3.77% under budget is how we got a 0% fee increase in 2018

We do our annual budgeting in October, which can be difficult because we don't have year end figures.

In October 2017 we projected a significant budget surplus. In other words, our total expenditures for 2017 would be substantially under the projected expenses. We didn't "skimp" on anything or hold back expenditures for the next year. The numbers reflected the actual, real and true expenditures, to the best of the knowledge of the board.

Of course, there are always year end surprises. For example, a nasty December can push up snow removal costs for the year. Significant icing can push up maintenance costs as we clear ice from roofs. Last minute bills can also have an impact. So I am inclined to think of 1% as within the "noise band" which is about  $13,500. We have to do substantially better to consider holding fee increases at 0%.

BTW, the change in our painting schedule and approach in 2011 has saved this association nearly $9,000 each year. That's an example of how we've achieved these results.   These things add up. I'm always preaching incremental, continuous improvement, but not everyone on the board believes this. The long term results speak for themselves. There are lots of gimmicks that our boards have used to achieve short term results. Shame on them!

When our association is under budget, any surplus is put into reserves. However, this can also be used to the benefit of the owners.

In January 2018 we got the final numbers. We were 3.77% under budget for the year. In other words, our 1.50% fee increase in 2017 was unnecessary.  We can't turn back the clock and I certainly don't want to undershoot in any year. In fact, some seasoned board members continue to adhere to the unsubstantiated belief that we need fee increases of at least 3% each and every year.

However, during the budget discussions in October 2017 which I prefer to call "negotiations" it was apparent that an increase was unwarranted. Those present voted for a 0% fee increase based upon 2017 data and 2018 projections.

I want to point this out: what we saved by a lot of hard work over a period of years reduced expenditures in 2017 by an amount equal to a 3.77% fee increase.  I'll let that sink in.

There is micro-management and then there is effective management. I prefer to be effective, which is reflected in this chart. Blue are actual fees per month per owner and red is projected. I joined the board in 2010.

Reserves of $86,321- Assessments and Budgeting

This is another post in a continuing series on HOA budgeting.

"In 2014 the reserve contributions were 312.4% higher than they were in 2001. The Operations & Maintenance (O&M) budget in 2014 was 14.9% higher than it was in 2001."

In other words, in 2014 the average monthly owner fee for the O&M budget at BLMH was $28.56 greater than it was in the 2001 budget. In 2014 the average monthly owner fee for the reserve budget at BLMH was $83.68 greater than it was in the 2001 budget.

The above is why I pay so much attention to reserves at our HOA and why you should at your HOA. Our reserve contributions climbed nearly four times that of the O&M budgets.

".....we need to live in the present."

"I have made a general statement that I think it is a mistake for a HOA to move forward with 0% annual fee increases. However, the actual budget each year should be based upon the actual finances and not some general theory or knee jerk, emotional reaction. The problems at BLMH can all be traced to the condition of reserves. In recent years boards have dramatically changed the approach to this very significant component of fees at BLMH.  This change has had a profound impact upon our HOA finances."

In February 2010 I sent an email with five links to the Architectural Director of the Board of BLMH. These had to do with fees and budgeting at our HOA. Four of these links are contained in this post.

As I have stated elsewhere in this blog, I had been doing my own research about the finances of the HOA since considering a purchase in 2001. All I had at that time was the information provided by the various boards to each of the owners and the most recent newsletter; that information (excepting the 2001 newsletters) is adequate and included published budgets and balance sheets.  Some of my research had been completed prior to purchase, but there really isn't a lot of time to delve deeply into this prior to making a purchase commitment. Of course, back then it was a seller's market. Today it might be easier to take one's time to do sufficient research. I had legitimate concerns about reserves and fees.

The first budget I was given was the 2002. It showed a reserve contribution of $108,000 for the year 2001 and a 2002 budget with a $148,108 contribution for reserves.  However, I later discovered that the total reserves at BLMH in 1998 were $86,321. The average annual fee increase had been 2.59% over a period of 10 years. This changed when a new management firm came on board in December 1998. Commencing in 1999 there were large annual fee increases of 11%, 11%, 9% and so on. Owners had become accustomed to very low annual fee increases in prior years. But those budgets were inadequate.

At BLMH the Operating & Maintenance budgets (O&M) were not separated from Reserve requirements in the percent changes to fees provided in the "Welcome Packet." Nor were reserve fund balances provided year by year. I suspect that a few owners might have become alarmed had that information been provided in that form. But it was in the "Balance Sheets" for the HOA and not flagged. But then, as is the case today, owners are largely uninvolved in the affairs of managing this HOA. Today, most owners prefer to let another owner in a board position do the work. When things are not to their liking a few of the "owners' will show up to express their displeasure and make demands upon the board of volunteers. Boards will frequently be inclined to acquiesce. That's the way it was, and that is the way it is today in our "entitlement" society.

