Yet Another Annual Budget Q&A

 

Good O&M budgets, maintenance and controls can avoid deficits and may
create annual surpluses, even
when delinquencies (Note 4) and foreclosures were present.
I left the board prior to the creation of the 2019 budget.
That board was aware of a surplus in yellow, but the board made a fee increase. 
Note: to determine actual surpluses requires an audit.

Republished 10/12-15/2021 Added charts, added topics, fee table, additional facts.

It's that time for a new association budget.  I've posted many times here about budgets, the process to prepare them and a few issues that I faced on the board. My posts have included some things to be considered when constructing budgets.  

I talked until I was blue in the face to educate boards 2011-2018.  I created lots of spread sheets. A few of the earlier charts shared with owners and boards are included here.

I post this as an aid to avoid the mistakes of the past. (Note 8, 9).

What is the Budget Meeting?

The budget meeting is an annual event, usually held in October. During the meeting the entire board determines the budget for the following year. The board sets the fees required to achieve that budget. The fees may increase, decrease or remain the same. 

The meeting is of only about 2 or 3 hours duration. It is open to owner observation. It is the culmination of work by management and other board members. 

In fact, I spent hundreds of hours each year on budgeting and related tasks. Those tasks included the hours required in preparing and reviewing reserve studies, supplemental spread sheets and reports.  

The actual budget meeting was a formal meeting was a review of the budget requirements and a discussion of how to deal with the costs anticipated to occur in the following year. It was a business meeting and should be conducted as one.  

Personal agendas and emotions including fear should be checked at the door by board members. It should be replaced by their fiduciary responsibilities and simple business sense. For some on the board constructing budgets is like an  Olympics for which they are ill-prepared. God help the owners who elect boards based upon the pap in the Candidates Form.  But then, owners do get the board that they elected. And they get the results, the maintenance (or lack thereof) and the fees. 

How to avoid emotions? Run the numbers and prepare the spreadsheets. However,  not all board members are swayed by facts. 

About special assessments.  If special assessments were required, that determination would have been made prior to the budget meeting.  However, some board members would dangle that specter during the budget meetings. I concluded that was a manipulative ploy using fear to run an agenda and promote fee increases.  I prefer working with the numbers; that’s what fiduciaries should do. 

I've included a table of fees (Note 6 ). Earlier fees and some of the budget discussions failed to distinguish the requirements of the O&M budget and those of the Replacement Fund.  

Separating the Budgets

One of the things I did was to separate the amounts and percentages of fee changes into two categories: Replacement Fund and Operations & Maintenance Budgets.  I tracked the amounts and percentage of each of these categories independently. That is how I know the dollar amount and the percentage of the budget allocated to the Replacement Fund.  I may publish that here in a future post. Boards were provided with the amounts each year and decided what they were to be via the budgeting process. Each board member could have run their own numbers each and every year.  I did give my charts, etc. to the board  and while on the board I did discuss this thoroughly and completely with the entire board. 

On a positive note, a portion of higher O&M fees may have flowed into reserves if there was a surplus. How is that? Read on. I have an opinion that boards did flush owner fees by avoiding such things as stream maintenance, which resulted in larger water usage. Yes, that water did eventually find its way under buildings and to the water table.  I say it contributed to some expensive maintenance problems. It was addressed as the roofing project wound down.

Prior to October 2010 boards failed  to distinguish  between the requirements of the O&M budgets, and the Replacement Fund, and provide owners with that information as percentages of the budget.  Emphasis was on budget increase percentages to fees.  This is why, in 2006 owners began to clamor for more transparency. A previous lack of formal reserve studies blindsided a new board in 2009. 

I made it a point, commencing with a board position in September 2010 to provide transparency. 

Annual Fees Including Replacement Fund and O&M Budgets

Budgeting is a normal exercise in business. 

Good budgeting is not an easy task. By "good" I mean accurate budgets that avoid excessive surpluses and deficits. Constructing good budgets requires a lot of background work. It required many, many hours of my time each year.

It is true that boards will attempt to avoid deficits.  So shouldn't they also track surpluses? In fact, I've observed an emphasis about avoiding budget shortfalls. I think this emphasis can be traced to the problems of early budgets at BLMH. Fees gyrated wildly, and then the board began accumulating funds for large projects.  In fact, for a time reserves were underfunded. My accountant flagged that when I considered a purchase in 2001. 

The real purpose of budgeting

I say, Budgeting is based upon fact and is a means to manage the fees extracted from owners.  It is a creative exercise which has factual and philosophical underpinnings. It may be distorted by the emotions or positions of some board members. Those board members, if fearful of a special assessment, are easily manipulated by others.  Those board members, if disdainful of owners, may be inclined to favor higher fees than required by the facts.

"Do you want to avoid a special assessment? Then vote for my 5% increase. " 

Those in fear on the board are are so easily manipulated, and they have been. Owners deserve better but pretend they are living in a apartment, and expect others to protect their financial interests in the HOA, because those on the board are elected volunteers.

Some board members view it as an exercise of "Good versus bad" or "Right versus wrong" and some see it as a means solely to avoid special assessments.

In this post I'll merely summarize and provide a few notes, including a table of annual fee increases.  This post includes a review of methods, surpluses and what to do if there are deficits and O&M expenses exceed fees collected.

In fact, the budget process at BLMH has improved significantly since 2010.  So much so that in recent years even with modest fee increases annual surpluses were created. What happens to those surpluses? Read on.  

Why a Budget?

The Illinois Condominium Act requires that HOA boards prepare an annual budget, submit it to owners for comment, and in consideration of such comments the board votes to approve or alter the budget. 

The budget is essential to maintain the association and pay the day to day bills. It also includes a Replacement Fund for reserves to address longer term infrastructure repairs. 

The two aspects of the budget are the Operations and Maintenance (O&M), and the Replacement Fund.

In fact, the board has quite a lot of latitude, but for some it is ithe eqivelant of the Olymics when contructing a budget. An Olympics for which they are unprepared. 

Operating costs from previous years history are an aid for construction the O&M portion. There are those who resist this, and prefer to avoid the history of the association. Matching their years on the board to the budgets and the reserves accumulated may indicate why.

There are reasons and then there is "Why".

 Professionally prepared, independent Reserve Studies are essential to the Replacement Fund portion. However, these are only guides. The board makes all of the decisions, as fiduciaries and are to operate in the best interests of the owners.

Under all circumstances, boards must be mindful of the financial capacity of the owners. The Illinois Condominium Act (ILCA) stipulated that in the preparation of budgets the board must consider "the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves."  (Note 1). This was a serious budget consideration by the boards of 2010-2018.

I want to note that Reserves Studies may provide a a worst case scenario which are unrealistic. Some board member will use that to promote their personal agenda. Boards must set priorities and construct budgets in such as manner as to be in the best interests of the owners.  That was my guiding light. Boards 2010-2018 did strive to operate the association within the budgets.

A failure to do so will spend more money than necessary, requiring higher fees. This cycle will continue indefinitely unless checked by the board.  At BLMH committees and management have provided input to the advisors who prepared the reserve studies 2010-2015.  I was a member of these committees. The committee prepared and  submitted detailed reports to boards for the budgets prepared in 2010-2017.  Other committee members have included the treasurer and the maintenance director. (Note 2). 

I want to point out that while I was on the board some board members argued in favor of using "The  worst case scenario" when constructing budgets. I did not agree to that approach. It is the board's responsibility to avoid such a scenario and if such a situation does occur, deal with it in such a manner that does not penalize the owners. Each year I as a board member pointed to the ILCA statement above, and to  others, as guidance for the board.

One board member rebuffed me with this statement about owners: "We should not cater to the lowest common denominator."  I don't recall ever seeing that position on a Candidate's form leading up to any election.

In fact, boards should do their utmost to design a good budget.  However, I need to add "Good for whom?" because I served with board members who placed the owners at the lowest tier.

I was on the board from October 2010 to October 2018. I was involved in constructing 9 annual budgets.  The annual fees over that period increased $512 per owner (average annual), or about $51 per year. The Replacement Fund contribution during that period, excluding surpluses, was almost $4,000,000.   

