Budgeting Part III - Budgeting and the Reserve Study 2011

This post was prepared several days ago, but publishing it was delayed because of current events and other obligations. Note added 11:30am 10/15/10, this post may have obliterated the brief one about yesterday's fire. That post is here:

Click Here for Post About Yesterday's Fire (October 14)

By my rough estimate, I've put about 60 hours into evaluating the reserve study. That time has been spent in reading the study, researching the statements and conclusions made in it, preparing my notes and spreadsheets and other analysis, and applying the conclusions and data of that study to those spreadsheets, for the purpose of developing projections.

I became concerned by some of the statements and conclusions of the study, and by the sums spent on a small portion of our driveways this year. So much so, that after I completed my initial analysis of the reserve study, and our driveway program, that I prepared a 3,000 word document, a "Rough Draft - Review and Highlights of the Reserve Study - October 8, 2010" to provide to my fellow board members at a brief workshop on Saturday, October 9. Our president agreed to attend, but two members declined due to schedule conflicts. The remaining four members did not respond to me, nor did they attend. (Note 2)

So, where to go from there? I decided to create a letter to the management and to my fellow board members. This was issued the morning of Sunday, October 10 as an email. It is a nearly 4,000 word summary of the current situation, with data and my concerns and considerations.

About fees, I see the issue as somewhat straightforward, but there are complications. First, we can’t spend money we don’t collect. That’s why, when the board voted a 0% fee last year, I was of the opinion that it needed a companion austerity program. I do understand that voting "0%" is much easier than creating an austerity program. Many of our costs are “built in” and include essentials such as snow removal. Others might be elective, but who wants to clean their own halls? I see no owners clamoring to take over services, and recent boards I have been present to did not discuss this in front of unit owners, or caved when there were complaints about dirty halls. Finally, when there is a repair required, owners will call this in to management, who issues a work order. Some owners are more persistent than others, so they call and complain when things aren't done in a timely manner. So, it seems the majority of complaints and requests are acted upon. That means a steady stream of work orders, and a steady flow of dollars out the door. This is what I call an "open ended" contract, which is one in which there is no cap on spending.  In the end, while an “austerity program” might sound like a good idea, what are we to give up to achieve that? What do we give up to lower fees? How do we set a cap? In other words, where and how to we say "NO"? We can't simply say "well, we spent $5,000 this month, so there are no more work orders until next month except for emergencies." So, are there any non-essential services we are willing to forgo? Is anyone willing to say "no" to a single unit owner? In 2008 and 2009, there were unit owners attending meetings who shouted “what do we get for our fees” and also complained about dirty hallways.

Some recent board members implied that the problem was waste and inefficiency. We were spending money needlessly. This was grounded by the opinion that our “fees are too high,” and could only be explained by waste, mismanagement or fraud. Certainly it could not be based on necessity. Well, the big push in 2008 to “scrutinize every bill” seems to have gone nowhere. Because of the complete silence in this matter, I am unsure if it is because after the “scrutinizing” there was nothing to report, or if it was simply a convenient campaign slogan that went nowhere.

I'll be monitoring finances, and I have made a suggestion to management that has the potential to save a significant amount of money. But I won’t be scrutinizing every bill. That was someone else’s campaign slogan, not mine. I’ve put my time in on this reserve study. I am now willing to take some responsibility for it, commencing with my actions effective October 1, when I picked up a copy. Everything prior to that is someone else’s doing.

So, the question might be “how low do we go” in funding this association. We tried 0% last year. An earlier board actually had a negative assessment. That means they gave money back to unit owners at the end of the year, I guess. A similar question about “how low is practical” might be what prompted a unit owner to stand up during the annual meeting and state “I didn’t buy here to live in a ghetto.” She then went on to state that was an exaggeration, but that because of some of the things she has experienced at BLMH in recent years, she is now concerned.

When it comes to money, passions do run deep. It’s useful to remember that the investment we each have at BLMH may be the one of our largest, and was approaching $200,000 at one time, not so long ago. Should we nurture and protect that investment? Or simply allow it to decay? Some want to sell at top dollar, which implies they want the property maintained. Some want special plantings at additional cost. Some want to spend no more than 1% in fee increases each year. There seem to be a range of owner opinions.Even in today's very low inflation, keeping expenses below a 1% increase could only be achieved by forgoing some maintenance. That low number would also assume that our roofing, driveway and other projects such as streets, are fully funded. They aren't, and at least one, the driveway project is severely underfunded, if we are to replace all in a short period of time.

