Budgeting Part V - Making a "Good Decision" and Avoid Being Wrong

By now, everyone should have had the opportunity to read the letter of the proposed budget for 2011. I am sure the thought of a 7% fee increase is causing some concern. Passage of such a measure will impact owner finances in 2011.

I need your help.

I have been asked by owners where I stand in this matter. First, let me say this is not a "personal" recommendation on my part. It was arrived at by the entire board, during two long "budget workshops" held last month. However, I realize that you want my personal position in this matter. I have been told by non-board members that this is being discussed with owners by other members of the board.

One impatient person who I assume is an owner, sent me an anonymous message and said "What percentage do you think the monthly assessment should go up?"

I am hesitant to state a number for one reason and only one reason. During the workshop, there was a certain amount of compromise on the part of board members. I too compromised. There will be consequences to the association because of this budget, or the budget that is voted and passed.

What I personally want to achieve is the ability to  make a good decision. That's a decision that allows this association to properly function in 2011 and avoid the consequences of a bad decision. I don't want a repeat of 2010. Nor do I want a fee that places an unnecessary burden on unit owners. Whatever decision I ultimately make and whatever percentage this board votes and passes, this association will have to live with. Future boards will have to deal with the consequences of any funding shortfalls, just as this board is dealing with the financial consequences of decisions made last year and 20 years ago.

Making a good decision today, is more difficult because of the uncertainty in the economy, the consequences of foreclosures on the association, the financial stress experienced by some unit owners, and the ambitious and necessary roofing and driveway programs. It is all the more difficult because of the projections for the next 10 years, and our reserve study.

Last year, the board made what turned out to be a bad decision regarding fees. I think that occurred because the board, after receiving information, decided to use some of it and discard some. Ultimately, that information was used that was consistent with their personal beliefs. They authorized a reserve study, assuming to would prove we were well or fully funded. It didn't. I concluded in 2008 and again last year, that some members of the board are somewhat confused.  I see nothing that has caused me to change that opinion. Making a popular decision is not necessarily a good decision. The opposite is also true; an unpopular decision is not necessarily a bad one. However, while I am not alone in this thinking, I most certainly am outnumbered on this board. So it is entirely possible this board will again make a popular decision.

A bad decision is one which will result in a need for a special assessment, or will allow maintenance to fall behind to a degree that future owners cannot again "stand the pain" of making up these financial shortfalls, when it is necessary to raise fees. As I have stated repeatedly to my fellow owners last year: "If we can't raise fees this year, what makes us believe it will be easier next year?" What would make me believe that we'll be in better financial condition in 2012 than 2011? There's nothing to indicate that owners will receive a windfall of money from anywhere. Serious financial shortfalls can result in probable ruin to this association. Last year I suggested to anyone who would listen, and published here that owners should "Save that 2% in a cookie jar, because you will need it next year." If you did, you will not experience the full financial impact of whatever fee increase we do have in 2011. I wish last year's board had vigorously promoted that idea to all owners, but they didn't.

I think it's also very short sighted for an owner to assume that it is to their advantage to hold fees down for a year, two or three and then sell their unit, passing on the financial obligation to the "new" owners. This economy and real estate market isn't going to allow that.

At this point, I'm not certain, because of our financial situation and last year's decision, that anything I do will resolve this problem to anyone's satisfaction. We are, as they say, "in a pickle." I have already stated that I will not be the scapegoat for this year's decision. Some owners will say "How could this happen?" Even when everything is done properly, things can go wrong. Our proposed budget does not provide much financial leeway if anything does go wrong.

Before I continue, I want you to look at this chart of our fees and the possible one for 2011:

Here is what is significant in the chart. In 1981-1982 there was a severe recession in this country, with extreme unemployment exceeding 10%. Unemployment began rising in 1980 and did not fall below 7% and stay there, until November of 1986.  Another recession resulted in high unemployment from 1991 through 1993. These periods were similar to today's high unemployment due to the recent recession.

In the chart above, you will see the response of the boards at BLMH under the stress and pressure of owners, during those economic times. They lowered fee increases, but when there was insufficient cash to pay the bills, voted in large increases. Then they reverted to the popular low (3%) or 0% fee increase, again fell behind and ultimately spent every dollar collected, with little saving for replacement of roofs, etc. in the "far distant future" of 2005.

Those earlier boards, particularly from 1982 to 1998, continued on their merry way with generally popular decisions and average annual fee increases below 2.59%!

By the year 1999 our boards, based on the published numbers, found they had almost no reserves, because of the earlier decisions to keep fee increases low. Boards thereafter had no choice but to raise fees sufficiently to make up for the fees not collected or saved. Owners didn't like the change from less than 2.6% average increases to about 6% annual increases. There was talk of "repressive measures," and that board was replaced, ultimately resulting in the current board.

The board in 1999 with the advice of new management, made the difficult but unpopular decision to raise fees. They didn't do it because they wanted to. They did it because they had to. To be honest, we were on a path to very large special assessments. Until that time, most owners were satisfied with the fees at BLMH, I am told! In 2000 fees jumped and when I purchased here in 2001/2002, I was told by several owners that they were very unhappy with the "high fees." Sounds familiar, doesn't it.

Today each owner at BLMH is paying a much higher monthly fee because those boards made popular decisions and kept fees unhealthily low. Here are the average fees for several periods. They demonstrate what I am saying:

• From 1982 through 1998 average = 2.59% annual fee increase.
• From 1999 to 2010 average = 6.61% annual fee increase (includes 0% in 2010).
• From 1982 to 2011 = 4.30% annual fee increase (includes proposed 7% in 2011).