There were heated debates and it was because of a group led one board member who continuously argue ford even larger fee increases.  I asked  "Why?" I led the group arguing for modest fee increases, using fact based analysis. Because of my position I and two other board members experienced personal attacks by one board member.  There were times it was facts, including numbers, documentation and historical data versus a belief system.   

It is important to realize there are actually two budgets which are ultimately combined

The annual budget includes money to pay for next year’s annual expenses, that's the Operations & Maintenance (O&M) budget.  There is also money for funding the Replacement Fund (Reserves).  These are separate and distinct.

These are to be discussed separately by the board when constructing the annual budget.  The annual needs are then combined into a single budget.

Surpluses may be generated when the actual O&M expenses in a year are less than the budgeted amount.  These surpluses should be recognized.  If large surpluses are generated and are ignored by a board when making future budgets, then those boards are, in fact, levying a stealth, higher fee to the owners. I became aware that some earlier boards didn't know such surpluses may exist. It was really about flying by the seat of one's pants.  

I can state categorically that BLMH has had board members who refuse to acknowledge the existence of surpluses when constructing the budget.  Their mantra is “There is never enough money”.  I have a different perspective. I say “Boards will spend every dollar levied on owners.”  In other words, owners should be mindful. and provide proper oversight the the board.  

For the 2019 budget the fees extracted from owners were increased by the board, even with the facts of a large surplus, noted in the beginning of this post. I objected formally via email. My spreadsheets and supporting documents were ignored and the entire board voted for a fee increase.  I must ask and I did, "What is the factual basis for a fee increase?" I did not receive a meaningful response. Most CYA responses by management are "I have forwarded this to the board". LOL. But I cannot fault management because it is the board that made the decision.  I can fault a board, which hides behind management.

All sources of Income need to be considered

The budget includes projected income. That income assumes that all owners will pay their fees and that all fees will be collected. In the short-term, the owners may be in arrears by $30,000, or more. That was included in the Newsletter to owners In December 2008. The new board, after my departure has not provided his information to owners, and when asked during the September 20121 board meeting they stammered and stonewalled. 

In fact, some fees owed the association may never be collected.  There is a contra account for that.  This is an amount subtracted from income to account for fees that may not be collected and will be “bad debt” which is uncollectible debt for the association.

Other sources of revenue include legal fees collected and fines.  Of course, an association should not levy fines as a means to generate revenue. Fines are a means to obtain rules compliance from owners. I've listened to one board member during a budget meeting who bragged about the amount of fines collected, as if it were a wonderful accomplishment.

The contra account is useful when determining if surpluses or shortfalls occur in a yearly budget.

Budgeting is an educated guessing game, with really serious consequences for owners

One thing to understand is that budgets are based upon projections. One part, the Operations & Maintenance budget, has short term implications. Problems that occur in one year can be corrected, improvements made and addressed in the next year. However, costs are always changing. There may be utility price increases and so on.

Budgeting, therefor is also a learning experience. Boards should approach this rationally and keep their emotions in check. In depth, annual financial analysis beyond the framework of a budget is very helpful.  The charts in my blog, and this post, were part of hundreds of spreadsheets I created and provided to the owners and the board to provide better insights, better forecasts and most importantly, better budgets. 

Were the O&M budgets while I was on the board, better budgets? Well, I was able to document consistent and sometimes large surpluses.  But to achieve this required a step change of improvements in maintenance. Better O&M controls contributed to better budgets and that was ultimately translated into lower fee increases for owners. 

The Replacement Fund portion of the budget, which funds reserves, is a much longer term exercise. The reserves studies I participated in were a 40 year projection into the future. Boards should be mindful that this year’s budget may have long term implications. On the other hand, because reserves are long term financial buckets, they can have less influence on overall annual budgets.  At BLMH when I tendered a bid to purchase my unit in 2001 the replacement funds were about 14.5% of the annual budget. From 2015-2017 during the period I was on the board the replacement funds peaked at nearly 36% of the budget.

Avoiding Smoke and Mirrors

As an example, I provide this. Once I achieved a seat on the board and began analyzing past budgets, interviewing contractors and management, etc. I discovered that one of the techniques used by boards prior to 2009 was to roll maintenance hours which exceeded the budgeted allotment into the next year.

That kicked the can down the road, and hamstrung any board that followed.  The budgets were apparently sometimes balanced this way.  It worked, I guess.  However, fees from 2001 to 2009 increased nevertheless by large annual amounts.  Postponed maintenance and deficient reserves can overwhelm any budget.

How much latitude does the board have in constructing the budget? (Note 9)

Management prepares a template of the O&M budget which includes the previous year's data, the current year's data as of September 30, and a projection to year end. As a board member I did a lot of supplemental research each year including determining Utility cost increases, reviewing contract dates and so on. This was appended to management's budget spreadsheet and became an important part of the board's budget decision making process.

I suggested adding a contra account item to recognize uncollectible fees.  Management can explain that to the board. The president at the time, a CPA, agreed and after board discussion it was added.  The boards of 2019-2020 zeroed the amount, even though the balance sheet indicated that contra amounts do exist.  Is this important?  It's only a few thousand dollars, but $4,000 is about $12 per owner.  

These small things add up.  

One of the things I began doing was tracking surpluses so they could become part of the annual budget discussions.  The chart above provides an indication of the magnitude of some of these.  

In constructing a budget it is essential to establish a baseline.  That is, determine as accurately as possible the expenditures for the coming year.  This included O&M  and adjustments to the replacement fund in recognition of current and identified circumstances.

Past reserve studies have included things that did not occur and were averted by boards that chose a different approach. In doing so, special assessments, fees increase of 10% and so on were averted. 

Does the budget include estimates?

Yes it does. For example, the water used by the association is a variable. Each utility closet for 4-units includes 5 water meters. One of these is for the association use, including outside spigots. The water will be used to replenish streams and for watering replacement grass, sod, shrubs and trees. It is not possible to predict how much water will be used next year. Water rates need to be adjusted if the city anticipates an increase in the following year.

Electricity for outside lighting, the hallways and the garage interiors is based upon the previous year's billing and rates.  I investigated potential rate hikes each year.  The electricity consumption also was based upon a prohibition of using common area outlets (garages) for electric cars and other unusual usage.

Snow removal is via contract.  However that contract anticipates a certain amount of snow and ice. If there is unusual snowfall in the next year, the costs will increase. Ice requires additional work on streets, driveways and building entries. Walks are not maintained or cleaned in the winter months, which is why I added large caution notices to the newsletters. A board could choose to clean those walks at significant annual expense and in so doing the association would take on additional liability for falls and injury.

Boards consider these and other estimates to construct the budget.

Annual Replacement Fund Adjustments

Contributions to the Replacement Fund may be adjusted in recognition of unusual circumstances not anticipated in the Reserve Study.  For example, the condition of trees has resulted in an additional amount each year to address this.  There is no special category in the Landscaping to address the redoing of the property entrances, or the area along the frontage at 1825-1827 Lakecliffe.  The existing category amounts may be adequate for replacement of dying shrubbery throughout the property, maintenance of shoreline, etc.

The information in the reserve studies should be a component in the board annual review of the contributions to the Replacement Fund.  However, the board has great latitude in this, as previously mentioned here.  Some boards do not conduct such reviews.

A failure to turn over the water mains to the city may require future boards to increase fees to accommodate the costs of total replacement. The current board includes several members who were briefed thoroughly by me about this when I was on the board. 

Does the budget include a surplus?

Yes, some do.  For the O&M budget 2011-2018 I advocated using the baseline, and then adding amounts to specific categories to deal with unknowns. I would prepare a modified version of Management's spreadsheet with notes and suggestions for adjustments, Some categories were increased by the board and others decreased. Note that I was never the treasurer.  I was willing to do this, I took the time and I was sufficiently capable. 

The board discussed each item and category, line by line.  Further adjustments were then made. 

At the end of the year management provided the board with the outcome.  Yes, we did accomplish surpluses in the O&M budget. Earlier boards ignored such surpluses, as did the board of 2019-2010 . Why? One should ask "What was their agenda?"  Such a position has supported higher fee increases. 

