Updated Surplus Numbers

Updated Surplus Numbers
Updated Surplus Numbers: Actual surplus 2018 per audit was $85,163.
Boards 2011-2018 implemented policies and procedures with specific goals:
stabilize owner fees, achieve maintenance objectives and achieve annual budget surpluses.
Any surplus was retained by the association.
The board elected in fall 2018 decided to increase owner fees, even in view of a large potential surplus

Average fees prior to 2019

Average fees prior to 2019
Average fees per owner prior to 2019:
RED indicates the consequences had boards continued the fee policies prior to 2010,
BLUE indicates actual fees. These moderated when better policies and financial controls were put in place by boards

Better budgeting could have resulted in lower fees

Better budgeting could have resulted in lower fees
Better budgeting could have resulted in lower fees:
RED line = actual fees enacted by boards,
BLUE line = alternate, fees, ultimately lower with same association income lower had
boards used better financial controls and focused on long term fee stability

Wednesday, April 27, 2011

Economic Update March 31, 2011

This is excerpted from an email dated April 2 that I sent to our board. I provided this as a service to our association, and to our board. I thought it might be useful to others. This is the type of background information I use when making decisions.

As I stated in the email:

"I prepare a quarterly economic update and forecast for my business, and specific clients. It’s unclear to me what information is available or used by this board. I separate the term “information” from most of the “noise” that we get on the evening news, which is what many use as their primary source.

I have decided to provide this summary, based on the information I use. This includes some trending based on current facts and known information. This information is based on BLS, Census Bureau, Federal Reserve, Wharton Business School at U of Penn., and other reputable and generally impeccable sources. The information is current and relevant. Note that this is information that I routinely use for planning in my business and personal life, and now as a member of the board. This is not to be copied and circulated, although you may quote it; it takes me time and money to prepare this.

From the information available, some tentative conclusions are possible. “The future” is unknown. But it would be foolish not to plan and prepare for likely outcomes. As an example, using my approach, I detected early signs of the recession in 2006, and made adjustments that allowed me to avoid serious financial or related pain. I say that so that you understand that I do use what I am providing, and it has been of significant value to me over the past 30 years.

March 31, 2011.

The U.S. economy is improving, but with fits and starts.

Inflation is increasing, and may now reach 3.0% by year end. The consumer price index has been increasing at a 3.9% annual rate over the past 6 months (this is a very high rate, and has reached 5%!). Inflation will increase the cost of many goods and services used by our association, and by owners. The price of petroleum based fuel and food have increased substantially in the first quarter of the year. Natural Gas prices are stable. Is inflation in food and fuel important? It accounts for about 23% of the average person’s spending.

Indicators are that this inflationary trend will continue. The Producer Price Index, which track the cost of materials to producers and which are eventually translated as consumer prices, show an increase of 35 to 40% over the past 6 months.

Unemployment has fallen from about 9.7% in November to a current 8.8%. The real numbers aren’t quite so good. If we take into account those who lost their jobs over the past two years, and compare number of employed then to now, the real unemployment rate is still above 10%. Note that unemployment percentages are unreliable indicators; as displaced workers decide that jobs are again available, some of the “discouraged unemployed” will again re-enter the market and seek a job. They will then be added to the rolls of the unemployed. In such a situation, the reported percent unemployed will increase. It’s important when tracking unemployment numbers to view the changes in quantity, not simply the percentages. According to the U.S. government, if you have not looked for a job in the last four weeks you are not considered unemployed. That’s called the civilian “participation rate” or CIVPART. Civilian employment at BLS is CE160V. (Note that the U.S. economy must create at least 125,000 jobs per month to keep up with population growth. Don’t forget to add immigration, too!)

The unemployment drop reported by the government is sudden, and may put pressure on wages. Real wages are flat or negative for the last 5 months, based on census bureau data which indicates that median household wage has not increased. In five of the past six months real wages have not kept pace with inflation. Wage earner annual spending increases are now increasing at a rate about 2.3% more than their earnings, as a consequence.

(Actually, according to the U.S. census bureau, real median wages in the U.S. have been flat for over a decade; that’s one of the reasons credit card debt also steadily increased in the past decade. Many people were maintaining their life style by borrowing; we’re all familiar with the concept of using the equity in one’s dwelling as an ATM machine. This practice was common until 2008.)

Businesses are hiring, but slowly and cautiously. Real output in the U.S. is up about 6.8% even with the current high unemployment; this means that businesses are able to produce more goods or services with fewer workers. Many businesses feel no pressure to hire. Hiring of temporary workers has increased. This translates into corporate profit margins above 12%. The National Federation of Independent Business which provides small business statistics, indicates that small business have once again begun to hire. Unemployment or underemployment (those working fewer hours than they would like) remains unusually high.

Real estate in the Wheaton area is now at 2002/3 prices. This is not consistent (all real estate is local) and is being affected by foreclosures. The real estate market remains stagnant as many banks are sitting on foreclosed properties. There is a serious backlog in the courts and foreclosures are reportedly now taking 6 months to a year longer than usual. Buyers are waiting on the sidelines and some are now attempting to “time the market,” and purchase at the “bottom,” according to some experts.

Interest rates remain low, but home mortgage rates are inching up. 30 year fixed rate mortgage is about 4.84%. One year CDs are at 1.06% and 5 year are at 2.29%. Money market accounts are generally below 0.75%, but there are non-commercial FDIC accounts available at greater than 1.0%. The government policy continues to punish savers, in an attempt to coerce them into placing their savings into riskier things.

Rents have been steady for the past 8 years. However, rents are now expected to begin increasing and some reliable sources report they may be up 15% nationally by year end. In the Wheaton area, there are about 600 rentals available, including apartments, condos, townhomes and houses.

