Last night (actually, earlier this evening) was the conclusion to the budget process for 2009 and the meeting of the board and unit owners. Owners from approximately 50 units attended the meeting, which is about 15%. After discussion, which was at times impassioned, the proposed budget was passed by the board, with one "nay" vote. This was not an easy decision. My congratulations to the board for listening to the unit owners, and for making a difficult but I believe, the appropriate choice. That choice approved a 5% increase in the assessments for this year.
There were arguments against and petitions made to either reduce the proposed increase or eliminate it entirely. Discussions also included possible methods of reducing costs. Some unit owners complained about the lack of "service" and collecting leaves, dirty entry windows, etc. That is the crux of the matter; reduce services to reduce costs and some unit owners complain. Other issues raised included reducing painting costs, changing from wood trim to more durable materials, pulling back funds spent on greens maintenance and trees. I think the board attempted to answer questions and address the issues with courtesy and in detail. The discussion of the budget and related matters prior to the vote took one hour and 2o minutes!
During the open session near the conclusion of the meeting, I congratulated the board for their consideration and for making this difficult decision.
In the very near future [December 1, 2008], I will add a summary of "where the money goes" for a monthly assessment, and the corresponding amounts. I have already prepared the spreadsheet for this, and I did so in advance of the meeting so that I had some idea of the impact of the budgetary process on my personal assessments. I have been doing this for several years. Here is a link to an earlier analysis, which was made from the annual budget and the financial reports provided to all of the unit owners for the annual meeting: How My Assessments In 2006 Were Spent or Allocated There are some current numbers for reserve allocation at the end of this post.
I have some comments and opinions to this meeting and to the general budgeting issues at the end of this post. In particular, I address the issue of funding reserves at our current rate and the impact this has on our monthly assessment fees.
One of the points raised repeatedly by several unit owners was the pain experienced by some of us as a consequence of the current recession. I think all of us are experiencing this. However, as I observed during the open session near the closure of the meeting:
- Oil prices have recently decreased by a substantial amount. This provides immediate relief to all of us. This will offset the 5% increase and prices are expected to moderate until the middle of 2009. In our immediate neighborhood, 87 octane gasoline is readily available (as of November 13) for $2.23 to $2.29 a gallon. Link: Find Gas Prices by Entering Your Zip Code . Our gasoline prices are about the same as they were in October 2004. [On November 18 I added the chart below. This is for Midwest Gasoline Prices for the past 10 years. As you can see, prices have been "rolled back" to 2004. On November 18 I also added data from the S. Louis Fed at the end of this post. Oil futures are expected to remain low throughout 2009] .
- Forthcoming 5.8% cost of living increase to those collecting social security benefits will also aid those who are living on these fixed incomes. Of course, we all are "living on fixed incomes" but those who are retired have been feeling inordinate pressure, and perhaps more angst with the current financial turmoil.
I do have the same concerns many of my fellow unit owner have. I understand the argument made during the meeting that as monthly assessments increase, our units become less affordable. Affordability can negatively impact the possibility of the sale of our units. However, these are general statements and at some point in the near future, I will do a study of the point of stability for our assessments. At present, we are successfully growing our reserves. We are on track to address the roof replacement and repairs. Once the reserves have reached an equilibrium point, and I think we may be there, the increases may only be required to offset inflationary pressures on the reserves and to accommodate increases in operating expense. This point was made repeatedly by the management company during the meeting. I agree with their analysis of the current situation.
I have a concern about the schedule for roof replacement. As I expressed to the board during the meeting, we will not accrue all of the necessary reserves until the year 2014. Actually, in January of 2014, we will be short $177,167 if we continue to fund at the present rate [the rate approved at the November meeting]. Our professional manager pointed out that we have reserves for other purposes that could be temporarily "borrowed" to complete the roofing at the currently projected schedule.
I presented spread sheets at the meeting, to substantiate my evaluation of the financial information. By 2014, some of the shingles could be 22 years old if they have not been replaced. That is far beyond the expected life for roofs of the type we have. In advance of the meeting I did discuss this with the Chairman of the Planning Commission for a nearby community, whom I am fortunate to know. He advised me that his city's engineers anticipate roofs of our type to have a life of 15 years. By that it is meant that we could expect to be "leak free" for that period of time. Unfortunately, I was unable to provide this information to the board and to the unit owners who were present. However, the discussion and presentation by the professional managers made it very clear that they are well aware of this time constraint and the urgency facing us.