Boards do have the ability to make a one time, annual adjustment to Replacement fund contributions to deal with an O&M budget issue. Boards should work to stabilize fees and avoid wild gyrations.  In the period 

However, it would be cynical of a board to increase O&M contributions rather than properly fund the  Replacement Fund contributions for the purpose of generating an apparent surplus in any year.  Politicians are adroit at such machinations, and I have wondered about some board members: "How low can they go?" Of course, there should never be politics among board members in a HOA, but when there are elections at stake politics may triumph; getting a seat on the board shouldn't be about an ego.

Why design a budget with a surplus?

The answer lies in answering the question: "What happens if there is a surplus?", and the related question "What happens if the O&M budget falls short and actual costs exceed the budget amounts?".  

In fact, it is impossible to design a perfect budget. Any board that claims to have done so has either been incredibly lucky or manipulated facts,  

Generating a surplus is very desirable and beneficial to owners. However, a surplus should never be created artificially via higher than necessary fees. Some boards may be inclined to increase fees rather than create controls. Boards may then brag that "We balanced the budget!"  But did they do their fiduciary duty?

What if there is a budget shortfall?

If the total amount of the O&M expenditures exceed the budget, then what happens is this: money is borrowed from the Replacement Fund to make up that shortfall. If this occurs, management can determine the circumstance, but the actual amount is revealed by audit. 

This is not desirable, but does not constitute a crisis.  Some boards feel that this could necessitate a special assessment.  Not true. Nor is it a terrible event. It is undesirable and must be avoided, period.  But again, by using controls, not artificially high budgets. 

If O&M  expense exceeds the budget, or owner delinquencies impact the budget, an automatic borrowing from reserves will occur. This is automatic because bills get paid and the funds are not segregated, but via accounting means. Management information may indicate how a shortfall occurred, but the precise amount of any borrowing will be only revealed during the audit and reconciliation. It will be addressed as part of the audit.

However, these things must be monitored and controlled within the ability of the board and in consideration of the ILCA.  

At BLMH possible annual deficits may be created by the amount of fee delinquencies in any year, which is why there is a contra account in the budget. A deficit may also be created by unusual circumstance.  It is important to monitor actual costs and trends. 

If there is a budget shortfall, the audit will show the amount and determine repayment.  Of course, if a board refuses to acknowledge the contra account category by funding it, they are pretending that all fees will be collected.  This is more smoke and mirrors.

A budget surplus may create the funds to repay such borrowing with no detrimental impact to owners; i.e, no fee increases for that purpose and no long term impact on the value of reserves.

What happens if there is a surplus?

In fact, from 2011-2018 an extraordinary amount of work was put into constructing budgets that would generate an annual surplus without requiring fee increases and might create such a surplus.  Improved maintenance contributed. That was a part of the improved controls. (Note 3).

In fact, information provided by management indicated that significant surpluses were generated. However, the actual amount of the surplus may not be determined until the financial audit. A table is included at the beginning of this post.

When an O&M budget surplus occurs, there are two possibilities:

1. The surplus may be added to the Replacement Fund, increasing the value of the reserves.
2. The amount may be returned to owners, if allowed by the Bylaws, etc. 

In fact, to my knowledge at BLMH all surpluses have been put into the Replacement Fund and none explicitly returned to owners.

Some numbers in support of good budgets and good process:

1. Let's begin with older budgets, using the automatic fee increases:   Annual fees from 2001 to 2008, an 8-year period, increased about $1,155 per owner per year.  About $1,518,000 was collected for the Replacement Fund  (Note 4, 5). The position for increases as discussed during that period before the owners was presented this way: That smaller fee increases of 3 to 5% were better than special assessments.

Actual increases were about 7.5% each year.  So boards argued that smaller increases were better, but in fact, the boards levied larger increases than what was presented to owners as the basis of the board's position. In other words, the board promoted 3% annual fee increases but actually extracted 7.5% annual fees increases from the owners. I say, read those annual candidate's forms and be skeptical.

During that period the annual budgets were in the range $787,000 to $1,131,000, an increase of almost 44% over that period.

2. Using improved budget process methods.  The results were achieved using annual surveys of critical and expensive infrastructure, improved cost controls, improved budget models, reserve studies, improved maintenance and establishment of priorities.  All reviewed annually. 

Annual fees from 2009 to 2018, a 10-year period, with new boards,  increased about $511 per owner. About $4,007,000 was collected for the Replacement Fund (Note 5). Annual budgets were in the range $1,181,000 to $1,352,000, an increase of more than 14% over that period.

3. Looking at the a 5 year period with much improved budget processes. This was after adaption of several reserve study updates, further improved cost controls and infrastructure improvements to reduce O&M costs:

Annual fees from 2013 to 2018 collected nearly $2,055,000 for the Replacement Fund. (Note 5). Owner fees during that period increased by $92 per owner. Annual budgets were in the range $1,313,000 to $1,352,000. An increase of less than 3% over that period.

4. Detailed review of 2019-2021 is not possible because I lack sufficient data to do so.  Here are a few earlier charts. At least three of the current board members were present during these presentation.

The chart for fees indicates that fees plateaued under new boards 2008-2018

Annual Fees Including Replacement Fund and O&M Budgets

Annual Reserve Contributions - Recent Years
This does not include O&M surpluses which were also Reserve Contributions.
In other words, actual Reserve Contributions 2011-2018
were greater than depicted here.
In one 5-year period, 2014-2018 surpluses may have been as great as $439,000.
(c) N. Retzke 2016-2021

Fees have a bearing on unit prices.
Affordability is determined by Monthly Payments: Mortgage, Real Estate Taxes and HOA Fees.
In fact, from 2019-2021 unit prices increased an additional 30%.

Delinquencies stabilized (c) N. Retzke 2021

Real and Projected Fee Increases (c) N. Retzke 2021

How fees escalated at BLMH from 1978 to 2014
Had the boards used better budgeting controls, the fees in 2014 would have 
been lower, and yet the association would have collected the
 same money from the unit owners throughout that 36 year period.  

Possible fees into the future, beginning in September 2016
I provided this to the board, and to all of the owners during the 
September 2016 annual meeting.
The point of the graph was to emphasize the long term consequences
 of various annual fee increases.
In fact, the actual fee increases by the boards in the period 1999-2010 were
much larger than those in this chart.

Notes:

1. The Illinois Condominium Act includes this as part of the statute:

(765 ILCS 605/9) (from Ch. 30, par. 309)

 (c) Budget and reserves.

(2) All budgets adopted by a board of managers on or

after July 1, 1990 shall provide for reasonable reserves for capital expenditures and deferred maintenance for repair or replacement of the common elements. To determine the amount of reserves appropriate for an association, the board of managers shall take into consideration the following: (i) the repair and replacement cost, and the estimated useful life, of the property which the association is obligated to maintain, including but not limited to structural and mechanical components, surfaces of the buildings and common elements, and energy systems and equipment; (ii) the current and anticipated return on investment of association funds; (iii) any independent professional reserve study which the association may obtain; (iv) the financial impact on unit owners, and the market value of the condominium units, of any assessment increase needed to fund reserves; and (v) the ability of the association to obtain financing or refinancing.

2. A number of boards including 2010 and 2014-2018 did an extraordinary amount of work on Reserve Studies. In fact, 2010 was the first year such a study was prepared by an outside firm.  An extraordinary amount of work was undertaken by a board committee in the period leading up to 2017.  That committee was comprised of the president, treasurer and maintenance director. It was intended to prepare information for board discussion for the advisors, so that an update could be prepared in 2017-2018.  However, disruption of the budget meeting in fall of 2016 by a board member prevented discussion during that meeting and information was tabled until 2017.  

3. The association uses an extraordinary amount of water for the streams and for the grounds including trees, grass and other landscaping.  A lot of water was being lost in the streams, which  were in serious disrepair. One was nothing more than a muddy gulch and others had numerous large cracks. Wooden bridge and deck supports ran through the concrete and were underwater, contributing to additional water loses and maintenance. A large quantity of water was being lost. This damaged some garages and created other issues.  Stream repairs included concrete deck supports which reduced water loss. Stream and pond repairs closed most of the cracks which lost water. Replacement of a pump discharge line further reduced water loss and reduced the mud.  These things combined should decrease water consumption and that means lower utility bills. Replacing wooden supports means those unit decks will no longer fall into the streams, etc. Maintenance hours and costs should be reduced for this. 