Returning to my financial concerns in 2001. This information was available in the prior balance sheets. This HOA had less than $100,000 in reserves in 1998 and yet would begin a multi million dollar roofing project in about four years, and a complete street replacement in four years. Simple arithmetic would indicate that there would be insufficient reserve funds to do these projects unless drastic action was taken.  Boards had no choice and so fees increased at an average annual rate of 7.41% during the period 1999 to 2008. Projects were delayed to allow the accumulation of funds to do the work. A significant amount of the money collected for these capital projects was spent as soon as it was collected.

But no one at this HOA read about this in any letter and any newsletter. So most of the owners were blindsided. They didn't know that the boards prior to 2008 had thrown us under the bus, spent money on a defective street project and, with about $250,000 had embarked upon a $2 million dollar roofing project commending with the building which housed the president of the association.

This history is why so many boards have struggled for nearly 20 years with annual budgets at BLMH. This history may also be why some board members have been so averse to 0% fee increases in recent years. They may remember the pain and the owner angst and they want to avoid it.

But as 2016 approaches it is important to realize that this HOA is not operating or being managed the way it was in the 1980s and 1990s. I am of the opinion each and every owner is better for it. Anyone who disagrees needs to state their case rather than simply gripe, or make derisive remarks under their breath during HOA meetings. A few probably prefer the "good old days" when we either didn't know what was going on, or we were fed "pap" with articles about architecture in England. Either way, ignorance may be bliss until reality sets in.  In HOAs the blissful hope they sell their unit before the reality sets in.

I do recall the newsletters of 2002. Back then the "big deal" was the winter tips. Reading those newsletters, one would assume the board had everything under control and we were in great shape. It was a sham and nothing could have been further from the truth. But one of the favorite expressions of the leader of the board back then was about "throwing people under the bus." And so they did. But for as long as possible boards and the board presidents of this HOA did what they could to keep up the facade. Reality intervened then as it does now. But today it is a different reality. The newsletter is no longer a facade or a "feel good" piece of paper. We do have reserves and we do know what they really intended to accomplish. The HOA is aging, but it is no longer falling off of a cliff.

I cannot go back in time and fix the past. We can and do address identified issues in the present, while planning a 30 year future. That is not the way it was, and those who participated in those years should take responsibility for their actions. That includes owners and former board members.

We today have owners who have lived here for 30 years and remember "the good old days" when annual fee increases averaged 2.59% and for many years the fee increases were 0%.  We also have one current board member who was on the board back in "the good old days" and experienced it all.

However, we need to live in the present.

I have made a general statement that I think it is a mistake for a HOA to move forward with 0% annual fee increases. However, the actual increases each year should be based upon the actual finances and not some general theory or knee jerk, emotional reaction. The problems at BLMH can all be traced to the condition of reserves and several projects began in 2002, including an incredibly costly roofing project.

In recent years boards have dramatically changed the approach to this very significant component of fees at BLMH. This change has had a profound impact on our HOA finances. These changes began slowly in 1999 but became more sophisticated by 2011. But until the roofing project is completed and the redo of the streets a lot of money will continue to be spent. Unfortunately our streets began less than 10 years after they were replaced in 2002 or 2003.

In 2014 the reserve contributions were 412.4% higher than they were in 2001. The Operations & Maintenance (O&M) budget in 2014 was 14.9% higher than it was in 2001.

The percentage of fees for reserve items has increased from about 0% in the 1980s and 1990s to about 31% or more in recent years. Reserve contributions via fees peaked at 33.9% with the 2012 budget. In 2011 there was a 7% increase in assessments to owners. All of it went to contributions for reserves. In fact, the budget for O&M items actually decreased that year by 1.1%. In 2012 the budget called for an approximate 3% fee increase. Of that increase nearly half went to reserves.

In recent years the boards temporarily shifted to a multi-tiered approach for reserves and very closely monitored requirements for the 10 year future period while also considering 20 and 30 year requirements. Had this been done from 1985 to 1998 there would have been no need for me to do the work to create the information contained in the links later in this post. I also probably wouldn't be providing about 450 to 700 hours of free services to the HOA each and every year.

The earlier approaches of low fees with minimal reserve contributions created the financial problems of the 2000s. The grandiose or poorly executed projects which began in 2002 sealed the fate of this HOA for the next two decades. It was the available funds that probably dictated the approach used for the street replacement project in 2002. That is understandable if a HOA lacks the funds to do it right. Understandable, but not excusable. However, for a time the HOA owners did get the low fees they wanted. This could not continue and owners from 1999 to 2008 paid for this and got average annual fee increases of 7.41%. That's 3 times the fee increases each and every year as compared to the earlier period 1982 to 1998. Most of the money for the annual increases after 1998 went into reserves and to pay for immediate capital projects including the 2003 street replacement and that $2 million roofing project.

It is only since 2010 that this HOA made the huge leap to more sophisticated and realistic reserve requirements. This has not been smooth, either. But boards are getting better at this. A lot of time has been spent by a minority of boards members since 2011 looking into reserve requirements and implications for finances. This was necessary because of the condition of Lakecliffe and other streets, which were not predicted for retopping until the 2020s. Instead we found we had to completely replace Lakecliffe Blvd. Other projects and surveys which had been delayed are finally being addressed. 2014 and 2015 have been very different years as compared to the preceding ones. This needs to be considered when preparing HOA budgets at BLMH.

