracy) instead of his immediate neighbors. Suddenly throwing a late night party doesn't inconvenience the neighbors, it breaks association's rules. People are far more likely to transgress against a (perceived) far-away, faceless, emotionless entity than they are the neighbor they have to face each day. Couple this with the decreased sense of community, the knowledge that the inconvenienced neighbor is unlikely to address the situation directly, and the impotence and reticence of HOA's to impose fines; and there is very little incentive to follow the rules.

All of this may sound like an argument for further rules and regulations and more power for HOA's. I think that just the opposite is true, though. That is not to say that problems like late night parties and dogs defecating on lawns should be regular occurrences with which one should have to put up. Rather, with less regulation, the responsibility of homeowners to be decent shifts back to the small, close number of people who are immediately affected by their actions. When neighbors have to deal directly with each other, they begin to empathize with and respect each other as equals instead of railing against a faceless bureaucracy in a far-away place.

Open Board Meeting - 15 April 2010

I apologize, but no in-depth "recap" of April's meeting will be posted. This isn't due to anything that did or didn't happen at the meeting but simply because I didn't have a chance to put up the post in the time immediately following the meeting, and to try to do so now would do a disservice to the (un)official record since too much time has passed for me to now accurately relate what happened.

Here is a not-so-in-depth review of the meeting:

• During the open forum, there was some discussion of (the poor shape of) the association's finances. There seems to be, in my opinion, a disconnect between the reality and the perception of the state of the association's finances among board members and homeowners. This led to a discussion of stopping the mailing of the meeting agenda to all homeowners. The association's property manager stated that it would require a vote to make the change (note that the board's president was absent from the meeting). I questioned why a vote was required to stop the mailing when a vote was not required to start it. This led to a confused look from the property manager and at least one "jeer" from a homeowner (in my direction, not the property manager's). Ultimately, there was a vote to stop the mailing, and it passed unanimously.
  
  
• Approval of the association's finances for the month of March was tabled so that internal board matters could be discussed during executive session.
  
  
• The board approved a few small landscaping items.
  
  
• A proposal for this year's reserve study came before the board for approval. The cost seemed a bit high, and the board asked for more proposals.

The board adjourned to executive session to discuss the aforementioned financial records. Discussion lasted for approximately 15 minutes, after which, the meeting was adjourned.

Quorum requirements for special meeting

[While originally writing this post, I did not have, for reference, the letter that was mailed to the homeowners with the ballots this last month. After re-reading it, it appears that the board president has positioned the handling of this vote and the upcoming special meeting in such a way that the meeting will be for vote counting purposes, only. As such, the entire matter is controlled by Corporations Code 7513, contrary to what I wrote below. This is not what I had intended when I agreed to set a date and time for a special meeting; however, it appears that little can be done about it now.

There is still the issue, as described below, of whether the measure fails or whether the vote is invalid if quorum is not met (which I'm still pursuing). I have been told (third-hand, unfortunately) that legal counsel has advised the board that a vote of this nature does not carry the same "weight" as an annual election; and therefore, if quorum is not met, the measure fails. If you truly care about this matter, please do your best to see to that quorum is met before the 20 May 2010 deadline.]

A little over a month ago, a number of homeowners requested a special meeting to reverse the rule changes adopted by the board of directors at the regular meeting on 21 January 2010. In response to a question from one of our board members about how to proceed on the matter, I sent an email to the board of directors outlining what I believed to be the required course of action. At the most recent regular board meeting and in an email to a number of homeowners, the board president expressed his (opposing) opinion that if the quorum requirement of 51% is not met, then the effort to reverse the rule changes simply fails without a reduction of the quorum requirement as applies with annual elections. What follows is what I found after further researching the relevant laws.

A reversal or "veto" of rule changes by an association's membership is governed by Civil Code 1357.140. According to subsection (a), 5% of the members are required to call a meeting; and according to subsection (b), they must do so within 30 days of the notification of adoption of the rules. Subsection (b) also requires the board to hold a special meeting and give notice of it in accordance with Corporations Code 7511 or alternatively, according to subsection (c), hold a vote of the membership by mail in accordance with Corporations Code 7513. If a meeting is held, then according to subsection (e), said meeting is governed by Corporations Code 7510.

Subsection (d) of Corporations Code 7510 reads, in part:

The votes represented, either in person (or, if proxies are allowed, by proxy), at a meeting called or by written ballot ordered pursuant to subdivision (c), and entitled to be cast on the business to be transacted shall constitute a quorum, notwithstanding any provision of the articles or bylaws or in this part to the contrary. [...]

The latter part of the quoted section turns over requirements for quorum to the association's bylaws which in section 3.03 state, in part:

The presence at any meeting, either in person or proxy, of Members entitled to cast at least fifty-one (51%) percent of the total voting power of the Association shall constitute a quorum for any action except as otherwise provided in the Planned Development Documents. If, however, such quorum shall not be present or represented at any meeting, a majority of the Members entitled to vote thereat shall have the power to adjourn the meeting to date not less than five (5) days nor more than thirty (30) days from the meeting date, at which meeting the quorum requirements shall be one-third (1/3) of the total voting power. [...]