4.  Budgetary numbers are from spreadsheets I constructed from information provided by management. Delinquencies were per financials and until 2019 the treasurer would discuss the amounts during the open session of the monthly meetings. Prior to 2019 the dollar amounts were occasionally published in the official newsletters.  All owners are given a budget sheet each year.  In the past, management also provided owners with balance sheets and the Treasurer would provide summary data during meetings and in the newsletters.  This practice was suspended by the board of 2019.  As a board member I was given monthly financial data by management, as were all board members. This included a balance sheet as well as income and expense information.  Audits are completed by an accountant, but audited information requires time to prepare and is delayed by a year or so. Getting any financial information beyond the budget which is published is very difficult.  For example, during the September annual meeting an owner asked about delinquencies and bank balances. The board could not answer the question. That is why financial information for 2019-2021 is not included here.

5.  Fee numbers per owner are simplified as the fees divided by the number of units. If fact, the fees per unit are determined by percentage ownership and not all units have the same number. That percentage was determined by the builder and is a part of the Bylaws and Declarations of the HOA.  If all ownership was uniform, each owner's fees would be 1/336 or 0.2976190476190476% of the total of fees levied each year.

6.  A table of fee increases, by year. Note that budgets and fees are determined by the board during a budget meeting held normally in October. In other words, the budget for 2019 was determine by the board elected in September 2018. I included some notes. For example, a reserve study in 2010 impacted the budget and fees of 2011. I departed the board as of September 28, 2018. Owners are allowed to comment on budgets prior to formal vote and passage by the board: 

Year  and Percent Fee Change 

1978 +35.0
1979 +22.0
1980 +26.0
1981 +25.0
1982 -12.0
1983 0.0
1984 +10.0
1985 0.0
1986 0.0
1987 +5.0
1988 0.0
1989 +12.0
1990 +5.0
1991   0.0
1992   0.0
1993 +6.0
1994 +3.0
1995 +4.0
1996 +5.0
1997 +3.0
1998 +3.0
1999 +11.0
2000 +11.0
2001 +9.0
2002 +6.0
2003 +7.9
2004 +6.5
2005 +5.8
2006 +5.4
2007 +6.0
2008 +5.5
2009 +5.1 (New board September, new 2010 budget)
2010   0.0  (I joined the board September 2010, after completion of reserve study)
2011 +7.0 (First reserve study used to determine; study flawed)
2012 +3.0 (Subsequent reserve study used)
2013 +2.0
2014 +1.0
2015 -2.0 (Updated reserve study)
2016 +1.5
2017 +1.5
2018  0.0 (my last year on the board)

7. Here is a link to more than 40 earlier posts.  

Click for link to: Budgeting Posts

8, This process would be so much easier if board members checked their personal agendas and baggage at the door. To take their personal agenda further, at least one board member has threatened management with dismissal if they didn't comply.  How do I know that?  Because that board member bragged to me about their power to do so. 

I have not posted most of the melodrama or animosity I had to endure while preparing budgets and on the board. I am not a therapist nor am I a financial counselor. As a board member I was not required to assess the source of the fear of board members when they were confronted with the discussion or possibility of  special assessments. At times some board members stated that if a specific fee increase did not occur, then special assessments would occur. In fact, I say the best way to avoid special assessments is proper, but not excessive, maintenance and proper budgets which include adequate reserves.  To do this means good reserve studies properly updated.  Yet, the first formal study completed by an outside firm did not occur until 2010. Some boards made this process far more difficult than it should have been. 

9. According to the Bylaws, the board can enact fee increases up to 15% with no need to listen to or accept any owner input or comment. The bylaws state "If an adopted budget requires assessment against the Unit Owners in any fiscal or calendar year exceeding one hundred fifteen percent (115%) of the assessments for the preceding year the Board of Managers, upon written petition of Unit Owners with twenty percent (20%) of the votes of the Association filed within fourteen (14) days of the Board action, shall call a meeting of the Unit Owners within thirty (30) days of the date of filing of the petition to consider the budget. 

10. The over zealous scheduler published an incomplete version.  This was updated and re-published at 3:00am 10/12/2021

(c) N. Retzke 2021

Budget Meeting 2015 - Part II

"The fees collected for reserves at BLMH have increased by nearly 8.75% each and every year for the period 2001-2015.   The O&M expenses actually increased by less than 1.5% each year." 

The above statement is the result of my ongoing cost/fee analysis at my HOA. This is precisely why I have put so much effort into scrutinizing the reserves here at BLMH. Because reserves are nearly one-third of our owners fees, any moderation in reserve requirements will have a very large, and disproportionate effect on annual budget requirements and on our owners fees. Conversely, if reserve requirements go upwards, that too will have a very large effect on fees, and it has, for 15 years.

Not everyone understands this. Boards at BLMH have historically focused on the O&M expenses. In doing so they miss the elephant in the room. This is not news. It began decades ago when boards focused on meeting annual expenses and darn near ignored capital expenses and replacement costs. Some boards operated on automatic which is why there is resistance to fees determined by actual budgetary requirements. It is easier to do an O&M budget and then increase fees by 2 or 3 percent. Any income excess can be allocated to reserves, ignoring actual requirements.

It could be worse. In some HOAs the boards simply go with low annual fee increases, or none, and then pass special assessments to deal with budget issues. But in recent years our HOA has declared that we want a steady approach. I agree because I think that is best for our owner/shareholders. That sounds simple. Getting there is not and doing the work falls on a few of the board.  In other words, making these grand statements is easy. Doing the work to make it happen is not. Which is why I put in 450 to 700 hours each year as a "volunteer" on a HOA board. What a bad deal!

Last year this HOA had a 0% fee increase. For some board members, you would have thought that was sacrilege. However, if one realizes that reserve contributions have increased nearly six times faster for 15 years than have O&M costs, then this is not really so difficult to comprehend.

I'll say it again. Reserve contributions have increased six times faster than O&M contributions for 15 years. So where would you put your talent if you want to deal with HOA budgets? I decided some years ago that the reserves were the Achilles heel of BLMH. Therefore they must be monitored more closely and scrutinized.

How do you think we did water main replacements and street replacements decades ahead of what was planned? It wasn't fun, and there have been consequences. For example, all of the drainage improvements would be done today if our streets hadn't failed. That is a fact. But that is another issue. For budgets, long term situations can have serious consequences.

Budgeting Overview
A short time ago I posted about the annual budget meeting, which is the first task a new board is faced with. At BLMH this occurs immediately after the election and assignment of officers.

As I am fond of saying "We need to hit the ground running." Not that I think that's the way it should be, but that is the way it is, each and every year. Is it any wonder a new board might struggle?

Budgeting should be straightforward. In a HOA it might not be. This and subsequent posts will provide some insights into the budgeting process and why it may be difficult. It also provides some history and emphasizes why it really is so important to get the budgets right. However, this is 2015, not 2000. A lot has changed since then. Some of our owners can't comprehend this.

In my blogs, it is important to understand that board members are also owners. So I may use the terms interchangeable. A "board member" is also an owner. When I describe owners, it is to be realized that what I am saying also applies to board members because they too are owners.

We are each either a part of the solution, or part of the problem
Budgets are a necessary part of any business. But many HOA owners don't run their personal lives like a business, and so a few don't expect their HOA to be run as a business, either. Some of these owners become board members. Owners bring their practical experience with them. Also their personal judgements, opinions and beliefs.

Nevertheless, the annual budgets are serious business, with long term consequences. Nothing more and nothing less.

The October 9 post delved into the some of the discussion items for the budgeting process. I have a link at the end of this post. That meeting was long because the budgeting is not a simple task and boards sometimes make it more difficult than necessary. We also have other things to do during the meeting. This is a full meeting and there are the usual agenda items, including the Homeowner's forum.

We're taking a closer look at some of the underlying assumptions and so the budget remains unresolved.  One of the problems to be solved is determining the projections for the Operations & Maintenance portion of the budget. We have information about how the money was spent for the first 9 months of the year, but our budget ends on December 31. Management prepares a "projection" for the remaining three months and that provides the board with the anticipated expenditures as of December 31.  There is obviously some guesswork involved.

It is done this way because "This is the way it has always been done." I suggested an alternative approach a couple of years ago with a long time board member and they were inflexible. As I pointed out at the time, this puts any new board member at a serious disadvantage and can create pitfalls for boards, both old and new.