Here are the links I mentioned at the beginning of this post. Yes, we can plan and prepare. Yet, it is true that some can't, some won't learn from the past, and a few expect a totally different outcome no matter what they do. Yet, boards are supposed to muddle through. History can be a great teacher if we are willing to learn the lessons it provides. The reader may not agree with all of the following, but it does include some eye opening information:

September 2008 - Assessment History


November 2008 - Where Our Fees Will Go in 2009


March 2009 - A Method for Arriving at Assessments


June 2009 - Unit Owner Budget

My Personal Response to the 0% Fee Increase

The board voted for a 0% fee increase for 2010 during the January meeting. Now, there are some, including myself, who are concerned that this may have been a mistake. Three experienced board members made statements during the meeting in favor of a small increase; one is our current treasurer and two are former board members including past treasurer and president. I understand management made a statement which contradicts their earlier, published data.

So who do I believe and how can I protect myself in the event one side of that debate was in error? What can I personally do? Well, let's take a look at the underlying concerns unit owners might have.

If our association has made an error, then they will at some time in the future, raise our fees. In fact, fee increases are unavoidable if for no other purpose but to compensate for inflation and erosion of the dollar. As I told one of our board members during the recent "coffee with the board" social "if you want to  play you need to pay".  So, what can I do to prepare for these future increases?

In my specific case, I am currently paying a monthly fee of $308.57. A 2 percent increase this year would have raised it by the following amount:

0.02 x $308.57 = $6.17 per month

So, I have two choices. I can save this for the specific purposes of preparing for future increases or, I can spend it. As I am now "forewarned" and I do believe that there are going to be future fee increases, it would make sense for me to put this amount aside. So that's exactly what I am going to do. I am going to put 12 months worth of this 2% increase, or 12 x $6.17 which is $74.06 for all of 2010 into a special bank account which I call my "Savings for future fee increases" account.

In my case, because I am a "B" unit owner, I have been putting a small amount into this account each month, so that I can be prepared for the day when I must replace the "dormer style" window as part of the roofing project. That project will be somewhere between 2 and 7 years in the future, if our management company is correct in their assessment of the situation.

That was easy, wasn't it? So I am now prepared for the future. I'll reevaluate this each year at the time the board does the budget assessment and I'll either increase the monthly amount or decrease it as I see necessary. If the board does not exceed the "Operating and Maintenance" budget and our reserves grow adequately then, I might be in a position where I actually have a surplus in that savings account. That would not be a bad thing now, would it?

I agree with a comment our treasurer made. He said something like "unit owners can financially deal better with small annual increases than larger, infrequent ones". Amen brother!

If you also agree, then I suggest that you too put a small amount aside each month, in a cookie jar or whatever, for those future assessments. You too will be prepared and if our board reverses direction at some time in the future, or there is a large increase in monthly fees, you can just reach into your cookie jar and not be overly concerned about the effects of a larger increase.

Think about it!

Budgeting, Planning, Home Ownership and Completing the Year

I've made a thorough analysis of the budget and the reserves. This includes a long term - 10 year - projection with possible outcomes. For whatever reasons, our board has decided not make such an analysis or, if they have, they decided not to release it to the unit owners. I updated my initial analysis prepared in the fall of 2008, which I never released. I have been waiting for the board to release some information and they finally did provide details of the "reserve study". Thank you for that!

My information is, and has always been, from publicly available information; the same information each and every unit owner is given. I say that because in the past I have been accused of having access to "special" information, even by certain board members! One of my numerous fax pas here is to read everything I get and study it. Apparently we aren't supposed to do that.

I'm not going to publish all of the planning details and scenarios I have constructed because this is a public site. However, I'll publish sufficient information to inform unit owners of what is going on, and of possible outcomes. If you want further information, then email me. As the board has not released their specific plans to us, the unit owners, we really have no specific idea of where we will be in 5 or 10 years, nor of how we will get there. That's called "a lack of accountability". Assurances that "it will all work out" are unacceptable to me, and should be to each and every unit owner. This is not about trust; it is about achieving results with the hard earned money we provide to this association.

I'd like to take a few moments to address the subject of "Home Ownership". Our board has decided to call us "homeowners" in lieu of "unit owners". As a former home owner, I don't agree with that title. As a former home owner, I was 100% responsible for all maintenance, planning and the financial decisions that accompanied them, as well as for the consequences of all of my decisions, both good and bad. That meant, that I was the one who got up early to shovel the walks and driveway, I was the one who did the mowing, plant feeding and fertilizing, tree maintenance, painting, landscaping and so on. I was the one who removed the various wildlife that decided to move in and I was the one who decided how much money to allocate to hiring contractors, maintenance people and so on, and when the funds were fully expended, I put in the "sweat equity" to complete the numerous tasks.  I also needed to make choices. I discovered that overall costs were lower if I maintained my property well. Carpets lasted longer, using better exterior paint more often, with replacement of trim kept the critters and carpenter ants out and better appearance. But I had to give up a few things, such as driving the automobile a few years longer as money was diverted to property maintenance.