The assertion that the measure would fail if quorum is not met on the first attempt appears to be predicated on subsection (b) of Corporations Code 7513 which states, in part:

Approval by written ballot pursuant to this section shall be valid only when the number of votes cast by ballot within the time period specified equals or exceeds the quorum required to be present at a meeting authorizing the action, [...]

The language here is not clear as to whether the measure "fails" or if approval is simply not valid, in which case the matter is not actually resolved and the association needs to find another or additional means by which to come to a final resolution.

It is my opinion that scheduling a special meeting as the board did at the regular March meeting makes Corporations Code 7513 irrelevant, however. Because a special meeting has been scheduled, Corporations Code 7510 is the controlling law on the matter which, in turn, gives control of the quorum requirements to the association's bylaws which are quoted above.

It is also worth noting (again) that this entire exercise may be academic as the rules may be unenforceable due to the fact that the board did not provide proper notice of their adoption in accordance with Civil Code 1357.130(c).

Agenda mailings

You may have noticed that, for the last two months, you've been receiving the regular meeting agenda in the mail as opposed to having it delivered to your door as part of Tom Crowder's (the board president) newsletter. I was told by Tom after last month's (March) meeting that he was no longer distributing the newsletter (he did not give the reason(s) why) and that that was the reason that the agenda was now being mailed. I explained to him, at that time, that the board was only required to post notice of the meeting and its agenda in the common area and that a mailing was only required to homeowners who had explicitly requested it.

After receiving the agenda in the mail again this month, I sent the following to Tom:

Is there a reason that the agenda was mailed out again this month instead of just placing it on the bulletin board?

After a day of waiting, I received no response, so I sent the following to the entire board (including Tom):

Does anyone know the answer to this? I didn't get a response from Tom.

According to Civil Code 1363.05(f), all that is really required is posting notice at the pool (unless I'm missing something). Considering that this mailing alone probably runs $150-$200, it seems it would be prudent to do that instead.

http://www.davis-stirling.com/MainMenu/Statutes/CivilCode136305/tabid/879/Default.aspx

I have received no response.

[Update: The other directors, at the April meeting, agreed that stopping the mailing was a good idea, and future agendas will be posted at the pool rather than mailed to homeowners.]

Us vs. Them

At March's open board meeting, the open forum portion of the meeting was dominated by discussion of the budget discussion of cuts to the budget overwhelming demand not to cut items from the budget... Well, that and a desire not to raise assessments.

I'm reminded of a post I wrote back when I left the board in 2007. Specifically, I'm referring to the need to find solutions, not more problems. In my opinion, the association has severely mismanaged its reserves and really, its finances in general, over the past few years. Currently, the association's reserves are just over 20% funded; it has "borrowed" approximately $30,000 from its reserves with no plan to pay it back; and its expenses exceed its revenue by almost $15,000 per year. In the face of all of this, homeowners are still demanding that no services be cut and dues not be raised. It's grotesque in its absurdity, and the disconnect would be hilarious if it weren't leading directly to the bankruptcy of this association.

As if this isn't bad enough, anger at the situation is being directed at the current board and the belt-tightening we all now face as if these problems merely appeared out of thin air and were not a direct result of financial mismanagement by previous boards of directors and the lackadaisical attitude the rest of the homeowners took toward the matter.

To paraphrase Walt Kelly: I have seen the problem, and it is us.

So, let me reiterate a couple of points from that previous post:

A homeowners association is exactly what its name implies. It is an association of owners of a given set of homes. All homeowners have an equal right (and in my opinion, responsibility) to participate. The board merely acts to handle the day to day business of the association and see that business gets done in the event that homeowners do not participate (usually the result of apathy, of which there appears to be a great amount). Homeowners who don't speak up should not be surprised when the board acts in a manner inconsistent with what they might have done.

and

The board of directors of an association has a fiduciary duty to the association, not its individual members. Decisions are made in the interests of the association. While the board should make an effort to be as accommodating as possible, eventually unpopular action may become necessary. This can have a disproportionately negative effect on individual homeowners, but that does not automatically make the decision a product of malice.

Let me also make a related point, explicitly. With regard to this problem, prior to now there was no "us", and there was no "them". There was only "we", and by "we", I mean every homeowner in this association. We are responsible for the situation in which we find ourselves. The board of directors may have made the decisions that brought us to this point, but none of the rest of us tried to stop them. We are now responsible for and bear the burden of rectifying this situation. The board of directors consists solely of homeowners within this association, and decisions that it makes to cut services and/or raise dues affect its members just as much as they do other homeowners.

We were the problem, and now we must solve it. There will certainly be disagreements about how to go about finding the solution(s), but the only "us" and "them" distinction that now exists is between those who are working toward the solution and those who are not.

