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)
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?
Like you, I'm very concerned about the state of our reserves funding. The problem is somewhat bigger than you expose here - any homebuyer doing his or her due diligence will be inspecting the financials of the association. Reserves as poorly funded as ours have become over the past two years are a major red flag for a special assessment. As you know, there are two ways to enact a special assessment. The board has the ability to vote one in up to a certain percentage. Anything larger has to go out to the membership for a vote - and unless our membership has experienced the negatives of underfunded reserves directly, such a vote would fail.
ReplyDeleteSo this issue is likely to stop prospective buyers even before an offer is made or financing is sought. Once financing is sought, the annual budget underallocation to the reserves will likely become an issue. In today's economy, it's already much harder to get any sort of credit - this is a gift wrapped reason to a lender to deny the loan. And it's not limited to buying and selling. This issue also has the potential to impact any homeowner refinancing.
I understand that money is tight for most of us right now. I've been unemployed for the past 13 months, so believe me, we get it. But I believe that the budget most recently passed was far too focused on keeping the monthly assessment the same without any view to the bigger picture, and this is a huge, ultimately shortsighted and incredibly irresponsible action. The realities of the credit market dictate that we must change this. If it's by getting rid of services in the short run, that's fine. But in the long run, we must figure out how to return our reserves to a funding level that is fiscally responsible.