Here at BLMH I do not make those decisions and I am not even fully informed of the planning process and the issues surrounding these decisions. I think it is ludicrous to be considered a "homeowner". Apparently, getting involved and even asking questions is a "no no" here. So I am and will continue to be a "unit owner", no matter what attractive label the board concocts in a misguided attempt to make me or other unit owners feel good. I also think that the 50% or so of unit owners who don't even bother to vote are not sufficiently engaged in the process of being a "unit owner". Of course, my view is not consistent with the official "party line". If you doubt me, perhaps you can find out how many dues paying members this Association has for its social club. This was a very, very big deal in 2009. Supposedly "the majority of us" really, really wanted this. So how many of that majority actually belong and pay dues? 75%? 66%? 51%? How about less than 5%! I'm willing to take a bet on that one, and I'm willing to be corrected.

That's another issue I have here. I am told I am a "homeowner" but as soon as I begin asking questions and attempt to act as one, guess what happens? Seems I have stepped over that invisible line. It's not about me. It's about "us", the unit owner body. Each of us should be provided with the same information. If one of us has a concern about holes in the budget, and the board provides information, verbally or in writing, shouldn't each of us get that same information? Remember, we are all equals here. Or we are supposed to be.

I have concluded that "homeowner" is some sort of honorary title, and as is the case with most of them, is worth less than the paper it is printed on.

The bottom line is this. We are, each and every one of us, "unit owners". We have made some sort of financial commitment and we have chosen to live her. We pay fees each month for the privilege, and taxes and a mortgage. As a "unit owner" I expect the board to manage this association in such a manner as to carefully use the funds I provide to them each and every month, and to maintain this association in such a manner that it is in the same shape today and 20 years from now, as it was when I purchased nearly 10 years ago. That means, formulate long term viable, strategic and equitable financial plans for infrastructure, roofing, paving, the grounds and the 800 or so trees, and everything in between. And exercise those plans and provide for the safety and protection of each and every unit owner at BLMH. And justify their actions to me and every other unit owner at BLMH. I will remain engaged in that process and will continue that oversight as my right and privilege as a "unit owner".

A budget is sufficient and adequate if it includes a long term maintenance plan. Our fees have two components; day to day maintenance, and long term maintenance. These are entirely discretionary. However, as I have pointed out on numerous occasions, the Illinois Condominium Act binds our board to act in certain ways. They are legally responsible. This reduces their freedom to act in ways contradictory to the good benefit of the unit owners. But where there is a will there is a way, as the saying goes. Reminding the board of their duties and obligations, and pointing out glaring failures is another "no no" and invisible line I have stepped over. Oh, but I'm supposedly a  "home owner"?

Is all of this too much to ask of the board? I'll let you decide. Asking questions seems to have resulted in attacks on my property, and that includes this site and the issues accompanying it, and the feeble attempts by people to disrupt it. I too have some information about who has said what to whom, as well as information about the numerous attacks on my personal property. Some of this was shared with the local police department. The board declined to meet with me in a timely manner to discuss this, and ignored my letter. This despite all the rhetoric about resolving all communications issues and even creating the position of  "Director of Communications". I concluded that what was lacking was the will, or that a member of the board or members could be involved in some manner in these attacks.  Is that rational or not? Again, I'll let you decide.

I find it amusing that someone would go to the trouble of interfering with comments at this site and then make it a point to say "Oh, but I don't live here", Nice try! I have been told that about 3% of our society is insane, which is to say "disconnected from reality". With approximately 336 unit owners, that means we possibly have about 10 individuals here at BLMH that fall within that definition. I am sure there are a few who would classify me as one of them.

If the board doesn't like me or my actions, they can take me to court and attempt to stop me legally. Any board member who makes statements or disparaging remarks about this site are doing so in their official capacity as members of the Board of Directors of BLMH. Such statements such as "someone should hack Norm's site" or stop me in some manner are threats and if overheard can be construed as direction or guidance by the board to attack me. I will no longer tolerate any such statements or the resulting attacks on my property.  To individuals who have made such statements, I suggest you consider who you made these statements to or who was present or within earshot when they were made, and discuss this with them and correct this. If a board member was present when others made such statements and said nothing, then you abrogated your duties and were in fact, in "collusion". Be aware that I am prepared to go to any legal length to handle this. The local police are aligned in this. By the way, this was to have been a part of the topic of the meeting I requested, and which the board refused to address in a timely fashion. So much for a commitment to communications. I am thankful for the recent call from our newly elected President, but I am unconvinced the attacks are over, and if they resume the new board members have inherited this problem and responsibilities.