Accounting and Finances

The board's treasurer and I finally met with our property manager and a representative from our property management company's accounting department last week. Our treasurer, as always, was on the ball with a number of questions. I didn't say/ask much since he had already prepared to cover the issues I had raised at previous meetings. Here is a summary of what we learned:

• The association is currently about $26,000 in arrears with regard to homeowner assessments.
  
• The reserve account(s) is/are approximately $30,000 in arrears with regard to budgeted funding.
  
  This point requires some explanation. I've written at length about our reserves being underfunded. The term "underfunded" in those contexts refers to the deficit between the amount of money the association has in reserve and the amount of money required to repair/replace association assets that have reached the end of useful life. For example, if $346,000 were required to repair assets that had reached the end of useful life, and the association had only $100,000, the reserves would be underfunded by $246,000. Alternatively, in this situation, the reserves would be at 30% funding.
  
  Now, saying that the reserve account(s) is/are in arrears by about $30,000 with regard to budgeted funding, using the previous example, means that instead of having $100,000 in the reserve account(s), there would only be about $70,000. Not coincidentally, this example is that of Park Lane's reserves.
  
  I've mentioned before that the 2009 board borrowed $10,000 from the reserves.
  
  The solution to the mystery of the remaining $20,000 was finally revealed during the course of the meeting. Bruner & Rosi (our property management company) has a policy of not funding an association's reserves each month unless that association's operating account contains at least 1 month's worth of assessments. Since our operating account does not contain the requisite amount of money, the management company has not been transferring money each month to the reserve account(s). Furthermore, this money is not explicitly accounted for anywhere and likely would not have been noticed save for the vigilance of our treasurer.
  
  It is my belief that this money represents a loan from our reserves in violation of Civil Code 1365.5(c)(2); however, the rest of the board (only one of the other members has explicitly expressed his opinion) does not.
  
• The management company reports assessments and reserves on what is known as an "accrual" basis. This means that when finances are reported to the board by the management company, the records show that all assessments are being paid and the reserves funded each month. It is not until one tries to reconcile these records with others that are provided that one realizes that this isn't the case. Furthermore, without extra work to reconcile these two reports, it is very difficult (if not impossible) to determine exactly how much variance in income the association has each month.
  
• Our property management company charges upwards of $.50/sheet of paper (it may be $.25/sheet; I don't recall exactly, now) for copies and, in addition, also charges the association for all outgoing phone calls made on its behalf.

In short, Park Lane's finances are an unmitigated disaster and seem to get worse with every layer of the onion that gets peeled back.

"Thoughts" on security cameras

I've been meaning for awhile to post my thoughts regarding the association's recently adopted camera policy. I don't think anything that I write, though, would be more well-researched than this article by Bruce Schneier, which originally appeared on CNN's website on 25 February 2010:

On January 19, a team of at least 15 people assassinated Hamas leader Mahmoud al-Mabhouh. The Dubai police released video footage of 11 of them. While it was obviously a very professional operation, the 27 minutes of video is fascinating in its banality. Team members walk through the airport, check in and out of hotels, get in and out of taxis. They make no effort to hide themselves from the cameras, sometimes seeming to stare directly into them. They obviously don't care that they're being recorded, and -- in fact -- the cameras didn't prevent the assassination, nor as far as we know have they helped as yet in identifying the killers.

Pervasive security cameras don't substantially reduce crime. This fact has been demonstrated repeatedly: in San Francisco public housing, in a New York apartment complex, in Philadelphia, in Washington, DC, in study after study in both the U.S. and the U.K. Nor are they instrumental in solving many crimes after the fact.

There are exceptions, of course, and proponents of cameras can always cherry-pick examples to bolster their argument. These success stories are what convince us; our brains are wired to respond more strongly to anecdotes than to data. But the data is clear: CCTV cameras have minimal value in the fight against crime.

While it's comforting to imagine vigilant police monitoring every camera, the truth is very different, for a variety of reasons: technological limitations of cameras, organizational limitations of police, and the adaptive abilities of criminals. No one looks at most CCTV footage until well after a crime is committed. And when the police do look at the recordings, it's very common for them to be unable to identify suspects. Criminals don't often stare helpfully at the lens, and -- unlike the Dubai assassins -- tend to wear sunglasses and hats. Cameras break far too often. Even when they afford quick identification -- think of the footage of the 9/11 terrorists going through airport security, or the 7/7 London transport bombers just before the bombs exploded -- police are often able to identify those suspects even without the cameras. Cameras afford a false sense of security, encouraging laziness when we need police to be vigilant.

The solution isn't for police to watch the cameras more diligently. Unlike an officer walking the street, cameras only look in particular directions at particular locations. Criminals know this, and can easily adapt by moving their crimes to places not watched by a camera -- and there will always be such places. And while a police officer on the street can respond to a crime in progress, someone watching a CCTV screen can only dispatch an officer to arrive much later. By their very nature, cameras result in underused and misallocated police resources.