In response to some of my questioning on the age of our roofs, the management company stated that the last roof was shingled in 1999. That is, the last building to have a second layer of shingles atop the old, was completed 10 years ago. If the roofs are replaced on an "as needed" basis, the last roof, which I assume would be the one last maintained in 1999, would be re-roofed in 2014. That is exactly 15 years from the date the second layer of shingles were laid on the roof.
I think the board needs to have an inspection made of the all of the roofs and publish a schedule for replacement, with the anticipated year of replacement for each building. This information should be made available to the unit owners. I expect that some studies have already been completed, as the board has made disparaging remarks about the condition of some of the roofs on some of the buildings. What is missing is a formal, published schedule. Unit owners who have experienced leaks, should be assured of when their roofs will be formally repaired and not just patched. This would promote certainty and alleviate concerns. Currently, people see annual assessment increases, with no tangible benefit. The publishing of a date, a true date, would be very encouraging to us all.
In these economic times, it is vitally important that people be provided with as much certainty as is possible. We cannot control the economy and there are also many aspects of our lives and circumstances that we cannot control. However, there are things that we can manage. Scheduling, budgets and projections are all tools that can promote certainty. With that comes stability, improved confidence and optimism. Link: People Will Be Strange
The suggestion was made during the meeting that committees be formed to assist the board members, who are all unpaid volunteers, in accomplishing their tasks. This is an excellent suggestion. I would hope that the board will quickly prepare guidelines for these committees, so that ad hoc groups, operating outside and beyond the board, do not further destabilize the situation and add concerns to those the unit owners are already experiencing.
The possibility of transferring assets to our city, so that we can avoid maintenance costs, which is to say, pass these costs on the city, was also raised from the floor. This has been previously discussed by previous boards and was diligently researched. At this time, some members of the board and the managers were not optimistic. There are the costs of meeting city codes and severe alteration to the complex in doing so. I also am pessimistic of the opportunity to do so. I recently listened to our Mayor discussing the budgeting issues facing our city. For example, tax receipts on gasoline formerly paid for all city street repairs. According to the Mayor, this year the city paid over $1 million from general revenues to cover street maintenance no longer covered by motor fuel tax receipts. The city is also projecting tax revenue decreases and increasing deficits. The "state of the city" meeting in January may shed more light on this, but the Mayor has stated that "City staff expects the next five years to be financially challenging". In that environment, I don't think the city will welcome us with "open arms" and the cost increases they will bear as a consequence. However, I suppose the board could propose and vote on a professional study to determine the feasibility and compliance issues we would face. We could then get bids from contractors to bring us up to the necessary standards. After knowing in detail the costs and types of alterations necessary, the board could then present this to the unit owners for our consideration. An initial study could be funded for $25,000 or so, which would only require a one-time special assessment of about $75 per unit owner. Or, the board can divert funds from the roofing project. I'm interested in knowing how the board would proceed with this one!
Good luck to all of us in the coming year, and to those of us who are struggling, I say "hang in there" and I strongly urge communication with the entire board about your personal situation. I have found letters to be the best method, followed up with telephone calls to articulate what I have written.
My Additional Comments and Observations:
Playing "Catch Up" with the Reserves, and dealing with rising costs:
First, this is not about pointing fingers or spreading blame or guilt. What follows are my observations and some arithmetic. We are all accountable for doing our own evaluations from time to time. I did my first BEFORE I purchased a unit about 8 years ago and our professional manager answered all of my questions, including my great concern about the state of the reserves. I purchased anyway, and all of us have made our own choices and decisions. If we don't do our own arithmetic from time to time, then we are not fully informed. In that case, we can only take what we get and then complain about it.
I'm putting these numbers out here so you are informed, and to provide a service to all of the unit owners. This is from my independent analysis of the information that is provided to us all. What I am doing does not relieve you of doing your own research. If you are angry, I can't do anything about that. However, you need to know that this problem began at least 15 years ago. It is my experience that the recent boards and professional management team have done everything possible to correct this problem, and to keep us informed.