In the spirit of completion, Anon. "December 23, 2009 11:04 PM" why don't you fill our unit owner "December 28, 2009 12:14 PM" in on what it is that has been going on and of which she or he is totally unawares? You know exactly what I mean and it is time for your little charade to end. If you don't want to tell the unit owners, then I will. So either leave or I will unmask those whom I am aware of and I will tell everyone everything I know about this and the attacks and if necessary I will obtain legal affidavits. And I assure you that you, the board and ultimately the unit owners here will not like the consequences. If you have any doubts about any of this, I suggest you discuss it with Mark Maute at First United.

On that note, have a happy new year and I'll be publishing the projections later this week.

Unit Owner Budget

I’ll be looking at the Association budget in the near future. However, to get a better grasp of the budgetary issues facing our Board of Managers, I thought it might be useful to develop a similar budget for a typical unit owner. This will provide some possibly useful information for the Unit Owner and will also reveal some aspects of the budgeting process in use by our Association. I’ll use a “B” unit in my example, which has an additional window, two baths and three bedrooms. There are a few notes at the end of this post.

It is my understanding that the correct method of budgeting is to determine the necessary expenditures and then levy the amount of fees and assessments. To do so the Board of Managers must prioritize the needs of the Association and maintain the assessments at an appropriate amount.

A unit owner personal budget can be developed in parallel to the one used by our association. Such a budget would have four components:

1. Establish a budget for day to day operational expenses.
2. Develop and save a for a Reserve budget for future maintenance and replacement needs.
3. Develop and save for an Emergency budget for unforeseen or unpredictable items.
4. Re-evaluate each of the previous three annually and adjust each budget accordingly.

Each of our Board of Managers should have the capacity to understand the concepts outlined above. If they do not, it is impossible for them to honor or to complete their fiduciary responsibilities.

Unit owners may not have such capacity nor are they required to. A Unit Owner can choose not to save, and purchase appliances or whatever on his or her credit card. That is a personal choice. However, the point made here is that the Association does not have that choice. The Board of Managers are required under law to develop reserve budgets and plans which include and satisfy all of the components described above.

Our Board of Managers is required to satisfy the four above requirements and more. Unit Owners sometimes forget that and attempt to sway the board into foregoing reserves for discretionary items, or divert fees to personal causes or for personal interests, or reduce fees to alleviate the financial pressure on the individual. That is one of the reasons why each member of our Board of Managers is prohibited under law and civil penalty from favoring individuals or groups. Extreme behavior can be rewarded with fines or jail time. There are laws that govern the operation of the Association, but we must be diligent and fully support the Board of Managers in fulfilling its fiduciary duties.

Day to day operational expenses.
In prioritizing expenses, the day to day or "Operational Expenses" come first. These are required expenses for the operation of the Association. For a unit owner, such expenses would include non-discretionary expenses such as:

1. Real Estate taxes.
2. Association fees.
3. Basic transportation (excludes performance or luxury vehicles e.g. BMW, Buick, Cadillac, Hummer, Land Rover, Lexus or Volvo, etc., etc. !).
4. Insurance for basic transportation.
5. Gasoline and annual maintenance for basic transportation.
6. Natural Gas for heating, cooking and hot water.
7. Electricity for lighting, the operation of the furnace and air conditioning system, and appliances.
8. Insurance as required for a Unit Owner.
9. Basic groceries.
10. Basic clothing.
11. Basic communications, either land line telephone or cell phone.
12. Postage and stationery.
13. Basic electronics and appliances.
14. Health Insurance.

All other expenses could be considered to be discretionary or elective, and therefor optional. Why is that? After meeting basic service needs, any remaining funds should then be allocated to growing reserves and growing or maintaining an emergency fund. Only after meeting the savings targets for base expenses (operating expenses for our Association) and Reserves (future maintenance or replacement costs and emergency funds) should any funds be spent on "discretionary" or unbudgeted items.

For the Unit Owner, such additional discretionary expenses may include better cable TV, a vacation home, a better car, large screen TV, other major electronics or appliances, appliance upgrades, HBO/ESPN to the max, vacations, etc. However, such expenses should come after the first three budget groups; Basic, Reserves, Emergency.

Personal budgets have some aspects for which the Association does not. For example, each person who is employed may save a portion of their savings in a Roth IRA retirement account. This is beyond any company pension, 401K or SEP IRA. However, while such a savings program is entirely voluntary for individuals it is nonetheless recommended by many financial planners and probably should be included in base personal expenses. According to the 2009 Retirement Confidence Survey, 25% of workers have no retirement savings and 53% report savings or retirement investments of less than $25,000, excluding their home or employer pensions. Funding for one's retirement might be a fourth budget group for a Unit Owner.

So the modified budget for a Unit Owner, modelled after the one for our Association would include:

1. Basic or Operational Expenses.
2. Reserves Budget.
3. Emergency Budget.
4. Retirement Budget.

Sources of Revenue or Income

The basic source of income for the Association is the fees and assessments paid by Unit Owners. The Association will continue to collect fees from unit owners as long as it is in existence. Unit owners, on the other hand must plan on meeting those fees and other expenses from wages while working and after retirement from other sources of income. Obviously, the unit owner must also plan an income stream sufficient to meet his or her needs in retirement. If not, then discretionary items must be eliminated followed by core items such as an automobile.