Cameras aren't completely ineffective, of course. Used properly, they're effective in reducing crime in enclosed areas with minimal foot traffic. Combined with adequate lighting, they substantially reduce both personal attacks and auto-related crime in multi-story parking garages. And sometimes it is cost-effective for a store to install cameras to catch shoplifters, or a casino to install cameras to detect cheaters. But these are instances where there is a specific risk at a specific location.

But the important question isn't whether cameras solve past crime or deter future crime; it's whether they're a good use of resources. They're expensive, both in money and their Orwellian effects on privacy and civil liberties. Their inevitable misuse is another cost: police have already spied on naked women in their own homes, shared nude images, sold best-of videos, and spied on national politicians. While we might be willing to accept these downsides for a real increase in security, cameras don't provide that. Despite our predilection for preferring technological solutions over human ones, the funds now spent on CCTV cameras would be far better spent on hiring and training police officers.

We live in a unique time in our society: cameras are everywhere, but we can still see them. Ten years ago, cameras were much rarer than they are today. Ten years from now, they'll be so small you won't even notice them. Already, people can buy surveillance cameras in household objects to spy on their spouses and baby sitters -- I particularly like the one hidden in a shower mirror -- cameras in pens to spy on their colleagues, and remotely turn on laptop cameras to spy on anyone. Companies are developing police state–type CCTV surveillance technologies for China, technology that will find its way into countries like the U.S.

If universal surveillance were the answer, lots of us would have moved to former East Germany. If surveillance cameras were the answer, camera-happy London, with something like 500,000 of them at a cost of $700 million, would be the safest city on the planet. We didn't and it isn't, because surveillance and surveillance cameras don't make us safer. The money spent on cameras in London, and in cities across America, could be much better spent on actual policing.

Garage Sale

The garage sale was incorrectly scheduled for 16 May 2010, which is a Sunday. It will instead be held on 15 May.

Open Board Meeting - 18 March 2010

March's open meeting was called to order at about 6:30pm with about 25 homeowners and all 5 board members present. The entire open forum portion of the meeting revolved around a single topic: expenses (and the cutting of them).

• A homeowner came with a prepared list of items that she insisted not be considered in an attempt to cut costs/save money. These included locking the gates open; reducing the security patrol, pool cleaning/maintenance, landscaping, regular maintenance, gate maintenance; etc. After about 5 minutes, she was cut short by the board's president for running over time.
• Two other homeowners rose to speak against locking the gates open for safety reasons (speeding cars and protection of children). One of them suggested that the street sweeping service should be stopped.
  
• A homeowner rose to speak against locking the gates open and presented a map of sex offenders living in the area as a reason. She also raised the concern that it would allow people who don't reside within Park Lane to use its parking spaces.
• A homeowner spoke against the cutting back of the landscaping maintenance within the community.
• There being no other speakers, the first homeowner was allowed to continue down her list. Her reasons for not making cuts quickly devolved into finger pointing at current and previous board members for their misdeeds (perceived or otherwise). At one point I interrupted the homeowner to point out that her facts were incorrect. She curtly asked me not to interrupt her "3 minutes".

The open forum portion of the meeting was then closed (though homeowners were allowed to speak at various times during the regular meeting). Minutes from the 18 February 2010 regular board meeting were approved unanimously. The board moved then to committee reports.

• Architectural: A request to replace the windows on a home with more energy efficient versions was unanimously approved by the board. The board president reported that another architectural improvement within the community was still in progress.
• Landscape: The board approved unanimously a proposal to remove a willow tree at a cost of $250 whose branches where allowing rodents access to an adjacent home and dripping sap everywhere. It would have cost $150 annually to keep and trim the tree. No replacement is likely due to the confined space. The board tabled, with the committee chairperson's approval, a separate proposal to replace a rosemary bush at a cost of approximately $100.
• Social: The next garage sale will be May 16th.
• Other committee reports were inconsequential.

The board elected unanimously not to foreclose on a homeowner who has fallen behind on his/her payments. This article explains why. At this point, the board treasurer explained the financial situation to the board and homeowners who were present. All of that information can be found here. He then listed some prime places that can be cut from the budget which would keep the association's expenses from overrunning the budget, i.e. these cuts would simply make up for the revenue shortfall created by homeowners who are not paying their assessments. It was at this point that I spoke up to point out that these cuts would simply keep us afloat and do nothing to address the problems with the reserves. The board treasurer also pointed out that 2009's reserve study assumed a starting fund of approximately $177,000 that would be depleted by 2019. Since 2010 actually started with approximately $100,000 in reserve, this depletion will likely occur sooner. The board discussed cuts to the association's expenses at this time but no actual motion was made. It's not clear to me what is going to happen with regard to those cuts.

Prior to the approval of the financial statement, the board treasurer and I both asked the property manager about discrepancies on the financial statement and for an explanation of various charges. She was able to answer some of the questions ($2,000+ in printing costs in January were due to the annual meeting). On others however, she deferred to her accounting department, with whom the board treasurer and I will be meeting next week. During this portion of the conversation, we learned that as part of the management contract, the association is charged for every phone call made by the management on the association's behalf. [It appears to me that despite the lowered management fee (in comparison to previous management companies), we're being nickel'd and dime'd on individual charges.]