Keep in mind that in 1999 we were paying about $1.15 a gallon for gasoline. I doubt if any of us were saving a $1 for each gallon of gas we put in the tank, so as to help pay for the fuel increases that have occurred since then. So too with our board. They cannot predict what inflation and the price of gas will be in 2015. If in 1999 they had raised our assessments $25 a month to help cover the effects on reserves as a consequence of someone's "predicted" $4.00 a gallon gasoline in 2007, I suspect unit owners would have been irate. And with good reason.
The board could not with certainty have predicted what has happened. What we do know is inflation does occur and it is historically between 3.5 and 4.1% per year over long periods of time. Or I should say it WAS. Because that is what economists do; they give us historical data and we apply that to the future. But who knows what the future will bring? We do know that the price of oil affects the cost of most materials, and even labor, as wages increase to keep pace as costs rise. That's why social security benefits are rising by 5.8% in 2009. We are all struggling with rapidly rising costs and the assessments required to raise reserves. Some of this is way beyond our control or that of the current and recent boards. If you are angry about volatile and rising gasoline and energy prices and the consequences on the economy and our association, that is something all of us are at the effect of. I suggest you direct your anger at the politicians who collectively have avoided a cohesive energy policy for the past 30 years!
Returning to the present situation, during the board meeting and during past budgetary meetings open to unit owners that I have been able to attend, I have been present to complaints about the increases in assessments. The board and our professional managers have done a very good job explaining how we found ourselves in the current predicament. For the nearly 8 years I have been here, the board has been accumulating reserves to make up for the fact that for many years there were either inadequate or NO contributions to reserves. Unit owners have overwhelmingly stated at the meetings I attend that they are opposed to "special assessments". That gives the managers, and our board, little choice.
To demonstrate the consequences of these choices, as of January 1, 2009 I will be paying a monthly assessment of approximately $47.28 to the roofing reserves. And so it is with paving, concrete and masonry reserves, to which in January 2009 I will be contributing $34.15 each month. These items combined are consuming $81.43 of my assessments each month!
If each unit owner contributes at this level of funding, the roofing reserve would accumulate in excess of $2,800,000 in 15 years! That is about 70% greater, or $1,160,000 more that is actually needed for roofs! So why are we today required to make this monthly contribution? It is because we don't have 15 years. We are "catching up" to the funding needs so that imminent roofing work which has already begun can be completed no later than 2014, and before we are all dealing with the breakdowns and expense of failed roofs. That's it, plain and simple. To put it bluntly, I am today putting $47.28 monthly into a roofing fund because 10 and 15 years ago there was $0 being put into this fund each month. So if there is no funding for 7 years, then the funding must be nearly doubled in the final 8 years to accumulate the necessary reserves. As a consequence, our current monthly roofing reserves payments are larger.
How much should the funding have been 15 years ago, back in 1998? If the average monthly assessment of the unit owners had been $25 greater than it was on January 1, 1998 and if that amount were put into reserves and, if each successive year the amount collected were adjusted upwards to compensate for inflation (let's assume by 3.5% per year), as of December 31, 2008 our reserves for roofing would have about $1,144,000! If we had been funding the roofing reserves commencing in 1998, our monthly assessment in January 2009 for roofing reserves would be about $36.50. Our actual payments, because we did not fund the reserves in 1998 will be about $47.29 each month into the roofing reserve fund. So our assessments are $47.25-$36.50 = $10.75 higher each month.
If we use that yard stick for concrete, paving and masonry reserves, which I am funding at the rate of $34.15 each month commencing January 1, 2009, these funds will accumulate in excess of $1.700,000 in 10 years.
If you are a long term owner at BLMH, you can take some consolation from the fact that the board, instead of funding the reserves for the roofing project, allowed you to keep that money all of these years. How much did you keep? I estimate that if the funding had begun 30 years ago, our assessments would have been $14 greater each month than they actually were in 1980 and would have increased at the rate of at least 3.5% each year to keep with inflation. At that rate, in 1990 we would have been paying $19.75 each month for the roofing replacement fund and in 2000 we would have been paying $27.86 each month for that fund. In 2009 our assessments for this fund would be $37.97 and we would have accumulated $1,692,000 in the roofing fund as of December 31, 2008.
