Budgeting - Part I - Fees and Assessments

To look at budgeting, I'm going to put a little history here as well as current events. Why? Some owners seem to either be unwilling or incapable to deal with the reality of budgeting for this association. I think that has, over the years,  included board members.

Budgeting is simply matching money collected to money spent. We all have budgets, and in any given year, as a general rule, this association should not spend more than it collects. However, some expenditures or spending, requires so much money that it cannot be saved in one, two, or three years. Our roofs, driveways and garage floors are good examples of this. It takes many years of saving to accumulate sufficient money to pay for these large and expensive projects. How many years? Our roofs and driveways have a lifespan of about 20 years each.

So over a period of 20 years, the association, via our board, with the advice of management, should attempt to collect sufficient fees from the owners, and save a portion of that each and every year. The goal is to collect enough money to replace the driveways and roofs as they approach the end of their lifespan. In this way, collection of fees, the aging of roofs and driveways, and the spending to replace them, are matched.

Long term budgeting has some considerations. One of these is the gradually increasing costs of driveways and roofs. That's called inflation, and money must be collected each year at a pace that assures there will be enough to purchase those new roofs and driveways when the time comes. That money that is collected will be saved and will accrue interest, which will be taxed. That interest may not be enough to fully offset, or be equal to inflation. So, the board must collect a little extra each year, to assure that the amount accumulated over 20 years, also matches the cost of a roof in 20 or so years.

How severe is inflation? I was talking to a long-term unit owner recently and she pointed out that in 1978 her monthly fees at BLMH were about $38. Today those fees are about $268.  That's not just inflation. For many years, those monthly fees simply didn't include sufficient savings for roofs, driveway, garages and so on. If there is any consolation to this, I can only say that from my limited experience, many other associations did not save enough, either. However, "that was then and this is now." We now know a lot more about running condominium associations today than we did 30 years ago. There are requirements for professional managers, and boards are much better informed. However, human beings have not changed in 30 years and so there are many of us attempting to benefit at the expense of others. So, even though we have all this information and guidance, we are not assured success.

Here's another example. If we had saved money for roofs assuming they would be the same price today, in 2010, as they were in 1978, we would not have enough money and a special assessment would be necessary.  In fact, when I considered purchasing here in 2001, I discovered this association had less than  $400 total savings in reserves for each unit! Consider that today, a 4-unit driveway or garage floor replacement is greater than $4,000 and the roof of an 8-unit building is greater than $40,000.

If our association had continued saving for roofs at the same rate it was saving in 1999, we would today have about $4,500 saved for each roof. Clearly that is not nearly enough money! So where would the additional $36,000 for each roof have come from today? From a special assessment, either directly to each unit owner or a special monthly assessment to pay for the mortgage incurred by the association.

Why Do We Need to Save Today for Something Someone Else May Benefit?
Those owners who this year get new roofs, and owners who get new driveways, and yet others, such as our president who will this year get the benefit of a new driveway AND a new roof, will do so because many owners "chipped in" an amount each year for the past 12 years to pay for this.

Is that fair? Yes, it is if we all get those benefits, under the same circumstances and with the same fees.

That new roof will begin aging immediately after installation. The association should immediately begin saving enough money each year to offset that aging, so that some day in the future, we will have sufficient funds to again replace the roofs. That's the job of the board. It works for the association, not for individual unit owners. Or, it should.

I think of it this way. When we get a new roof, we get an immediate and wonderful benefit. But we don't get an immediate bill.

But it doesn't have to be that way.  This association could instead assess each unit owner about $6,000 and do all of the roofs. That's another way to do it. Every 20 years just levy a large assessment. That would not quite be fair to a new unit owner, who was simply "unlucky" and purchased the year prior to the special assessment. Of course, others would be "lucky" and would sell their unit just prior to the special assessment. So in the name of fairness, experts recommend gradual accumulation of fees, and the Illinois Condominium Act demands it of boards. In my 9 years here at BLMH, I have yet to have a single unit owner tell me that they want a special assessment. I've never attended an association meeting and seen an owner demand one, either! Of course, there are some here who hope to escape these fees.


Spending and Not Saving
In the 1980s and 1990's we experienced some nasty recessions. Somewhat like today. So our boards made the decision to keep fees low. Those decisions, made over many years,  required that fees be collected to primarily meet immediate, annual association spending requirements. Enough was collected to meet annual budgets and pay the bills, but not much more. Reserves were spent but not sufficiently replenished. This assured that larger assessments would be passed to future owners, such as you and I.

Perhaps the thinking then was "we'll raise fees next year." I don't know! However, putting off these decisions is a serious mistake. Who can foretell the future? Who thinks it will be easier to raise fees "next year" than it was "this year?" Returning to the present, our board decided on a 0% fee increase last year. Will that make it easier to raise fees in 2011? Will we be able to "catch up" and rebuild the reserves we did not collect? I seriously doubt it.

However, commencing about 1998, newer boards under the guidance of new management, concluded that this was not workable. The decision was made to increase fees to both meet immediate needs and future requirements, such as roofs and driveways. However, it is not easy to collect 20 years of fees for reserves, in 10 years. This association was unable to do so, and so began a race against time. The race is this; could we collect sufficient fees to replace roofs and driveways as they decayed and approached failure, without special assessments?

Our boards, over the past 12 years, decided to try. What other choice did they have? They were opposed to special assessments, so they made the decision to attempt to balance spending to saving. That required the gradual and continuous increasing of fees, and the saving of a significant portion for 12 years.  By 2009 they had amassed about $1.5 million in reserves and made the decision to commence the driveway and roofing projects. This too was a significant commitment, which was possible because it was balanced by the commitment to collect the necessary fees.