The board president then moved to approve the financial statement. Prior to the vote, I interjected to reiterate what I had brought up previously during the executive session, and that was that the reserves were not funded in January. I told the board that, to me, this represented a loan to the operating account, and that I believed we are acting in contravention of the relevant law concerning loans from the reserves. No one spoke at this point [the board president and I discussed this issue briefly during executive session, but I'm not sure of the legality of relating the substance of that conversation in an open forum], and the review of the financial statements was unanimously approved.

The last item before the meeting concluded was the issue of scheduling a special meeting to address the petition presented by a number of homeowners wishing to reverse the recently adopted rules. The board president read the petition and then stated that the board had no choice but to schedule a meeting. This led to questions from and discussions among homeowners and the board about the legal rights of the petitioners, the costs of holding the meeting, and the legalities of handling the vote. I spoke up and suggested that the board meet with the petitioners to see if something could be worked out. The president replied that there was no way to stop what had been put into motion by the petitioners. I suggested that they (the petitioners) could all agree (in writing) to reverse their request and that no one would sue us for not holding the meeting if the petitioners reversed their request. The board president insisted that the letter was delivered to him and, as such, was his responsibility and that the meeting must go forward.

A homeowner involved with creating the petition then spoke up to say that she would favor a meeting between the petitioners and the board and that no special meeting would be required if the petitioners and the board could come to an agreement. There was some minor discussion about the possibility, but the board president again insisted that the issue was his responsibility (to which I vocally disagreed) and that no such "arbitration" was possible and a special meeting must be held (to which I again vocally disagreed). The special meeting was scheduled to coincide with May's open board meeting, currently scheduled for 20 May 2010.

The meeting was adjourned a few minutes prior to 8:00pm.

Filling in the blanks

As I mentioned here, I've been trying for awhile to obtain a number of documents from our property management company. I finally picked them up this morning and have scanned and uploaded them.

• 2008 Reserve Study
• 2008 Reserve Accounting
• 2008 Minutes
• 2009 Budget
• 2009 Reserve Accounting
• 2009 Minutes

I have no further requests outstanding for any documents. If my collection is somehow incomplete, let me know.

Update on veto of rules changes

In the tradition of sunlight being the best disinfectant:

The homeowner who served notice to the board of directors that a special meeting was being requested to veto the rules changes emailed the board again on 8 March requesting an update regarding the process. His request was met with a response from the association's president that the matter was being reviewed by the association's legal counsel. Below is my response to the homeowner.

Lest you or anyone else have any confusion about the word "we" in Tom's response, let me clarify what has happened since your original email:

• 4 March 2010 @ 1928: Your email with an attached request for a special meeting to veto the rules adopted at the January open board meeting was received by the board of directors.
• 5 March 2010 @ 0824: One of the directors asked the other members of the board for clarification, i.e. what is required of the board in response to your request and how many homeowners are required for such a request to be valid.
• 5 March 2010 @ 0905: I responded to the other board members and our property management that, in my opinion, your request met the requirements for a special meeting and that we were now bound by law (which I cited for the other members) to hold such a meeting and facilitate a vote on the matter. (The timing of such a meeting is subject to debate, but it was my opinion that it should be held within 45 days.)
• 8 March 2010 @ 1658: You sent a second email to the board requesting an update with regard to your email/letter of 4 March.
• 8 March 2010 @ 2221: The board president replied, as below, that the board is in communication with the association's attorney regarding the matter.

As you can see from the time line I've presented here, there has been no conversation among board members regarding the scheduling of a meeting in response to your request (other than what I've described) and no discussion of involving legal counsel in the matter prior to the board president's reply to you on 8 March.

It is my opinion that the board's president has committed an "ultra vires" act, that is, I believe he has exceeded his authority by requesting a legal opinion (and incurring the associated costs to the association) without consent of the board of directors.

In response to this action, on 8 March 2010 @ 2248, I sent email to the other board members and our property manager stating that I am unaware of any vote authorizing said action and asking who approved of it. While it has been less than 12 hours, at this point, I have received no response.

Veto of rules changes

A request by 5% of the homeowners in Park Lane has been delivered to the board of directors requesting a special meeting to reverse the rule changes that took effect in February. This has generated some internal discussion among board members about how best to respond. Below is my reply to the rest of the board and our property manager.

According to Civil Code 1357.140, it takes 5% of the owners to call a special meeting, and they must make the request within 30 days of notification of the rule change. Since we have 159 homes, it takes 8 homeowners to call a special election, and since notice of the rule change was not delivered to the homeowners until 14 Feb, it appears that they are within the 30 day time limit.

The Civil Code does not give a time frame for scheduling of the meeting, but section 3.02 of our bylaws states that it must be scheduled "promptly". I would take this to mean within 30 days.

The bylaws require 51% of the homeowners (81, 82 to be absolutely sure) to constitute a quorum at which time a simple majority vote is sufficient to settle the matter. Based on my understanding, the same rules for the annual meeting regarding quorum apply to special meetings.