Household debt is generally decreasing. This is due in part to foreclosures. According to the Federal Reserve, consumer credit increased at an annual rate of 2-1/2 percent in January 2011. Non-revolving credit increased at an annual rate of 7 percent, while revolving credit decreased at an annual rate of 6-1/2 percent.

Caution continues for about $400 billion in mortgages, which are scheduled for possible recast or reset between now and 2014. A significant or sudden inflationary spike could force this to occur. If inflation were to simultaneously erode the finances of the debtors involved, then many of these mortgages would fail.

The bottom line:

Optimists see problems continuing for the remainder of the decade. They are of the position that there will be no hyperinflation, debt will gradually unwind, the government will address unsustainable deficits and housing will be stabilized. This will all occur by 2020! It is not all good news. To address the high deficits, the government will reduce benefits (entitlements) and increase taxes. This means less disposable income for retirees and wage earners, alike. It also means there will be unpleasant surprises ahead for boomers and retirees, those being in the ages 55 and above.

Problems with states and municipalities are difficult to quantify. Some states such as ours (Illinois) have debt that is well known and publicized. For example, public employee pensions are underfunded about 60% (for every $100 promised to retirees, there is only $40 saved) and the state continues to spend more than it takes in. This adds additional pressure in the form of unknown tax increases for Illinois’ residents. Taxes will increase; what is not known is by how much.

The issues for the Association at this time and based on current information:

1. Continued deterioration in the financial health of some residents. This translates into reduced capacity to absorb any fee increases.

2. Continued lower sale prices for units, than owners expect.

3. Possibility that every unit mortgaged since 2004 is underwater. This is dependent upon the type of financing used. (Note 2).

4. Increased costs of basics including roofing materials, driveways, concrete, etc.

5. Modest local tax increases.

6. Inflation increases will provide an increase to interest paid on reserves. However, this may not be sufficient to offset material price increases.

7. Unknown future adjustments by government to entitlement programs makes predicting the financial health of retirees, or near retirees, difficult. It is probable that between means testing and tax increases, the consequences will be real reductions in retirement income for many. Those with ample savings or secondary sources of retirement income will be able to absorb these government adjustments. Experts anticipate some changes to occur in as little as three years. The 0% COLA increase for social security beneficiaries is one method the government has at it’s disposal to reduce entitlement spending, and it is using it.

One possible conclusion:

1. The current economy and outlook for the anticipated (near future - 3 years) economy, and probable entitlement program adjustments makes board decisions difficult. Postponing fee increases with the anticipation that the income of owners will increase in the near future is hazardous. There is no evidence that owners will be able to absorb any increases better “someday in the future” than they can, today. That approach was tried, either by accident or by intent, in the 1990s and based on current fees, it failed. So here we are.

Additional information, for your consideration:

Should the board put on the “rose tinted” glasses and assume that things will indeed, get better, much better? Here’s something to consider. Our economy is in a fragile condition, and it wouldn’t take all that much to put it back into recession, according to the experts. We’re dependent upon other countries, for oil to generally remain below $100 (it’s currently $108), the world economy, and the ability of our government to smoothly and quickly solve problems that have been accumulating for 30 years. Is it possible that no events will intervene in this economic recovery? Or is it equally possible that there may be serious bumps on the road ahead?

Last week “The Economist” contained an article that said, among other things, “This was supposed to be a stress-free year for the global economy…….The year without crisis is not to be." Analyst Morgan Housal commented “Has there ever been a year without crisis? Have we ever made it 365 days without something really awful happening? I don't think we have. Ever. In the history of human history. Something big, terrifying, and [stock]market-moving happens every year without fail.” He then provided this list as evidence; it’s not all-inclusive and you will note some ommissions, such as the Haiti earthquake (that easily forgotten blip “only” killed between 90,000 and 220,000 and left about 1.8 million homeless, according to conservative, which is to say, understated sources.) If we don’t know what some on the list are, that might be an indicator of our current financial or other awareness, I guess.

2011 (so far): Japan earthquake, Middle East uprising.

2010: European debt crisis; BP [gulf coast] oil spill; flash crash.

2009: Global economy nears collapse.

2008: Oil spikes; Wall Street bailouts; Madoff scandal.

2007: Iraq war surge; beginning of financial crisis.

2006: North Korea tests nuclear weapon; Mumbai train bombings; Israel-Lebanon conflict.

2005: Hurricane Katrina; London terrorist attacks.

2004: Tsunami hits South Asia; Madrid train bombings.

2003: Iraq war; SARS panic.

2002: Post 9/11 fear; recession; WorldCom bankrupt; Bali bombings.

2001: 9/11 terrorist attacks; Afghanistan war; Enron bankrupt; Anthrax attacks.

2000: Dot-com bubble pops; presidential election snafu; USS Cole bombed.

1999: Y2K panic; NATO bombing of Yugoslavia.

1998: Russia defaults on debt; LTCM hedge fund meltdown; Clinton impeachment; Iraq bombing.

1997: Asian financial crisis.

1996: U.S. government shuts down; Olympic park bombing.

1995: U.S. government shuts down; Oklahoma City bombing; Kobe earthquake; Barings Bank collapse.

1994: Rwandan genocide; Mexican peso crisis; Northridge quake strikes Los Angeles; Orange County defaults.

1993: World Trade Center bombing.

1992: Los Angeles riots; Hurricane Andrew.

1991: Real estate downturn; Soviet Union breaks up.

1990: Persian Gulf war; oil spike; recession."


Comments, Corrections, Omissions, References
Note 1.  "Morgan Housal" can be read at the Motley Fool website:
http://tinyurl.com/morgan-housal


Note 2.  April 28 update. According to CoreLogic as quoted in Morningstar "23.1% of all homes with mortgages are underwater"

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