To Spend or Save?
Spending for discretionary items or saving for reserves is a choice facing the Association and each unit owner. The Board of Managers has a fiduciary duty to develop viable budgets, set the fees necessary and collect the money required by those budgets, and also control spending on day to day or “discretionary” items. A viable Unit Owner budget would do the same.

The Association can choose to improve or expand services, add park benches, expanded and glossy newsletters, web sites, purchase special insurance and fees for block parties and so on. However, in so doing the association has these choices:

1. Increase the fees collected.


2. Divert funds from the reserves.


3. Reduce services.

Reserves cannot be legally mis-allocated or depleted. So the Board of Managers has two legal choices:

1. Increase association fees.


2. Reduce services.

Unit owners face a similar dilemma in their personal budgets. However I, for example, am somewhat limited in my ability to raise fees. My personal choices are:

1. Earn more from my current job or work two jobs and increase my revenue.


2. Divert money from my “reserves” and spend the funds I should be saving for my retirement, for my “emergency fund” or for replacement of the elements in my unit for which I am responsible. This option is not available to the Association.


3. Reduce my discretionary spending. For example, keep my car long after it is paid for, or when I must replace it do so with a cheaper and more fuel efficient car, go to basic cable or no high speed Internet, do less dining at restaurants, take no or cheaper vacations, do no spending on big ticket electronics, purchase fewer clothes, etc., etc.

I have the ability to mortgage my future to live well, or better, today. That is not a choice for the Association. Nor can the Association assist me if I make poor decisions or should circumstances align against me. The Board of Managers are prohibited from acting on my behalf.

Unit Owner Reserves:
Internal maintenance of my unit or of the elements for which I am responsible, can be a financial “surprise” to a unit owner. I suggest that unit owners learn from the financial operation of the Association and build a “reserve” fund for repair or replacement of windows, furnace and air conditioner, hot water heater and major appliances, etc.

Here is an estimate of the expected life span of various elements I am responsible for in my unit. Each unit owner could have a replacement fund, which I’ll call a “reserve” fund for these. This is exactly the same approach the Association uses for planning for replacement of roofs, sidewalks, streets, street lighting and so on.

The Association is currently reviewing the reserves and conducting a reserve study. One of the purposes is to determine if the Association has a savings program in place which is adequate to address aging infrastructure. Emergency funds are described as funds required by unforeseen circumstances. However, a lack of planning is not an emergency. The goal is to develop a viable plan which can then be budgeted.

I would probably review my personal “reserve study” every few years. The purpose is to re-assess the condition of the elements for which I am responsible and to determine the current cost of these elements. Our Board of Managers is required to use historical data when making a budget. So should I when preparing my own budget.

The unit owner is also wise to consider an “emergency fund”. Emergency budgeting for a unit owner is a difficult thing to determine. However, many financial planners recommend at least 6 months wages, after taxes, be set aside for use in personal financial emergencies which could be considered as medical, loss of job, legal, property destruction, etc. For a median income family here in the U.S., such a fund would be about $25,000 using median annual income figures for the state of Illinois and deducting 20% for federal, state, social security and Medicare taxes normally with-held from wages. To go further into the need or adequacy of such a plan would require financial data specific to each unit owner’s circumstance.

Personal Reserves, excluding an Emergency Fund
Such a reserve or saving program would include a survey of the elements which are the responsibility of the Unit Owner. Here is a possible list, and this list is somewhat unrealistic. It assumes a new unit with all new appliances and appointments, and then begins aging the unit and its contents. An individual plan would require determining the age of each of the components in the unit and estimating their condition and remaining life span. From that I could then determine how much to save.

For example, when I purchased my unit it included an aging stove and refrigerator. I replaced those within a year of moving in. The refrigerator was not a choice. The stove was in poor shape, but could have made it for a year or two. However, it was an electric unit and I wanted a natural gas unit; so it was quickly replaced. Approximately 5 years later I replaced the hot water heater which was showing signs of stress and imminent failure. At about 6 years, the air conditioning compressor failed. I was fortunate that I had the remainder of the warranty for the unit installed by the previous owner. My pro-rated costs with labor were “only” $900. It is possible that I will replace the furnace in less than 10 years and before its maximum rated life.