So we continue to do our budgets with a certain amount of guesswork. The sole reason is so owner fees can be adjusted on January 1 of the year. I am of the opinion that is an artificial date imposed by boards and have stated so.

Budget Issues
I have not been completely satisfied with the budgets amd the methods used to arrive at budget projections. For example, are they straight line approximations? Should they be otherwise? I am of the opinion that the budgeting could be improved, and should be. In recent years it has been, but this is a slow process and it occurs incrementally. Change can be difficult. In my experience there may be resistance. Remember the expression "The best defense is a good offense?" Call into question how people do things and that's what one may get. It's called "push back."

I am of the opinion that with an entirely new board it could be easier; no methods or turfs to defend. On the other hand an entirely new board would have to get up to speed in less than 30 days. Won't happen and entrenched boards may have a lot of automaticity. As in, for example "We always did it that way."

Additional Scrutiny
This year, I've provided additional scrutiny to some aspects of the budget and I asked a few more questions. The purpose is to arrive at a better budget.

Each year boards literally agonize over some of the budget decisions. Boards need to meet O&M budget requirements plus reserves and then set fees. Sounds straightforward. However, if a board overspends the total O&M budget, then the HOA must make up those funds. If we use more maintenance hours than were allocated, then we may have to "borrow" hours from the next year. This of course, reduces the hours available in that following year. "Robbing Peter to pay Paul" is not a good method. It also places additional pressure on the new board. There is nothing worse than starting the year with a deficit. 

If the opposite occurs and if we are under budget, then we collected more via fees from our owners than was absolutely necessary to run the HOA for the year. If this is a moderate amount, it is acceptable. To be 1% under the O&M budget could spare owners from larger, future fee increases. If we are within 1% for O&M then we are actually within about 0.7% for the entire budget because O&M is about 70% of the annual budget.

Trying to hit that bulls eye is difficult. In a household budget of $50,000 that would mean we are within $350 of such a budget, or within $175 of a $25,000 budget. I would guess that most of us aren't able to manage our household annual budgets this well. Yet, owners demand and expect that boards get it right.

Boards simply do the best they can. I suppose if we worked on the budget for the entire year, we might do better. But the reality in any HOA is some board members come to the meeting and may not be fully prepared. We have been discussing reserves for several months. But not everyone participates in the details of the planning.

How Much is 1%?
When budgeting it is really important to separate O&M requirements from reserve requirements. Why?  For example, let's assume that our HOA is attempting to get our O&M budget to within 1% of the actual. That's an attempt  to get the O&M budget to within $2.32 per owner per month. I'm using the average owner. What the board is attempting to do is project the costs of the future utilities, snow removal, printing, postage, legal, tree repairs, grounds maintenance, miscellaneous repairs and all other unknowns of 2016. It cannot be done with absolute precision, or if it is, it is part luck and part planning. 

Owners expect and a few demand that boards walk these tight ropes and get it right. I understand the expectation and I think that's acceptable. However, for those who make demands of the board, I guess that's all a part of their desire for apartment living, where some one else is supposed to make things work.

A few years ago I brought a crystal ball to the annual meeting as a tongue in cheek symbol of the problems all boards face. If we get it right, our budgets balance. If we don't, then we either under collect the fees (overspend) or over collect fees (underspend). The only way I know to do this is to identify all known costs, and also identify the unknowns. Add them up and that's the budget.

I think everyone would agree that HOA boards should not collect money simply because they are concerned about the future possible shortfalls. Fear is not a good business plan. We need to do the numbers and then base our decisions upon them. Nor should HOA boards spend money simply because it is in the budget.

Avoiding Debt
HOAs have financial limitations and most don't want to go into debt. In a household, when people overspend and run out of cash, it may be handled by making purchases with a credit card, which can be paid off in a few months or years. HOAs don't have access to this type of quick credit, which is probably a good thing. It is my understanding that the average household owes $7,529 on their credit cards. If our HOA did this, we would have $2,529,744 in credit card debt.

With no credit card available, boards work hard to get this right, and they have been doing so for about 40 years at BLMH. If boards get it wrong, they either collect too much from owners or collect too little. It is a fact that it is impossible to get this absolutely right and have the budgets balance to within the penny.

It is obvious that a few of our owners have experienced this in their personal lives. That's why in HOAs there are delinquencies and foreclosures. 

Avoiding the Short-Cut

Because we know we won't get it absolutely right some boards may take a simplistic approach. Add up what we think we know about the future budget, increase by 2 or 3 percent and then collect the necessary fees to match. It is my understanding that this is to avoid larger fee increases in the future and avoid a budget shortfall while dealing with inflation. This may not work as planned because:

1. Budget surpluses don't remain in O&M accounts and so each year stands alone.
2. Historically, the largest budget shortfalls at BLMH came from capital projects and reserves.
3. Reserves can and do accumulate and that's essential to have the funds available for projects such as roofs and streets. But these funds can't be used for O&M.
4. Reserves can and should be determined by long term planning, but some boards have problems doing this. 

If boards do want to take the easy route, then I am of the opinion that two budgets must be closely scrutinized each year. These are the previous year and the coming year. For the previous year's budget, what we are interested is identifying:

1. How well the crystal ball worked. Did we make good decisions? If not, why not? 
2. To identify those areas that may have experienced significant budget changes.
3. To avoid runaway escalation of fees. 
4. To avoid nasty budget surprises. 
5. To learn from our mistakes.

As with all things budgeting, a board must be willing and able to do the necessary research and ask responsible questions. 

Annual 3% budget increases might not sound like a lot, but over time these small amounts add up. Fees will double every 25 years.  

Long Term Versus Short Term Trends

Now, over long term periods it is true that the cost of maintaining a HOA does increase. These costs may vary each year as water rates change, or we receive more or less snowfall, or roofs need repairs, or ice dams form, etc. 

That's one of the pitfalls of taking, for example, the budget for expenses in 2001 and comparing it to the budget for expenses in 2015. Of course, total expenses have increased since 2001. But those increases don't occur in smooth and steady increments each year. For example, in 2001 this HOA spent $19,000 in roof repairs. In 2015 it spent $0. If we simply added 2.5% to this number each year, it would be expected that this HOA would have budgeted and spent about $27,000 in 2015 on roof repairs, but we didn't.  Costs for utilities (electric and water) have increased since 2001 and by about 3% per year. However, overall the costs of O&M at BLMH have increased by less than 1.5% per year. But you wouldn't know that unless you 1) did the research and 2) separated reserves from the total amounts of fees.

But some boards do like to use generalities. It is my opinion that isn't good budgeting. Trends may be useful for identifying anomalies. This is useful for detecting changes or errors. 

The Elephant in the Room

Now, there are those at BLMH who might look at historical changes to fees for guidance. But to do this properly, one must separate reserve contributions from O&M contributions. The information on fee increases is contained in the HOA welcome packet, but the percentage of fees allocated each year to reserves was not tracked in that manner. For decades, boards were concerned about total budget and the O&M accounts, but overlooked the elephant in the room.  

In fact, the fees collected for reserves at BLMH have increased by nearly 8.75% each and every year for the period 2001-2015.  The O&M expenses actually increased by less than 1.5% each year. 

Here is the change in fees collected for reserves over the past 15 years:

2001 percent fees for reserves = 12.27%

2015 percent fees for reserves = 28.6%

2001 amount of monthly fees to reserves, average owner = $26.79

2015 amount of monthly fees to reserves, average owner = $93.27

Change in monthly amount of fees, average owner, since 2001 = $107.40

Boards are Comprised of Owners

Let's look at it this way. Boards are comprised of normal human beings. How many households in the US have viable 30 year financial plans? How many have a retirement financial plan? How many households live debt free? That's what a HOA board is expected to construct for the association. If this were so easy, most of our households would be debt free. But they aren't.

Yet, these owners as board members are the very people who create our long term budgets. I think it is fair to say that owners bring the burden of their personal finances with them when they become board members. They also bring their skills and knowledge. 

Why Are My Fees What They Are?

That's one of the labels for this post. I wish that owners became more engaged in the budgeting process. By that, I wish they would observe and listen. A few will do this. Others will come to a meeting and then will complain. Some show up thinking they will figure it all out in 20 minutes. Most really don't know why their fees are what they are, and a few prefer to throw blame at someone else. Ah, the joys of apartment living where some one else is supposed to take responsibility for my well-being! But HOAs aren't apartments!