Funding reserves is not an easy task and requires predictive skills and the ability to make adjustments each year. It is necessary to determine the point of replacement, and project the costs at that time. For example, let's assume that roofing must be done every 15 years to avoid leaks and damage to the units. So a second set of shingles can be put on each roof in 15 years. In another 15 years, the two sets of shingles are then stripped and repairs to the wood structure beneath the shingles, new membrane and totally new shingles are installed. If that approach is used, then we could say that we need to save enough to 1) Add new shingles in 15 years and 2) To completely re-roof in 30 years. If that is so, then the annual amounts we would be adding to the roofing reserves should be the amount necessary to shingle in 15 years PLUS the amount necessary to completely re-roof in 30 years. We also need to increase the amounts collected each year to compensate for inflation, as the cost of materials and labor do increase each year.
As for projecting the costs, let's assume that the new roofs will cost $1,650,000 in 2011. How much would such a project cost in 30 years? If inflation is 3.50% per year, and costs rose at the rate of inflation, then the cost of such a project would be $4,474,599 in the year 2040! If inflation were 4.0% per year, then the cost would be $5,145,775! The actual calculations need to include various factors. These may include, but not be limited to the differences, if any, between the interest accrued on the money saved in reserves and the rate of inflation, actual costs which may rise over time at rates greater or less than the basic rate of inflation and, adjustments for current inflation. So having a management company which is good at these types of calculations and keeps a "pulse" on true costs, is essential for projecting reserve requirements. These numbers may seem large, but keep in mind the cost of a unit in 1978 and what they are selling for today. Even automobiles prices have increased. As I recall, I purchased a new compact car in 1969 for the price, including tax, title and shipping of $1,800!
My final comment on reserves and the assessments for them is this. When we as unit owners are inclined to compare our funding requirements and assessments with those of neighboring associations, it is essential that we also determine what the nature of their reserves are and how they got that way. I can imagine a situation 20 years ago, at a time that we were not funding roofs, in which a unit owner in a neighboring association attended a board meeting and said “I don’t know why our monthly assessments are so high! The people over at BLMH, their assessments are nearly $50 a month less than ours!” Of course what that neighboring unit owner did not take into consideration, was that we were not funding some of our future maintenance needs, while their association was doing so!
The "Good News" about Funding of Reserves:
There is good news. This does substantiate our professional managers' assertion that these increases will stabilize the reserves. For if we are overfunding by 70%, then that implies that the $81.43 I am paying each month into those reserves is also about 70% greater than it would need to be if we had been consistently funding these reserve items for the past 15 years. So what does this mean? Once that we have accumulated the necessary funds, we can begin funding for the next repair cycle for the roofs at a rate consistent with a 15 year/30 year schedule. That schedule implies that the actual funds needed for roofing reserves, if consistently funded for the entire 15 years, would be $27.82 each month for each unit. This will have to be adjusted annually, but it won't be necessary to include an additional "catch up" amount for roofing, which currently is about $19.46 each month. See Note (2).
If I assume a similar percentage of overfunding for "catch up" for paving, concrete and masonry, then I am paying a "catch up" amount of about $14.05 each month. If my assumptions are correct, then I am paying total "catch up" amounts of $19.46 + $14.05 each month, which is currently $33.51 each month.
I am not suggesting that it will be possible to reduce our assessments in the future. What I am suggesting is that this implies that our fees are stabilizing. Increases should begin to taper off to an amount consistent with inflation. Long term inflation is typically in the range of 3.5 to 4.1% each year. Of course, there are no guarantees for the future. In fact, the inflation for the previous decade was below the normal. There are economists who are predicting we are now entering a decade of higher than normal inflation. We, the unit owners, and our board and the professional managers have no crystal ball.
However, it is my opinion that we have seen the worst and if we can bear up under the current situation, we may find some daylight in the very near future.