So, in answer to your question, I believe we are now bound to hold a special meeting in accordance with Corporations Code 7511 and deliver ballots according to Civil Code 1363.03. (1363.03 states that ballots must be sent 30 days in advance of the vote, which means we probably can't reasonably schedule a meeting in less than 45 days.)

Watch this space for updates.

Closer look at finances

This past Tuesday, I sat down with our association's treasurer to review the association's finances. Fortunately, our treasurer is a pretty smart guy. Before I had even arrived, he had really done his homework, and here are the highlights of what we discussed:

• The 2010 budget was drawn up assuming assessments were being paid by 159 households. Unfortunately all households are not keeping current on their assessments, and the budget should have assumed about a $15,000 shortfall for the year.
• Given this shortfall, the only way for the association to maintain its current level of services would be to completely stop funding the reserves.
• There are about $22,000 worth of immediate cuts that can be made to the budget, but it will require a fairly deep level of cuts to services. Possibilities include reduced security patrols, reduced watering of common areas, shortening heating times at the pool (or not heating it at all), putting tree trimming on hold, etc.
• Because it is already [late] February, the $22,000 above has to be reduced by 1/6 to approximately $18,000. This number reduces by approximately $2,000 for every month that the budget is not amended.
• The utility costs were extremely high for the first month of the year.
• The "Printing" line item in the 2010 budget is already at 95%, and a number of other items are already projected to be over budget for the year.
  
• The association was significantly over budget in fiscal year 2009.
• The 2009 reserve study, conducted in September of 2009, shows the association starting fiscal year 2010 with approximately $177,000 in reserves; however, January's reconciliation statement shows just over $100,000.
• The association transferred $10,000 from its reserves to its operating account in November of 2009 to cover day-to-day operating costs. (I don't believe that the association met its notification requirements under Civil Code 1365.5(c)(2) for this transfer.The board approved this transfer early in 2009.)

I'm still working on getting an accounting of the association's reserves beginning in January 2008 and the remainder of 2008/9's minutes. We (the association's treasurer and I) are in the process of trying to find out more information about the discrepancy between the reserve study and January's bank reconciliation and the loan out of the reserves.

Open Board Meeting - 18 February 2010

The open meeting of Park Lane's board of directors began at 6:30pm with all board members and about 8 homeowners present. Three issues were raised by homeowners during the open forum portion of the meeting:

• A homeowner spoke up to say that [s]he felt that the newsletter circulated by Tom Crowder explaining that basketball hoops and such were going to be allowed in the cul-de-sacs so long as they didn't block the ingress/egress of vehicles was confusing and would lead homeowners to believe that these items would not need to be stowed out of sight when not in use. The board's president explained that the very next rule in the "rulebook", although not shown in the newsletter, stated that these items must be stowed out of sight. A discussion then ensued for another 5-10 minutes about the (in)ability of people to read, understand, and follow the rules.
  
  
• A second homeowner raised the issue of registering dogs with the association or proving their registration to the association. [S]he felt that it would be better for the association to simply reference the city ordinance requiring animals to be licensed and otherwise stay out of it. (This homeowner seemed to be aware that the board did not intend to pursue the enforcement of this rule with any real vigor.) The homeowner further felt that the non-enforcement of this rule could lead to liability for the association in the sense that the association, by passing this rule, is assuming responsibility for policing the dogs living in the neighborhood but not actually following through on that responsibility. The board's president replied that the rule was intended as a means to force people to properly license their animals. (He never actually said that the board did not intend to enforce this rule, but given his previous statements on the matter, I think the inference of such is reasonable.)
  
  
• Finally, the issue of a loud, threatening resident was brought to the board. The president stated that the board was already aware of the issue and is addressing it via the association's rules enforcement policy/procedures.

The regular open board meeting then began with approval of minutes. Minutes from the 21 January 2010 regular board meeting were approved with one abstention (mine, I wasn't present for the entire meeting and could not approve of items that I don't even remember happening). Minutes from the 21 January 2010 annual meeting were approved with one abstention (mine, I didn't feel that the annual minutes could be approved at a regular meeting. The property manager explained that the board could approve the minutes, but that the membership would also [have to] approve of them at the next annual meeting. I wasn't convinced, and voting "no" would have legitimized the vote, so I abstained.) Minutes from the 21 January 2010 organizational meeting of the board of directors were unanimously approved.

The board received no (new) applications or interest from members to serve on any committees. The current landscape and social committee members were reappointed to their positions. Two homeowners who were present also expressed interest in these committees and were appointed to them. The committee reports were of little, if any, consequence.

The board tabled the issue of the financial statement and bank reconciliation. One director (me) had questions about it, and the treasurer had not had time to review the documents, yet. It was my understanding that the board would come back to these documents near the end of the meeting during the budget/reserve agenda item, but it never happened.