Earlier Post on Budgeting 2015:

http://briarcliffelakes.blogspot.com/2015/10/budget-meeting-2015.html

Reserve funds cannot be used for daily working cash

One of the resources available to our Board of Managers and to unit owners is Mark Pearlstein's "Condo Adviser" column in the Sunday Chicago Tribune. This is usually in the "Money & Real Estate" section of the newspaper.

Mr. Pearlstein answers questions posed by boards and unit owners of HOA's regarding the business of running and living in an HOA.

On Sunday, February 7, Mr. Pearlstein addressed a question regarding the use of reserves for working cash needs. The article title is repeated as the title of this post. The reader who had a question stated that "Over the last few years, our expenses have gone over budget. The board has used our reserve funds to cover these excess expenses.........Should our capital reserve only be used as an emergency rather than as a revolving door for working cash?"

Mr. Pearlstein's reply, in part was this:

"No. As Section 9(c) of the Illinois Condominium and Property Act directs, the purpose of an association reserve fund is for capital expenditures to repair and replace major portions of the common elements." Mr. Pearlstein goes on to define what those "major portions of common elements" to which reserve funds are applicable, might be. He then goes on to say that "While directors do have authority to use reserve funds for temporary emergency expenses, the board must maintain the reserve fund. Directors have to structure assessments to replace any reserve funds used for these emergency purposes."

Mr. Pearlstein also suggests that "The better practice... is to adopt an operating reserve fund. This fund is a separate account, not mandated by statute." He uses the example of the use of this operating fund as the means to pay for an unexpected increase in "seasonal" utility costs. I can see this would also be a means to cover an overage in something like our snowplowing budget. It's my understanding that our plowing includes a certain number of "pushes". If we were to have a winter with unusual number of snowfalls we can exceed that contracted number and also exceed the budget.

The Chicago Tribune website, which includes the Condo Advisor article referred to in this post, as well as other, recent articles, is here:
Condo Adviser February 7, 2010

Click for Chicago Tribune Condo Adviser Articles



Additional Information:
Who is Mark D. Pearlstein? He is a partner in the Chicago law firm Levenfeld Pearlstein, LLC. According to the biographical information of that firm:

"Mark is a partner in the Community Associations Service Group where he specializes in representing community associations and developers, particularly in relation to mixed use developments. Mark is the current Chairman of the Illinois Legislative Action Committee of the Community Associations Institute (CAI), and he is a member of the Charter Class of the CAI College of Community Association Lawyers. He is the former Chairman of the Chicago Bar Association Condominium Subcommittee and a former member of the CAI Illinois Chapter Board of Directors.

Since 1988, Mark has written a weekly column on condominium and homeowner association law for the now entitled “Condo Advisor”. He is the co-author with Partner Howard Dakoff of the current chapter on “Condominium Management” for the Condominium Law textbook published by the Illinois Institute for Continuing Legal Education; and the author of a recent article on “Legal Defenses and Other Practice Issues in Architectural Covenant Enforcement” for the Journal of Community Association law. Mark has lectured extensively at State and national seminars on homeowner association law, including the subjects of association contracts, condominium insurance, covenant enforcement and mixed use developments. He has been actively involved in drafting provisions of the Illinois Condominium Property Act. He was the principal draftsman of legislation pertaining to condominium insurance, manager conduct and post foreclosure assessment recovery for associations. He is the current leader of the Chapter initiative to enact community association manager licensing.

He is a member of the Leading Lawyers Network and a member of the City of Chicago Condominium Task Force. In 2008, he was the recipient of the Premier Leadership Award by the Illinois Chapter of the Institute of Real Estate Management."

Click here for Levenfeld Pearlstein, LLC Link

What the 0% Fee Increase Means to this Association

The board decided, during the January association meeting, to hold the fees of unit owners at the same amount as 2009. This decision was reached with a "No" vote by the Treasurer, a "Yes" vote by all other board members (1). This vote was also reached with the concurrence and advice of Management. The manager who was present, stated that a fee increase was not required in the view of Management.

From a personal perspective, this suggests that I don't have to adjust my personal budget this year to accommodate a fee increase.

This vote is, I believe, very significant. It carries some additional meaning, which is implicit in the vote and the position of Management. In passing this vote, the members of the Board of Managers who voted  "No fee increase" made a declaration, which I view as this promise to the unit owners:

1. There will be no operating and maintenance spending increases this year. The spending will be held to the figures used to discuss and debate, and published to unit owners prior to the discussion and vote, and mailed January 26. If any area in "Operating and Maintenance" should require additional funding, it will be achieved by budget cuts in the other areas of operating and maintenance.
2. Our reserves are adequate. With the current amounts collected and the amounts to be collected in 2010 they are accumulating at a rate sufficient to fund our driveways, roofs and even deal with repairs to Lakecliffe. 
3. There is no need for "special assessments" or unusual fee increases next year or into the foreseeable future. That is to say, the Board with the advice of Management, has decided that we will have sufficient reserves to complete roofs in the 6 to 7 years identified by management in the "reserve study" released and discussed as part of the review. Driveways, etc. will also be completed in a similar fashion and on time.
4. No funds will be transferred from Reserves to Operating and Maintenance budgets to cover shortfalls in O&M. That does not prevent the use of Reserves for drainage improvements required by relocation of downspouts, as part of a capital roof project. It does prevent use of Reserves for decorative or other embellishments. 
5. There will be no loans or mortgages by the association to cover O&M or Reserve shortfalls. Shortfalls will not occur in the best business judgement of our managers and the Board. 
6. Fee increases in the future will not exceed the average here at BLMH, which is 5%. That is to say, current collections will not create future deficits which will be corrected by higher than average fee increases, loans or draconian measures which would require unusual service or other cuts.
7. Management and the Board took into account current inflation as well as near and mid-term inflation, as well as the long term averages for inflation when making recommendations and making their decision. 
8. The Board decided that with current receipts (fees) and expenses (O&M and Reserve expenditures in 2010 as well as Reserve deposits in 2010) that this association does not require the approximately $22,000 that even a modest fee increase would have provided.
9. The Board decided that the recommendation of the current Treasurer, who is a seasoned board member, as well as the recommendations of the previous Treasurer and a past President, who all recommended a modest increase, could be ignored. 

The board did decide and vote for another reserve study. I am not really clear about the specific reasons for expenditure of funds for this purpose. However, doing our best to establish clarity is understandable.

I want to congratulate Management as well as all of the past members of the board, in particular those who served in the period 1999 to 2009 for their hard work, dedication and perseverance, and for taking the necessary and at times unpopular steps to get us to this point. I thank you for doing your fiduciary duty. I will also be sending a letter to Management, with my thanks.

==============================
Errors and Omissions
(1) Originally reported that the LD was not present.

Budgeting 2010, Part I

I received my "official" 2010 BLMH budget via the mail. I also have a spreadsheet that was made available to unit owners who attended the January(1) association meeting.  As I stated in an earlier post, I refrained from publishing until after the board decisions had been made and after they had released their "official" data to us, the unit owners.

The association spreadsheet provides a glimpse of the proposed and actual budgets for 2004 to the present. Only "2010 budget" information was included. I assume the "actual" information for 2009 was not the audited data for the year, and so is possibly "preliminary" data.

For your information, here is a chart I made of the Operational and Maintenance expense portion of the budgets.

You will notice a spike in 2009. I suspect the actual for 2009 includes the expenses for concrete, landscaping modifications, etc. which were associated with the roofing and driveway projects. As near as I can surmise, the spreadsheets do not indicate the amounts spent on reserve items in 2009; for example, roofs and driveways. Or, if they do, the amounts are buried within maintenance items. However, no clarification was provided.

One item of interest was the expenditure for "Grounds Maintenance" which was nearly 59% greater in 2009 than it was in 2008 (3). The actual difference was $16,423. This is not a trivial amount. I am not aware of the explanation for this variance. Was this a one time event? Is it related to the driveway and roofing projects of 2009? Our 2010 budget increases the amount for this category by 12.4% above the actual expenditure for 2009.

