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.

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.

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.

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.