The board voted to write off approximately $2,000 in bad debt. In this case, it was explained that the debt to the association remained after either a bankruptcy or a lender foreclosure. The only recourse open to the association is to sue the homeowner, likely in small claims court, but in many cases (these, in particular) the costs coupled with the unlikelihood of recovery outweigh the loss. Also of note here is that the 2010 budget calls for $4,500 in bad debt. It is February, and half of that is already used.

Nothing worthy of note was contained in either the management report or work order list.

The board briefly discussed the wood fence repair/replacement necessary in the community. The board has been advised by legal counsel that it is (entirely) responsible for the fences facing common areas and that individual homeowners do not bear half of the responsibility for this cost as is traditional. This is going to be a huge expense to the association, and the board is going to look for volunteers to join a "work party" to do the replacement of some/all of the fences.

Finally, the board discussed the budget/reserves. (Interestingly, every homeowner got up and left at this point in the meeting.) I presented the comparison of the 2008 and 2010 budget that I wrote about previously. There was some back and forth among the board members and a mild amount of finger pointing. In the end, though, using the comparison spreadsheet, I was able to show that even though prior boards had been able to cut contract costs (landscape, management, janitorial, etc.), those savings were not translating into money in the association's pockets. Instead, the savings is simply being diverted elsewhere in the budget to other costs. At this point, the treasurer spoke up and said that there are a number of "discretionary" costs in our budget, and like any other business or government entity, we need to cut costs/services. Much to my surprise, there was very little resistance to this. The remainder of the board was very amenable to the idea, and a committee was formed to look at the budget and recommend how to make cuts.

The meeting was adjourned at approximately 8:15pm.

2008/2010 budget comparison

For tonight's open board meeting, I've obtained time on the agenda to discuss the state of Park Lane's reserves. In preparation for the meeting, I've prepared a comparison of the 2008 budget, the last budget for which I have a readily available copy, and the current budget. (In the interest of full disclosure, I helped create the 2008 budget.)

The comparison I've prepared has five columns. The first two are the unaltered budgets from 2008 and 2010, respectively. The third and fourth columns are modified versions of the 2008 and 2010 budgets, respectively. For the 2008 budget, the special assessment was removed from the income section, and the associated contribution to the reserves was removed from the expense section. For the 2010 budget, the collection reimbursement was removed from the income section, and the collection costs were removed from the expense section. The final column shows the difference between the modified 2008 and 2010 budgets (the best "apples to apples" comparison I could come up with). Each comparison is broken down annually, monthly, and monthly per unit.

(In performing this analysis, it came to my attention that the 2007 reserve study took into account the association's plans for a special assessment at the start of the 2008 calendar year. Basically, maintaining the level of reserve funding in 2008's budget beyond 2008 would have required another special assessment of $70 per unit in perpetuity or a cutting of approximately $11,000 from the budget.)

Within each breakdown, I've highlighted, in red, the contributions to the reserves. The yellow highlighted items represent either significant or questionable, in my opinion, increases in the budget. These yellow line items, if cut back to their 2008 levels, add up to just over $20,000, which is enough to return reserve funding to 2008 levels minus the special assessment. In my opinion, these are the first places to look for cuts.

Finally, I would like to draw attention to the subtotals. First, note that income has decreased since 2008. This is due largely to the lack of interest that the association earns on any reserve funds (due to lack of reserve funds as well as interest rate declines in recent years). Despite sagging income, however, costs have increased. Utilities have increased approximately $6,000 since 2008, a 20% increase. Maintenance and administrative costs have increased as well, but these are marginal increases especially when one accounts for the bad debt that the association writes off in its budget.

The $20,000 deficit in reserve funding between the 2008 and 2010 budgets is entirely accounted for by the increases in costs, amounting to approximately $13,000, and a decrease in income of approximately $7,000. In short, the board is robbing the association's future (its reserve savings) to cover the costs of maintaining and even increasing services.

I've explained the problems associated with underfunded reserves before, but crushing special assessments are also a very real possibility. Currently, the special assessment required to fully fund the reserves stands at just over $1,000 per unit or about $85 per unit per month for 12 months (imagine your monthly assessment doubling!), and it will only increase with time. Creative cost cutting and outright cutting of services are still viable alternatives to special assessments, but the time is fast approaching when these options will no longer be available.

Rules "adoption"

The rules adopted by the 2009 board during its final meeting in January have been posted. According to published materials, these rules went into effect on 5 February.

I, personally, was not notified of the adoption of the rules as required by California Civil Code 1357.130(c). (The rules were adopted at the open board meeting on 21 January 2009 which would have required notification to all homeowners by 5 February 2010.) While I may be the only one, I suspect that this is not the case. If this is true, then Park Lane's rules may not be enforceable without further action (e.g. re-adoption as specified by section 1357.130).

2009 Reserve Study

The 2009 reserve study has been posted in its entirety. In addition to the executive summary that was mailed to all homeowners with the annual budget this past November, this document contains funding options including one to fully fund the reserves and one to ensure that there is at least enough money to pay for repairs/replacements as they become necessary. Note that this second option will require increasing the reserve funding to 3 times its current level (coincidentally, back to where it was at the start of the 2008 fiscal year).

