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.