On The Subject of Reserve Studies:
During the meeting of November 13, the board and professional manager presented viewpoints about obtaining a reserve study. It was pointed out that this needs to be done with guidance and direction. The example was made that a consulting firm could tell us that we need to fund the reserves to replace the decorative lighting on the buildings. We don't need to spend money to have someone tell us that! It was also pointed out that a reserve study is a double edged sword. Yes, we will get confirmation that we are on track for major items, such as roof replacement. On the other hand, such a study might render opinions about things like underground piping and so on, that could put additional pressures on our already buckling unit owners. That is not prudent at this time.
I am of the opinion that now is not the time for a reserve study. However, I do see circumstances under which I would, as a unit owner, DEMAND that a study be done. For the present it is my opinion a study is not required because immediate, major items have already been identified and are being well funded. These are roofs and driveway paving. So why not continue on this course and as these are addressed and completed, then in 2012 or so, if we need additional outside confirmation or guidance along the lines of 1) What don't we know or what are we missing? and 2) What would be an appropriate funding level now (in 2012 or so), that will accommodate our needs for the next 30 years?
However, during the board meeting, one member of the board suggested that an assessment increase not occur in 2009. I want to state for the record that it is that type of approach that got us where we are today! The years we had 0% increases or assessment decreases are well documented, and I am of the opinion that some of the current members of the board were elected because of the frustration of some of the unit owners at the assessment increases since 2000. I urge all unit owners to keep the recent past in mind. We do not want to go through this again. We and the board must be rigorous in funding the needs of our community.
It is my opinion that the only circumstance that can justify a 0% assessment increase, or an increase that is below inflation is the determination that 1) All reserve items are well funded and on budget and 2) There are no "unknowns" out there. To determine if our board and managers are on track and are not being blindsided, a Reserve Study would be a very useful tool to determine this. So I think that a reserve study must be completed PRIOR to any reduction in assessment increases to a level below the current rate of inflation. If the board does otherwise I will vigorously oppose such an action.
My opinion for deferring a reserve study at this time is based on my observations at the meeting and the following: 1) We have already identified major items and are funding those, and this funding is for the immediate or very near future; 2) We are really tight on funds and I don't think unit owners will want to provide additional amounts via assessments to fund a study at this time; and 3) The economy is in turmoil and any reserves study would make assumptions about projected costs. At this time, such projections are more unreliable than is usual. We don't really know what the price of oil will be in 6 months or 1 year from today. That impacts the price of roofing, asphalt for driveways and vinyl plastic siding and trim, for example.
As of today, it is expected that the current recession, which extends beyond the U.S., will reach a bottom in mid- to late 2009 or early 2010. When the economies begin to pick up, we will have a much better idea of the cost of critical commodities such as oil, and the reliability of such projections will also improve.
The Impact of a Recession on Major Projects:
There is a "silver lining" to the. That sounds contradictory, but because of the recession we are in, prices have fallen or stabilized for many of the materials we need for these same projects. Hard times also mean that contractors may be more willing to negotiate. Combined, these factors mean that while prices may not decrease in the near term, nor should they increase. We do not know what will happen beyond the summer of 2009 but right now, and probably in the spring, it should be possible to get good bids and accomplish work with a potential savings on some of it. That means we may be able to do more roofs in 2009 that the board is projecting we can do. If so, we can do more of the oldest roofs next year. I am sure the board and management team will be watching this closely. Once that final bids are received for work to be completed in the summer of 2009, they will know what is possible. I am very optimistic!
Energy Initiatives and Our Forthcoming Projects:
I would prefer that we hold funds for the purpose of determining how this association can benefit from possible energy credits and so on, that the U.S. government will probably make available for the purpose of reducing this country's "energy footprint". Roofs are a significant energy component on buildings because of their exposure to sun light and insulating properties. So too, siding could be replaced with energy efficient improvements. If the government moves as rapidly in the direction and provides the funds that some economists are forecasting and calling for, this association could be in a wonderful position to reap some of the benefits and address some of the issues we are facing. It is too early to determine exactly what benefits are possible but this is something that really bears close monitoring and has the potential to impact our roofing project in a major way!