Budget/Reserve Problems

What's the problem with Park Lane's budget/reserves?

Park Lane's reserve funding is currently at approximately 50% (according to the most recent reserve study put out in November of 2009). Furthermore, according to the 2010 budget (put in place by the 2009 board), the association is currently contributing $15,384/year ($1,282/month) to its reserves. (This is approximately equal to 7.1% of the association's budget, a figure that will become important shortly). More importantly, though, at this rate, according to the most recent reserve study, the reserves will be completely depleted in just ten year's time.

The problems with insufficient reserves [funding] are not limited to deferred or even possibly discontinued maintenance. Many people are not aware that the government, via quasi-public entities like Fannie Mae/Freddie Mac (who buy mortgage loans from primary lenders like Countrywide or Wells Fargo) and its own agencies like FHA and HUD, imposes requirements on reserves [funding] before it will allow a mortgage to be bought or underwritten. In the past, this requirement dictated that associations maintain reserves at a minimum of 60%. This requirement has been relaxed, requiring instead that associations contribute a minimum of 10% of their operating budgets to the reserves. These requirements can be found here, here, and here. A summary of the HUD/FHA requirements can be found here.

What does all this mean?

Recall that Park Lane currently allocates just 7% of its operating budget to its reserves. This means, as stated here, that "[...] potential buyers cannot get Fannie Mae backed loans. Financing will still be available but the costs will be higher and fewer buyers will qualify. This may have the effect of driving down property values in the development." In short, if Park Lane does not properly fund its reserves, property values will be negatively impacted. (Simply increasing the association's contribution to its reserves will not solve the underfunding problem, however. I will address this in a later posting.)

What can be done?

In the most simple terms, the association needs to either reduce costs or increase income. An increase in income would almost certainly come from a special assessment or an increase in monthly dues. Since no one wants to pay more, that leaves reducing costs. First, though, either course of action is going to require the association to alter its budget. Based on my admittedly limited legal understanding and research, it appears that Davis-Stirling (the portion of the law largely responsible for the operation of homeowners' associations) is quiet, if not silent, on the subject of a mid-year budget change. A tangentially related question of the ability of an association to raise its dues mid-year is addressed by Adam Kessler's law firm on davis-stirling.com. In the end, the author reasons that "[...] boards can revise the budget, provided (i) the original budget was properly implemented, (ii) boards stay within their 20% increase limitation, and (iii) they give a minimum 30-days notice of the change." Since no one is [yet] proposing an increase in dues, (ii) is irrelevant. I believe that (i) has been met, and (iii) would be met upon making the change.

Assuming that the budget can be legally changed, here are some suggestions about where the budget can be trimmed:

• Security Patrol
  
  During my previous time on the board, the lack of effectiveness of North Coast Patrol (NCP) was a regular complaint. In general, NCP drives through the community a contractually obligated number of times each day. One of the complaints received was that they drove too fast through the community to even see anything that might be going on. Furthermore, whenever they were called out to address a specific problem (kids skateboarding or climbing fences), the problem had usually rectified itself or abated by the time NCP arrived. In the past, NCP provided ticketing of vehicles parked in violation of Park Lane's rules, but I believe that even this duty has been taken on by a current board member.
  
  NCP charges the same as they did back in 2006, 7, and 8, but they provide less service than they did then. Furthermore, the effectiveness of the service that they do provide is questionable. In my opinion, this service could be replaced by homeowners taking responsibility for policing their own cul-de-sacs and the implementation of an effective neighborhood watch.
  
  Savings: $7,200/year ($600/month)
  
  
• Street Sweeping
  
  When I last served on the board, the community did without a street sweeping service. Consider that our streets are not open to regular traffic, and can only be entered/exited via two well defined points. This means that we don't suffer from litter from passers-by (either by car or by pedestrian) or debris from another neighborhood being blown into ours. Most, if not all, of the trash and debris that ends up on our streets is generated internally.
  
  This problem can be addressed simply by picking up after ourselves and sweeping the areas in front of our own homes. Much like a neighborhood watch, a group can be formed to care for common areas that need sweeping like the storm drain near the picnic benches.
  
  Savings: $5,400/year ($450/month)

These two items alone, if funds were diverted instead to the reserves, would raise the association's reserve contributions to 12.9% of its operating budget. This would put the association on the right side of government housing regulations and make houses within the community more salable. It still does not solve the long-term problem of our underfunded reserves, however.

The most important step in correcting the immediate problem, though, requires that homeowners become involved. Getting this matter before the board is easy, but this argument, coming from a single homeowner (even a board member) will not hold much sway considering that a majority of the board is comprised of the very same people whose actions have directly contributed to the very problems that now face the association. Getting the board to take this matter seriously is going to take a concerted effort by homeowners to make their voices heard either by showing up at monthly board meetings (generally held on the third Thursday of each month) and/or by emailing the board.

What ideas do you have for cutting costs? What about creative ways to increase income?