- 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.)
Thursday, February 25, 2010
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:
Friday, February 19, 2010
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:
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.
- 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 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.
Thursday, February 18, 2010
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.
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.
Friday, February 12, 2010
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).
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).
Friday, February 5, 2010
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).
Monday, February 1, 2010
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:
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?
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?
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