You will also note that expenditures for operational and budget items continue their upward trend. Several items of interest here. First, the budget adapted for 2010 is identical to the budget for 2009. However, the actual costs for 2009 were 3.96% greater than the budgeted amount for 2009. Nonetheless, our Board of Managers decided that the 2010 budget will not be based on the "actual" budget for 2009. So it appears to me that we may have a possible 3.96% shortfall built into the operating and maintenance budget for 2010.

Second, even though costs continue their upward trend, the board has decided to hold our monthly fees at the same level as 2009. So the question is, if costs do increase, where will the funds for any budget shortfalls come from? My guess is, from reserves if the board can find a way. Third, this budget is after the great uproar by that group called the "Residents of Change" and their vow to go over the budget and bills "item by item".

Here is a graph of our actual expenditures, with 2010 using the amount projected by our Board of Managers. You will note that the trendline is continuously upwards. From the "actual" in 2004 to the end of the trend line in 2010, the trend in increasing at 3.35% per year. However, our association is budgeting for a 0% increase in operating and maintenance expenditures in 2010. I think there will have to be a few budget cuts to accomplish that. So where will those occur? I suppose our Board assumes that the annual inflation rate, which is currently 2.7%, will have no impact on us. In other words, energy, contractors who held the line on costs last year and so on, will not pass along their costs increases to us as the economy moves out of recession and expands. All  costs will be exactly the same as that budgeted last year (2), and therefore will be nearly 4% less in 2010 than they actually were in 2009. Hmm, I don't think Com Ed is going by that play book.

Please don't make the assumption that a 4% fee increase was required in 2010 to meet rising costs. That portion of the budget allocated to operating expenses and maintenance is about 75% of the total annual budget. So, if the amount allocated to reserves is a constant amount per year, then our total budget shortfall will be about 3% in 2010, using the data provided by the Board of Managers.

According to the Balance Sheet dated November 30, 2009 as of that date, BLMH had a surplus of $6,643 for the year to date. I am uncertain if that Balance Sheet reflects the expenditures for roofs and driveways in 2009. I hope some of this becomes clearer with the balance sheet for the calendar year ending 12/31/2009. You will recall, the driveway projects for 2009 are incomplete and were scheduled for completion in 2010. Of course, our new Board of Managers may choose to go in another direction, to save funds. I understand another "reserve study" has been ordered by the Board of Managers, as announced at the January(1)  association meeting. Obviously, the board is trying to find a way out.

I'll be publishing additional information on the adapted budget and I will also be publishing my projections for the driveway and roofing projects for BLMH. I had hoped the Board of Managers would have provided us with this information but they apparently chose not to, or did not do the analysis necessary. No matter, I have done mine.

==========================================
Errors and Omissions

(1) In the original post, the December meeting was cited.
(2) In the original post, was mis-spelled.
(3) the original post compared the 2009 budget.**
**With kudos to a sharp pair of eyes!

Can We Afford It? and Other Issues

During the most recent “official” Association meeting, which all unit owners were invited to attend, there were a number of discussions about budgeting and cost increases. As usual, this meeting was attended by about 5% of the unit owners. There have apparently been other meetings between a member or members of the Board of Managers and unit owners. However, these have not been formally announced or publicized. I state that because unit owners have been coming to Association meetings and appear to be prepared for some of the issues or topics discussed. For example, during the May meeting, when the Landscaping Director announced that he was evaluating the grounds and could use suggestions, prepared notes were passed to him from some of the unit owners attending.

As I am not invited to other, special meetings, I must limit my observations to "official" announced Association meetings, including the one of June 12, and the information provided in the official newsletter.

During the June 12 meeting, there was a continuation of discussions or statements made during previous meetings. The discussions included requests for approval of expenditures for landscaping, the expanded newsletter, block party insurance, and so on. The Treasurer advised that some of these items were not in the current budget. He advised that he will make a brief presentation during the July meeting.

During Association meetings, discussions by Board members regarding the pros and cons of expenditures, are frequently met with boos, jeers and other taunts from unit owners. This has gradually and continuously escalated. Now some unit owners have actually asked the question of the Board of Managers "What do I get for the money you spend?"; in other words, what's in it for me? It would seem some unit owners are willing to attempt to do something about this and that some board members are willing to go along.

I find some of this confusing. During the most recent Association budget and finance meeting, the board voted for an assessment fee increase. However, the Communications Director did not want to pass the measure. She attempted to abstain but finally voted “NO”. I do understand that unit owners were under pressure last year because of significant increases in gasoline and certain other commodities.

However, the arguments for a zero fee increase, for reducing and controlling expenditures through more rigorous bidding procedures, discussions about “wasting money” and attacks on some of the members of the Board of Managers (I recall one manager telling another that what he was doing or saying was “stupid”) all led me to believe that the principal goal of our newly elected board members was to reduce expenditures and substantially improved "communications".

Now that the fee increases have been passed, these measures and concerns seem to have largely abated. The term "competitive bidding" is used as a club to intimidate board members, but doesn't apply to all projects or landscaping. There have been statements about reducing costs by firing or replacing our construction maintenance company and one of the Board of Managers has apparently befriended a contractor who arrived at a unit owner meeting and made a presentation to the unit owners and announced his willingness to do the work. He dangled some carrots and implied that he would do it for less than the Childs Company.

However, an issue has now surfaced that seems to be how to spend the money that is being collected. Inflation is currently low, but it is a certainty that it will increase and electricity, natural gas and fuel and material prices will also increase, and there will again be substantial pressure on unit owner personal budgets. So why not save the money or prioritize the spending on driveways, etc. During the May meeting, it was revealed that there were insufficient reserves to do the driveways that have been identified as requiring immediate repair or replacement.

Certainly, the association can choose to spend money on an expanded newsletter, on insurance for a block party, landscaping, etc. And certainly, some unit owners will see this as a waste. I am sure some unit owners will not attend a block party and some probably never read the newsletter. That is a reasonable statement to make about a diverse group of 336 or so individuals.

So the questions are, how to create a newsletter that everyone would want to read and how to create a block party that everyone would want to attend?

Another question is, what are the priorities for expenditures of funds at BLMH? I would think a prudent individual would realize that core services come first, and reserves and emergency funds after that. However, fees collected for reserves and emergency funds cannot be ignored or spent on expanded services. There are choices to be made. But the problem seems to be in the details, and differences about what are “core” services and reasonable savings rates for reserves and emergency funds. There are brief discussion of some of these issues among the board members during Association meetings. However, the vast majority, or 95% of unit owners do not attend and are not provided with this information. Unfortunately, the official newsletter does not elaborate on the meetings and on the issues that unit owners have about budgeting and differences about how to spend the monies collected by the Association.

I’ve done what I can to provide some insights into the issues here on this blog. However, for the 95% of the unit owners who do not attend the official, announced Association meetings, their only source of information is the newsletter, which seems to have morphed into some sort of National Geographic with full page articles about the “resident of the month” and English architecture. With 336 unit owners, it will take 28 years to hear about each one of us. Obviously, that will never happen.

I would really like to know about the issues and perspectives of our past presidents. I would then like detailed statements from each of the members of the Board of Managers regarding their positions, concerns and how during their tenure they will address them. Subjects would include finance and balancing the needs, wants and desires of unit owners who vacillate between wanting improved and expanded services, totally maintained buildings, grounds and streets, and also want no fee increases. Then I would like to see similar statements from each approved candidate for the Board of Managers. I have emailed our Communications Director about this.

A Method for Arriving at Assessment Adjustments

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This is based upon a letter sent March 4, 2009 to our Management with a request that this be distributed to the board members. It should have been received prior to the March board meeting, and our board members have had ample time to read and to absorb this.

I have observed some of the planning process used by our association in determining assessments. There are a range of emotions displayed by the board and by unit owners when the subject of assessments is discussed. I have previously written to the board about analysis I have made and of my assertions on how we got to where we are. In October, 2008, I began a study to assess using different techniques to determine our monthly assessments. I determined that there was an alternative method that would have yielded lower assessments had the boards consistently adhered to a simple schedule of adjustments using data published by the U.S. government.

My study of past assessments provided some insight into how we arrived at our current assessments and the consequences of the path chosen by the board in 1982 and the following years, until 2000. I have included those insights here. What also follows is a comparison to the alternative method of raising assessments, which seems to be a simple, reliable tool for use in determining assessment adjustments.