Here is a list of replacement costs. Each item has the expected life expectancy per “experts”. In many cases this is a range in years because exact dates are the result of use and abuse, unusual wear, quality of the item and for windows and doors, the weather:

1. Aluminum Windows 15 to 20 years. I have 5 windows estimate $500 each and one patio door estimate $1500. Installation estimate $500. Total $4500. Amount to save each year =$4500/15 years = $300. (Rough estimate; see Notes).
2. Garage door 20 to 25 years. Installation estimate $500. Amount to save each year = $25.
3. Hot water heater 10 to 14 years. Price installed = $400. Amount to save each year = $400/10 years = $40.
4. Washer and Dryer 10 to 15 years. Price for mid-range dual units = $1,500. Amount to save each year = $1500/10 years = $150.
5. Furnace 15 to 20 years. Price for natural gas, mid-tier unit $5,000. Amount to save each year = $5000/ 15 years = $333.
6. Gas Range 15 years. Price for mid-tier unit $800. Amount to save each year = $800/15 years = $54.
7. Refrigerator 13 years. Price for 21 cu. ft. mid-tier unit = $1,000. Amount to save each year = $1000/ 13 years = $77.00.
8. Dishwasher 9 years. Mid Tier unit = $700. Amount to be saved each year = $700/9 years = $78.00.
9. Faucets 15 years. Replacement by plumber, mid-tier unit = $200 each or $600 for two baths and kitchen. Amount to save each year = $40.
10. Shower faucets 20 years. Replacement by plumber and removal and re-installation of tile = $400 each or $800 for two baths. Amount to save each year = $800/20 years = $40.
11. Carpeting 10 years. Prices vary with quality and total square footage. Estimate $25 per square yard for four rooms totaling 75 yards = $1,875. Amount to save each year = $188.
12. Garage Door Openers 15 to 20 years. Price installed $250. Amount to save each year = $250/15 years = $17 per year.

Summing the annual amounts above determines the total required to be saved each year by a Unit Owner as “reserves” for the replacement of the items. Using the lower lifetime for each item yields a sum of $1,342. I could use the higher, but that belongs to the "Dirty Harry" school of budgeting, where, as in the movie, the question to be asked is "Do I feel lucky"?

However, there is one complicating factor and that is inflation. The purchasing power of the dollar diminishes over time. The older I became, the more aware of this I became. My first car was an Opel and it cost me $1,800 driven out the door of the dealer including all taxes, title, etc. Today such a car would cost about $18,000.

So that needs to be taken into consideration when saving for long periods of time. Planners and economists tell me that long term inflation is usually in the range of 3.5 to 4.5%. For some years it is lower and for others higher. So for simplicity, let’s assume that long term inflation is 4.0%. My saving for reserves must include an additional amount to compensate for the higher future cost of everything.

My actual saving should be increased by 4.0% per year. For example, in year two, my savings would be $1,342 plus an additional 4% of $1,342. The total amount to be saved in year two is $1,342 + $53.68 = $1,395.68.

The saving for year three would be increased by 4% over the amount saved in year two. In year three I would save $1,395.68 plus an additional 4% of $1,395.68. The total amount saved in year three is $1,395.68 + $55.83 = $1,451.51. And so on for years Four through 25.

Here is a brief spreadsheet:
























The column "Accumulated Savings" indicates how much has been saved since beginning in Year 1. Of course, if this were a true savings account, the actual amount in the account would fall as I spent funds to replace items according to the budget. For example, sometime between year 10 and 15 I probably would have replaced my clothes washer and dryer. That would have depleted some of the funds in the account and lowered the amount saved.

Is this plan realistic? Will my anticipated or planned costs meet the actual costs of these elements in 15 or 25 year? Probably not. It is necessary to assess the actual cost of replacement of the elements with the amount of reserves I have accumulated for that purpose at any specific point in time. That is what our Association does from time to time. The Board and Managers and our professional managers review the amounts saved for each item in the “reserves” to the current actual cost to replace that item. Savings to each reserve item can thereby be adjusted.

In September of 1998 the total reserves for BLMH was $86,321. Subsequent review revealed this was inadequate for th ecommon elements including 44 roofs, streets and so on. That is why the Board of Managers began adjusting the fees collected. They were honoring their fiduciary duties and acting responsibly. I can’t say why the reserves were what they were. The professional manager, whose responsibility it was at that time to guide our Board of Managers, is no longer with us. Our current profession management came on board in 1999 or so and our fees began increasing shortly thereafter.

The Board of Managers increased the Association fees to increase the amounts directed into the Reserve account. In my personal plan, I might have to do the same. For example, when I purchased my unit, the windows were about 22 years old. They have already exceeded their anticipated life and to achieve the funds necessary to replace the windows in the near future will require I increase the amount saved each year to make up for that shortfall in funds. If I save an additional $500 each year for windows, I should have enough to do the job in 8 years or so. To save additional amounts, I'll have to reduce discretionary spending or increase revenue. Of course if the windows fail in three years, I may have insufficient funds to do the work. As an individual I may have the ability to borrow funds and go into debt. Our Association does not have the option of using a "credit card" and so it must save. Financing is a possibility, if it is available. However, boards must exercise caution because fees would increase to service the debt. Reserve funding must continue and cannot be diverted to "servicing the debt". As a Unit Owner, I can escape from under the yoke by selling my unit and renting. The Association has no such escape clause. Any and all debts pass to the Unit Owners and must be serviced by the fees collected.

