Budget and Reserves

I've read the budget which was released to unit owners. This included the reserve study prepared by management and which I requested be released to unit owners. As directed by the board, management did release the study to unit owners with the proposed 2010 budget.

I don't know if unit owners have read the study. If not, I suggest you do so. It includes some interesting information.  I have updated my 2008 spreadsheets and I will be providing additional insights and perspective into the 2010 budget. Until then, I suggest the reader review the 2010 budget and in particular, the management's comments on "Roofs". To quote the report "Maintaining the current funding will limit the association to replacing no more than 5 buildings (10 entries) over the next 8 years, beginning in 2010. Management is not convinced that any of the roofs will be able to wait 8 years to be completed."  I would suggest that unit owners contact the board and ask them what their plans are, in view of this appraisal by management.

Let me state that my interest in the portion for the reserves is basic. About 72% of our fees are allocated to the day to day "budget". The budget released and with the letter dated December 1 is interesting. It seems to be essentially a duplicate of the budget for 2009. After board discussion about some items such as "bad debt" this has not been added to the budget. So there appears to be little concern on the part of the board about uncollected fees,  foreclosures and so on!?!

Our board has control of the spending of all fees collected. About 72% of the fees go to that part of the budget which is not allocated to reserves. However, some of these expenditures are less discretionary in nature than are others. For example, expenditure for electricity is mostly fixed by basic needs, such as lighting. Snow removal is another item for which there is limited budget control. The board can decide to allow more snow to accumulate before the removal service arrives for a "push". But would the residents tolerate this reduction in service?  Grounds contract and  maintenance includes discretionary items, but the board has decided to increase this slightly for 2010 and apparently will not be cutting any items in these budget items, which nearly equal the cost of the Maintenance Contract, which was so hotly debated by new board members last year - go figure!  It would seem to me that this is one area that could be closely scrutinized and budget improvements made. The board has discussed this during association meetings; for example, re-allocating landscaping budgets, re-thinking some of this, and applying river stone or equivalent around some of the buildings affected by rainwater run-off and muddy, etc. But there has been no action to date.

Some members of the board did pledge to go over the entire budget and even peruse each and every bill during their election campaign in 2008. However, the submitted budget is nearly identical to last years budget. So that effort has apparently been abandoned or has proved to be fruitless.

Returning to the proposed budget, about 28% of the fees are allocated to the reserves. That 28% is nearly equal to the amount of fee increases in recent years, lending credence to our professional manager's statement at several association meetings, that our reserves were underfunded. In other words, most of the increases in fees in the past 5 to 10 years have been allocated to funding reserves. According to the information released, the fees for reserves are collected and allocated for the purpose of roof repairs (54.5% ), paving (18.1%), concrete (12.1%), masonry (9.1%),  lake (4.5%), carpet (1.5%), infrastructure 0%) and lighting (0.0%).

The board has chosen not to fund certain items. As noted above, lighting, which is the amount for replacement of fixtures is currently 0%. Management suggested that some infrastructure funds be moved from "contingency" to "reserves". The board has apparently chosen not to do so. Concrete may be underfunded, as noted by management in the report.

Now why would the board avoid funding an infrastructure reserve and minimize funding of other reserve items? One reason is to keep fees at current levels. To fund additional reserve items or increase funding of reserve items would require a reduction in operating expenditures or a possible fee increase. I think it is also worth considering the methods available to the board for manipulating funds. Funds allocated to general operating expenses are available at the discretion of the board. If the money is not spent or appears not to be spent in the budget year, it can be moved to another category and spent at any time. Funds in reserves catagories are essentially in a "savings account" for use for the designated item. It is more difficult to move or manipulate these funds. Pulling funds out of reserves for spending on discretionary things is a "red flag" item. So I can understand the possible apprehension on the part of the board or board members in placing funds "off limits" in reserves.

However, given the history of this association, I think unit owners must be wary of the funding of reserves. In 2008 there was an attempt to replace our current management, who are financially astute. A return to the "good old days" of underfunded reserves is a real possibility if we take on a new manager. And I don't care what certifications or credentials a manager possesses. I have seen highly educated people do remarkably stupid things. Under pressure of a board to reduce fees, it would be very easy to simply let our reserves fall off a cliff, and leave future unit owners holding the bag. This did occur here prior to 2000, is currently occurring at other associations in the area, and certainly could occur here, again, if directed by the board and allowed by unit owners.  To put it bluntly, I am not certain current board members have the financial acumen or the association's health in mind. For example, after the open debates about funding an "infrastructure" reserve, in which valid points were made, it would seem to make sense to create such an item, and management seems to favor this. However, our board did not. So they have chosen to ignore "infrastructure" and prefer to gamble with the "contingency" funds available, leaving these funds available for discretionary spending rather than the funding infrastructure repairs. It is my opinion this is not a good method to run a business.