Of course, board members and unit owners may choose to ignore the data presented here.

I have several purposes in writing this. I am interested in the “how” of our arrival at this particular financial point in time. I want to provide our board with useful information so as to avoid repeating how we got to this point. I am also very interested in tools that can aid in the decision making process. For example, without knowing the details of the future (inflation, etc.) how can we prepare, that is, how much should our association save each and every year, for the repairs that will undoubtedly be required?

Upon reading what follows, one can conclude that there was a time when our assessments were simply too low. The association appears to have been operating with a "technical" deficit for at least a decade, beginning in the 1980s and nearly to the year 2000. We had sufficient funds to operate, but insufficient for reserves. The current management and recent boards addressed the problem and our assessments have risen. However, we continue to make up for the shortcomings of the past. Finally, on reading this, you will get some idea of just how large a financial hole we had dug for ourselves.

I have listened to unit owners (and that includes members of the board) who seem to have difficulty comprehending how things became the way they are. The following should prove useful in determining how this occurred. The why, I cannot say, because I was not a unit owner in the 1980s and 1990s and so I did not attend meetings. If you did, perhaps you can shed some light on the "why". I am very interested in that!

This chart shows the actual assessments voted by the board each year, commencing with 1983 and continuing to the most recent vote in 2008. The assessment increase is shown as a percentage. There are several things about these increases. 1) They were very erratic prior to 1996. 2) They were zero or a negative value (a decrease from the assessment of the prior year) for several years prior to 1996. 3) They increased dramatically in 1999 but the pace of increases has since tapered off.

The following charts are derived from spread sheets I have made, which included the actual assessment amounts, the percentage of adjustment voted by the board each year, and the COLA or cost of living adjustment determined by the U.S. government. The U.S. government has different legal and economic bodies that generate this information. Most COLA data is backward looking, i.e. published after the fact. My spreadsheets and the resulting charts use data which is forward looking. I use the Social Security Administration annual benefit adjustment. This is a percentage, issued in the fall of each year by the SSA, which determines the increase in SS benefits for the following year. It is an attempt to anticipate cost adjustments on a year to year basis. For example, in 2008 this was published as a 5.8% increase, applied in 2009.

Each chart has two trends. One is derived from the actual decisions made by the board. The other is an alternate, derived from the COLA adjustment, and indicates the result if the boards had based the annual assessment adjustment solely using the government COLA adjustment. The difference between these two trends indicates a gap which in our association’s case, was a shortfall in saving. That gap continued each and every year and as a consequence, our savings rate fell further and further behind.

The first chart is a comparison of the monthly assessments using the two methods. It has two trends; one is the actual, average monthly unit assessment and the second is an alternative COLA based assessment. The alternative assessment replaces the percentage increase voted in 1982 by the board, with the percentage calculated by the U.S. government for SS benefits in 1982. This is repeated each year from 1982 to 2008. This is chart No. 1 “The High Price of Avoiding Assessment Increases” so named because prior to 1995 the board chose zero or negative adjustments for several years. You will note that the trends cross in collection year 2001. Prior to that time, our assessment increases consistently lagged those deemed necessary by the government COLA method. If left unchecked, this would result in operating deficits, i.e., the inability to meet basic financial needs. Later boards and our current management, apparently in recognition of this, have since 2001 raised our assessments annually by a rate above that of the COLA percentage. This has resulted in today’s higher monthly assessments as compared to using the alternative, COLA method. It has also built up our reserves. I chose 1982 to begin because this is the first year the board chose a negative or zero assessment adjustment. Assessments began in 1979 and the interval until 1982 provides too unstable a starting point, as boards attempted to find their footing and establish assessments that would fund ongoing "operational" needs.

Chart No. 2 “Annual Assessed Amounts Collected” depicts the total assessments collected annually from the period 1983 to projected for 2009. The amounts collected annually are trended using the two methods, and the trends cross in 2001. The amounts collected using the percentages chosen by the boards were lower during the years prior to 2001 than the amounts that would have been collected using the U.S. government percentages. As the assessments have increased each month, so too have the amounts collected. The amounts collected annually are now much greater than they would have been had the U.S government percentages been used. However, the space, or area between the trends to the left of the point of crossing is nearly equal to the area to the right of that point, which means that we have finally collected an amount sufficient to make up for the difference since 1983!Chart No. 3 “Accrued Amounts Using Actual Assessments and Alternative COLA Method” shows the long term effects, the sum of all assessments collected from 1983. It compares the sums collected using the board selected percentage adjustment to the sums collected using the U.S government SSA COLA method. The U.S. government COLA percentages consistently grew the savings at a higher rate. By December 31, 2009, the actual, total assessments collected at the association, for the period 1983 through 2009 is projected to be $16,028,211. During that same period, using the COLA method $15,910,181 would have been collected. These are nearly identical with a difference of 0.74%. The trends do not include interest accrued on saved funds.
Chart No. 4 “Monthly Assessments Using Actual Method and Alternative COLA Method“ compares the average monthly amounts collected per unit using the board selected adjustment method and alternative COLA adjustments from 1982 to the present. If it looks familiar, it is! Chart No. 4 is identical to Chart No. 1 and I repeat it here with this additional information: In 1999 the assessments at our association began to rise at a faster rate. Prior to 1999 the assessments consistently lagged those which would have been collected, had the U.S. government COLA SSA adjustment percentages been used. In 1999 the average assessment was about $135 and had increased to about $291 by 2009. Today, my actual assessment is $308.57, but had the U.S. government alternative percentages been consistently used, my actual assessment today would be a much lower $216.90. The reason is simply this: our current assessments are an attempt to collect in the period 1999 to the present, the sums of money that were not collected in the prior period 1983 to 1998. This difference is the space or area between the two trends on the graph below. The "gap" prior to 1999 seems deceptively small, but it wasn't, and the difference is now saved as our "reserves": The final chart trends the assessment adjustments as percent change voted by the board, compared to the percent change which the U.S government COLA method used for the same period of 1982 to 2009. You will observe that the percentages voted by the board were quite erratic prior to 1995. You will also observe that the U.S. government method was nearly always below 5%, and was as low as 1.3% in 1986 and 1998. There is one caution. In the period 1978 to 1982, prior to the trends and during a period of pronounced inflation, the U.S. government COLA percentages were above 8.0% for four years.
All of this is for exploring possibility using “what may have been”. However, several observations and conclusions can be drawn from the data shown in the charts.

1. Had the association boards used a simple method of calculating assessment adjustments based on U.S. government SSA COLA and collected assessments consistent with inflation increases, we would have today achieved the same balance sheet and reserves. However, in the process we would have had smoother, consistently smaller assessment increases and would today have lower monthly assessments.


2. Using assessment increases below the COLA percentages is an inferior method, as experienced by our Association.


3. The pace of assessment adjustments should moderate to the COLA rates, and has.


4. The COLA method may not assure sufficient funding for large capital projects, such as the planned roofing and paving projects. This is because specific, actual costs are unknown. Further analysis is required.


5. The COLA method, it has been pointed out, includes factors not of direct concern by our Association. For example, changes in the cost of food. However, the point of the analysis is to review a forward looking, annual method that would avoid the issues we have experienced and smooth the adjustments, from year to year. The analysis speaks for itself.


6. The association is now collecting funds at a rate greater than the COLA method would, because our monthly assessments are higher. The impact on future balance sheets cannot be determined with certainty until the true costs and timelines of capital projects is known.


7. To avoid large “spikes” using the COLA method (e.g. 14.3% as in 1980) and consequential disruption to the budgets of unit owners, it is advisable to adjust very low COLA percentages upwards to provide some short term smoothing and avoid large increases. This requires analysis of future, anticipated balance sheets.


8. This data can empower condominium boards to consider using the U.S. government COLA percentage increases as basis for the minimum for assessment adjustments, if that method is not now used.

I provided this data to our board on March 4, 2009 and I hope that this is useful and will have some influence on the predilection of the board when the time comes to vote for assessment adjustments. I will be doing additional analysis and I welcome comments.

The following is the SSA website which includes the COLA data I used. http://www.ssa.gov/OACT/COLA/colaseries.html