There are consequences for the financial decisions of our boards. The history of the association shows that our boards have never been able to raise rates sufficient to make up for the fees that were never collected, when they were lower than the average 4.30%. It's because most boards find it difficult to collect money. The difference is staggering. If our boards had maintained a 4.30% fee increase each year, 1982 to 2011, we would now have a monthly assessment that is about $100 LESS than what it currently is.

However, our fees are where they are because we have been attempting to collect and save enough money in about 6-8 years to do our roofs, and other improvements. We should have been saving for 15 years.

Coincidentally, last year, the board, in similar economic times and under similar pressure from owners, made the decision of a 0% fee increase. That was the popular thing to do. The treasurer objected. I suspect that if this thinking continues, we'll simply stop funding roofs when we finish this project, to "keep fees low" and pass that financial problem and pain on to future unit owners.

So, what decision should I make? Why did the board decide on a 7% proposed increase? It's because, to their dismay, some costs such as energy and water, did increase last year. It's because they deferred paying for some of the landscaping completed in 2010 to 2011. It's because the reserve study, which they apparently expected would show we were excessively funded, did not show that. It's because of the failure of the water main on Gloucester; at the time of the workshops we did not know the full cost, but we did have rough budget numbers from past failures and the price of a driveway. It's because of the age of our roofs and driveways.  It's also because of the 0% fee increase last year.

My considerations now include this. I want to avoid making a bad decision and a mistake. Will the economy continue to sputter along? That seems to be the consensus of the "experts," with slow growth and high unemployment. Will inflation come back? Probably not yet, but as we have seen in 2010, there can be price spikes or other unforeseen events that will financially impact this association. Will ComEd get that proposed transmission fee increase? Will the price of roofs and driveways increase in 2011? Will any of our contracts go up or down in price in 2011? Can we reduce expenditures, or will irate owners attend meetings and complain about a lack of services "what do we get for all this money we pay," etc. and finally, will the board cave in to these owners. So as to be "popular?"

My primary concerns are:

1. How to avoid a special assessment or assessments, which will put owners under far more financial stress than they are at present?

2. Can we achieve a fee that will allow the association to meet it's current financial commitments? In doing so, we can then maintain the property for the owners, and promote both current living and possible sales.

3. Can we get sufficient time to complete the planning process of the reserve study? We will need a lot of time in 2011 to do that. Then we will have further information and can make a reasonable budget decision for 2012.

4. At the rate of funding proposed in the budget, most owners will have roofs that are an average of 17 years old when they are finally replaced. Can we hang on that long? According to a 2006 letter by management, our roofs can be expected to last 12 years. With the increased funding of the roofing reserves, at the fastest pace planned in making the proposed 2011 budget, and replacing the oldest roofs first, this will be the age of the remaining roofs as they are replaced at BLMH:

• 2 roofs 16 years old
• 14 roofs 17 years old
• 17 roofs 18 years old
• 4 roofs 19 years old
• 1 roof 20 years old

5. If anything goes wrong, how will we deal with it?  

Conclusion
If you, the reader, have any ideas, let me know. I suggest that we get someone on the board, if the opportunity presents itself, with some real financial acumen. A CPA would be ideal. I have spent about 60 hours doing the "number crunching" and that doesn't include the data from management and the time they spent in preparing it. There is a lot more to do in 2011.

However, before we again go down that path and plan on firing our maintenance company, I want you to consider that such a move will not solve the problem in 2011. I will be looking at various expenses here at BLMH in 2011 and thereafter. However, for the moment, I need to work with the hand I have been dealt. That means, improved planning and preparation on the part of the board. However, I am but one board member of seven. If we can't even manage the rules, then how are we to deal with real problems and a crisis, which I do consider this financial situation to be? Your board needs your support. This is your property we are attempting to maintain. These are your property values we are attempting to keep. We are required by statute, the Illinois Condominium Act, to do so.

Comments, Corrections, Omissions, References
Note 1. On that roofing letter in 2006. The letter was requested of management by our former Architectural Director. He was replaced when some current board members refused to support or endorse him. I got a copy of the letter after asking management and former board members for information on the age of our roofs. I asked that because I was very concerned by our budget, the roofing schedule, and the condition of our roofs. I am sure our other board members also had access to that information. 


Note 2. As I stated in the title, I want to avoid being wrong. However, if I make a mistake, I'll admit it. At present, if I vote for a fee increase that is too high, I'll possibly stress some owners. If I vote for a fee increase that is too low, I'll lead to future financial problems. With spending for capital improvements at the projected levels and the age of our infrastructure, any mistake now will have serious consequences. Consider that last year was, perhaps a minor one. But we don't have the luxury of time to allow us to increase fees 1% per year. If we had 5 or 10 years, we could "ease in" fee increases. However, I have no confidence in the vocal minority of this association to allow that, either. The history of this association has shown that sufficient number of owners are far too willing to attempt to avoid financial responsibility and push the pain on to other, future owners. We've done it before and we'll do it again. 


Note 3. We'll see how the association meeting goes. I suggest that owners attend and be constructive to this process. Telling the board to cut expenses will not work this week. However, i am in favor of eliminating some contract work in 2011 as contracts come up, even should that mean passing the work on to owners. 


References:
Here are some earlier posts on finances and reserves for this association:


Association Finances and Reserves

My personal response to 0% fee increase