Why? Because in 2009 we lacked sufficient fees in reserves to do all roofs and driveways. So to do this project meant that it was necessary to continue collecting fees at a sufficient rate, or simply postpone the entire project until sufficient reserves were available.

Did Last Year's Board Decide to Go Another Way?
Last year, a new board decided to stop the fee increases and selected a 0 percent fee increase. Funds collected for reserves were "frozen" at the same rate as 2009. So, in 2010 our roofing and paving reserves would have increased by the same amount as 2009. Will there be a consequence to this? Yes there will; it will take longer to save the necessary fees to do all of the roofs. It will also take longer to save the fees to do the driveways.

What does that mean? Some owners will have to wait longer for their new roofs and new driveways.

Did that board have another goal? I don't know. They did not explain this action, nor did they explain the consequences to unit owners. So it is entirely possible, that like the boards we had in the 1990s, this board simply made a bad decision.

However, in 2010, the board also decided to go "full steam ahead" with the roofing and driveway projects. They apparently believe we have sufficient funds. That big number of nearly $1.7 million on September 30th does seem like a lot, but it is not enough.

Exploitation and Spending Phase
We have now entered a new phase here at BLMH. I'll call that the "exploitation" phase. That's the phase in which the money so carefully collected over many years, is now being spent, and spent rapidly.

This year, the new board had the wonderful opportunity to spend some of that money collected by the previous boards, and so they decided that 52 percent of our entire paving reserves, which includes reserves for both streets and driveways, would be spent on 14 driveways; we have 84 driveways in this complex, and three small parking areas adjacent to driveways and not a part of the streets. A little arithmetic would seem to indicate that we spent most of our paving budget on 14/84, or about 17% of the driveways here. I asked the board at the annual meeting what actual percentage of driveways, based on area, were completed. The answer was "I'll find out."

This year, the board also decided to do 4 roofs. We had 81 remaining on the schedule. About 15% of the roofing reserves were spent on 5% of the roofs.

Clearly, we need to keep collecting fees to do all of the roofs and driveways. In fact, at the current rate of collection, we probably will not have sufficient funds to do roofs in a timely manner. We certainly will be unable to do all of the driveways in 5 to 8 years.

So, how could the board make the decision to freeze fees? Why don't you ask them!

Budgeting
I have decided to "hit the ground running" as a new board member, and I'm preparing my own budget analysis. I'll be presenting some of that here over the next week.

I have begun measuring the driveways at BLMH so I get a much better idea of the real costs of this project. We currently know the cost of the 14 driveways completed last week and their area. I now know the area of an additional 23 driveways. Combined, that's about 44% of the driveways. I have also photographed all of the larger driveways and I'll make approximations from those. I expect I will have a good idea of the true costs in a day or two. I'll then compare that to the recommendations of the reserve study and our current fee schedule. I'll be able to report when the driveways will be completed and by how many years we will miss the recommendations of the reserve study.

I have also completed a spread sheet of the current roofing project and also the funding requirement for the next phase, in 25 or 30 years. I'll explain the significance of that in another post.

What does this have to do with budgeting, you may ask? Previous boards made difficult decisions, with the guidance and recommendation of management, to collect sufficient fees to financially empower this association. I intend to supplement the information available, so that this board, of which I am now a member, will have substantial information upon which to base our decisions. What we do, of course, remains to be seen, but this board will not be able to say "we didn't know." They will be given the information and will therefor know; I will make certain of that. And, so too will you!

Last year, I met with our newly elected AD a number of times. In our first meeting to discuss the architectural and infrastructure needs of this association, I told him it was absolutely vital that he "hit the ground running." I am taking my own advice. I have several advantages, including my skills and the knowledge gained from attending most of the past three years association meetings. I have been analyzing this association for many years, and have published much of that information here. I think I am well prepared.

Comments, Corrections, Omissions, References, Miscellaneous News
Note 1. I have no illusions about the coming year. I am completely aware that I am but one of seven votes and I am overwhelmed by the others. Clearly votes can always go against any position I make.

Note 2. I suppose that any fee increase, should it, or when it occurs, will be attributed to me. That was part of the chant against me by the unenlightened ones. "Vote for Norm and you will get fee increases!" I wonder who on the board was behind that?  As I said in "Note 1" it is not possible for me to vote in any fee increase or decrease. It will require the entire board. I have no problem with fee decreases, if the board can continue to pay bills and save sufficient money to assure that all owners get roofs and driveways in a timely manner, just as those who got a roof and driveway this year. By the way, my building was scheduled for a driveway in 2009. I and 55 other owners were the "lucky" recipients of new driveways this year. Due to some mix-up, four other owners, including our current president, also got a driveway. That means there are another 276 owners waiting for their turn and the day they too will get a new driveway. Will this and succeeding boards make that happen?

Note 3. The board decided to authorize a "reserve study" last year and an edited and revised version was announced and released to the unit owners at the annual meeting. Will the board heed the advice of that study and the advice of management? If not, why bother to spend the money? I have often wondered why the board  did authorize and spend the money on this study. I suspect some genuinely thought this was a good idea and would provide valuable information. I also think there are others who truly believed our fees are too high, and such a study would demonstrate that previous boards and management were collecting far too much of our precious money. It seems they were wrong. Did we get a summary of the findings of the study at the annual meeting? No, we did not. Why is that? Perhaps this board majority is committed to only producing that which supports their positions. That is certainly one possibility. Another is simple politics and simply stated, that is "Don't produce anything that could harm a current board member's chance of re-election. "