The result of a “personal” Unit Owner Reserve Study:
On viewing this, you might be shocked by the amount shown to be necessary over a period of 25 years. The amount of “Accumulated Savings” is the total amount saved over that period of time. From the perspective that 25 years is 300 months, the projected amount to be saved and spent on replacing the “elements” for which I am responsible, is an average of $186.30 per month.

What the chart above indicates is how these small sums can accumulate over long spans of time. To look at it another way, if I live at BLMH for 25 years I may have to spend $58,000 on appliances, an air conditioner and furnace, windows, two stoves, two hot water heaters, etc.
Of course, I may choose to attempt to use the same stove for 25 years. There are choices and lifestyle tradeoffs. It may also be that inflation will only be about 3% for the next 25 years. Should that be the case, I would only need $48,928.33 to accomplish the same. Inflation at 5% per year would require $64,049.77. So lower inflation is my friend.

Unfortunately, I’ll have to pay whatever the going rate is for the appliances and windows at the time I replace them. I can choose a lower tier product such as the cheapest possible dishwasher when the one I am using requires replacement in 2033. But I can’t predict what that will cost in the year 2033, so for now I must use inflation and current costs.

So it is with our Board of Managers and our professional managers who, hopefully are diligently attempting to guide this Association to an uncertain future!

A well run Association will always be balancing the requirements of staying the course, with the requests of unit owners to expand the programs or change the course. Some of the demands placed on the Association are mutually exclusive and contradictory and cannot be readily achieved. So it is with our personal endeavors.

I would like to make one final observation. The amount I should save to maintain the elements for which I am responsible is $111.42 each month in 2009. The association is required to paint, repair, replace, maintain, snowplow, mow, provide street lighting, clean the common elements, provide insurance hire a professional manager, provide service, etc. etc. etc.! So when I am inclined to think my assessments are "high" I think it is useful to remember that my personal budget, which excludes the exterior and common elements, is about 33% of the budget I'm allocating to the association so that it can do its work. Sounds like a bargain.

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Notes:

1. This is an example. It would be prudent for each Unit Owner to prepare a similar budget for their own use. The Unit Owner budgeting technique described above will be familiar to people who practice the technique called LBYM. That acronym means Living Below Your Means.
2. I have used the cost of "mid tier" furnace and appliances in preparing this example. These are generally mid price and moderately energy efficient. If you want "only the best" then your prices could be at least 50% higher than what I have here. You should therefore plan a budget accordingly.
3. I am using a dollar figure for windows which was mentioned to me last year. I cannot say that it is accurate and I should get an estimate and update my personal numbers.
4. Inflation may be higher or lower than what I have used here. Any plan should be re-evaluated periodically to verify that the prices being used are realistic. If not, then the plan should be adjusted to correct the amount saved. However, from time to time we go through periods of unusually low or high inflation. We are currently in a period of very low inflation and many prices are unusually low. I caution the reader that such periods are often followed by higher inflation. It would be unwise to understate the amount to be saved.
5. Day to day or "Operational Expenses" also vary with inflation. It is prudent for the Unit Owner to plan on annual increases to the cost of fuel and energy. Food too, will vary from year to year. The U.S. government provides "CPI" data each year. Annual Social Security increases, determined in the fall of each year, are useful for anticipating the cost increases to basic consumer items. These predictive indicators are not perfect and are sometimes inaccurate, but they are useful.
6. I do not include a "contingency fund". This is an amount budgeted to cover possible shortfalls or unexpected price increases. Such a fund is an expression of the Associations committment to get the job done on time, even if there be modest price changes. If you have a driveway that is disintegrating, you probably want that repaired or replaced, rather than waiting another year because the price of asphalt is high this year due to high oil prices, and the Association had no contingency amount in its budget. "Contingency" amounts vary but are typically 10% or so. If I were conservative in building my personal budget, I might include such a contingency.
7. When constructing a personal budget, there are lifestyle choices to be made. For example, automobile prices and features vary greatly. For the purpose of this budget I consider a "basic" vehicle as being a sedan that seats 3 to 5. According to Kelly Blue Book there are about 20 such new vehicles priced under $20,000. Of course, you may choose a Kia Forte at $15,430 plus tax, title and delivery. Donald Trump would probably choose a Bentley!
8. If you have a personal bias against having a budget of the type described in this post, you probably are not a good candidate for a position on our Board of Managers. I suggest that because it is difficult to leave a personal agenda at the door when putting on our "Manager" hats. Of course, many people operate differently in their professional, work environment than they do in their personal environment. However, if I do not believe in budgeting, saving for the future, seperating essential costs from discretionary expenses, etc. then it might be difficult for me to do so with the Association funds.
9. I have heard our reserves described as "deep pockets" which alludes to the seemingly large amounts in those reserves. They are not available at the discretion of individual board members. They are Association savings and belong to the Association and have a specific purpose as defined in the published budgets. This excludes "emergency" expenditures which pose an "immediate danger to the structural integrity of the common elements or to the life, health, safety, or property of the unit owners".