The Economy:
For information on my view and economic outlook, go to this link. You may return to this blog by using your browser "back" or "return" button. Link: Nov. 11 Outlook on the Economy
Additional Supporting Information:
Oil and Natural Gas Futures, as per the St. Louis Fed on November 14, 2008. These indicate continuing low prices through 2009. For the original data, go to http://research.stlouisfed.org/publications/usfd/20081114/usfd.pdf
Oil Futures, per the Federal Reserve:
Natural Gas Futures, per the Federal Reserve:
Notes and response to Reader's Comments:
(1) Replaced and updated price chart for gasoline on Nov. 18.
(2) Revised Nov 21, per comment.
(3) Comment: "I don't understand how the board got us to this". My response: It wasn't simply "the board". It was the boards, as there have been different members over the past 30 years. It was also the "unit owners" that is, us, you and me, who got us here. Our professional managers identified the problem and then worked with the boards, since about 2000 to correct this problem. That is why we today, have the reserves and the replacement program. I have a further comment on this. We the "unit owners" elected some new board members this year including a new president, because a majority of us exercised our rights and elected members of a group which represented "change". It is my opinion that members of that group had an agenda to lower our assessments. Unfortunately, what we did was to "shoot the messenger" and replace some of the people who identified the problem and worked with our professional managers for over 8 years to correct it. It is ironic that some future board will take the credit, when our assessments level off and the roofs are replaced. All I can say is, some of these problems take years to occur. So too, it can take years to correct these problems. As I explained in my comments, we had two roofing programs here at BLMH even if we weren't completely funding them. As unit owners, I am convinced most of us were oblivious to them. The first roofing program is to add a second layer of shingles in 15 years and the second is to remove, repair and reshingle in 30 years. So this problem began 30 years ago.
(4) Further response and Nov. 24 response to "who was minding the store": As to how we got here, it took a while and I suspect the board, over the years, succumbed to pressure from unit owners. From time to time, there has been grumbling about assessments. There will ALWAYS be grumbling about assessments! Our professional management was changed in 1998 or so and since then, there had been more assessment discipline which includes long term planning and the funding to accomplish those needs. I surmise that prior to 1998 the professional management and boards had a different emphasis, which seems to have been characterized by “keeping assessments as low as possible”. How else to explain a program that for 14 years consistently had assessment increases below the annual “cost of living” increases published by the U.S. government? Each year of that period, the average assessment was about 1.5% below the annual social security increases, for example!
During the recent 13 years and with the new management we have been on average above the “cost of living”. As I have stated elsewhere, this was to “catch up”, so as to adequately fund the reserves, and meet day to day operating costs. So we have changed from assessment increases that were consistently below the rises in the “cost of living” to assessment increases that have been on the average above the “cost of living”.
However, for 2008, our assessment increase will be 0.8% below the published U.S. government SS “cost of living” increase.
These differences may seem small, but they add up and have big effects on the reserves.
Let me demonstrate. Let’s assume the monthly assessment was $100 in 1983. Since 1984, the various boards and managers have given us a variety of assessment increases. Sometimes less than 0%, sometimes 0% and an increase as high as 12.0% (in 1989). This resulted in total monies collected from assessment fees from 1984 through 2008 of $16,761,887.
If the board had instead voted assessment increases that were consistently the same as the U.S. government COLA figures of the Social Security administration, the total monies collected from assessment fees from 1984 through 2008 would have been $17,482,301.The peak assessment increase would have been 7.4% in 1982 and would have been below 4% for all but four years!
The big difference between the two methods is this; our assessment fees in 2008 would have been about $225.04 each month and the association would have collected more money! As I said, these small differences do add up. I’ll publish the spread sheet at some time in the near future, so you can see the exact number, year by year.
So to answer the question,” who was minding the store?” I have to answer, “Who was arguing for assessment decreases back in 1982, 1983, 1985, 1986, 1988, 10991 and 1992”? So now perhaps you see why I am concerned about a repeat of the past.
Can you clarify the last paragraph in the "good news" section? I don't understand some of the numbers.
ReplyDeleteSorry, I meant "Can you clarify the FIRST paragraph in the "good news" section?"
ReplyDeleteI don't understand how the board got us to this.
ReplyDeleteHow can you say that the reserves were underfunded. We have paid assessments for years! Services are down. Who was minding the store?
ReplyDelete