It will be a board decision about when and if there is any austerity program at BLMH. That will require a serious discussion of what we are willing to give up, and what we should give up, and how to give it up.

Returning to the reserve study, I have reviewed and studied most of it. As I stated earlier in this post, I did produce a 3,000 word document for the use of the board.

At this point, the responsible thing to do is to use the study constructively to reach as many conclusions as possible, including the impact, if any, on funding and fees here at BLMH. It will take additional time to research some of the conclusions, and those may be deferred from current planning. We’ll see. When management stated to the ownership that the 7% recommended fee increase is based on the study, with a decision to disagree with one or more study conclusions, such editing would seem the approach. Some items have apparently been removed from consideration at this time for technical reasons.

It would have been helpful to distribute the work of the reserve study among the board members, so that we would each be fully prepared for the budgeting workshop, and so we would have some “ownership” or a stake in what it says. I’ve spent the equivalent of between one and two “work weeks” with it. That was my personal choice; there was no request made.

There are portions of the study that are "obtuse" and difficult to decipher. There are omissions. The study makes some statements and conclusions about reserve areas, about which the text and supporting data varies and sometimes there are contradictions. That creates some difficulties, and the report must be very carefully read and notes taken.

The study provides funding and budgeting projections, based on the various descriptions, photos and tables. There are options given, and so it is necessary to decide which option to choose. In the end, I found it helpful to generate spread sheets for:
1. Notes
2. General Financial Data and Summary
3. Reserve Study Conclusions and Data
4. Reserve Budgeting Tables and Data
5. Roofs
6. Driveways
7. Garage Floors

I could add others, but am waiting for the conclusions of the budgeting workshop and specific recommendations of management to questions that have been asked.

There are other issues in the report, and it omits our garage floors. So there is a lot of data and some discrepancies to sort out. Some is this is simply due to the subgroups of infrastructure in the report, which is different than the current grouping at BLMH. So it is necessary to come to various conclusions for each area of our infrastructure. Some of the areas included as major in our current reserves and also in the report or worthy of specific analysis and budget review include:
1. Roofs
2. Paving - Driveways
3. Sealcoating - Driveways
4. Paving - Streets
5. Repair - Crack Filling - Streets
6. Concrete - Garage Floors
7. Concrete - Curbs
8. Concrete - Sidewalks
9. Concrete - Streams
10. Building Exterior Masonite Panels
11. Building Masonry
12. Hallway Carpeting
13. Lake Restoration
14. Exterior Doors and Entrances
15. Hallways
16. Contingency

My letter of October 10 to the board expressed fully my concerns including the statements of the Reserve Study and the issues it raises, and the budgeting process which will culminate in the workshop meeting of October 14. The board authorized the reserve study and it has an obligation, as I stated in my letter "The association spent [a large sum] for this study and we have an obligation to find in it what we can and use it to the best advantage of the association and for its intended purpose. I may disagree with some of the findings, but I can’t simply throw it out the window and disregard it."

So, how is a board to respond to this reserve study? Here is a quote from my letter:

“As fiduciaries, the board has some extraordinary responsibilities. I am going to summarize one aspect here because it is the heart of this matter.........

There are two aspects of fiduciary duty. The first relates to a director’s responsibility to perform his duties in good faith, in a manner each director believes to be in the best interest of the association, and with such care, including reasonable inquiry, as a prudent person in a like position would ordinarily use under similar circumstances. This standard of care has been adopted in most jurisdictions and is often cited as the “prudent person standard” or the “business judgment rule.” Directors will not be liable for mere mistakes in judgment so long as they act in good faith and have a rational and informed basis for their decision.”

The “reasonable inquiry” above would seem to mean that for the current budgeting process and reserve study, the board must come to an informed consensus about the specific recommendations. The definition of fiduciary duty would mandate that every director of BLMH review this study, become familiar with it and be willing and able to discuss some of the key points and conclusions of the study. Why? Because the study is a critical component of the budgeting meetings this board is preparing for. The board has an obligation to be prepared, and because each member votes, each member must be in a position to “act in good faith and have a rational and informed basis for their decision.”"

In reviewing all of the data, and of course, the general issue of fees and funding, I asked this question of my fellow board members: "How is the board to raise the necessary funds? I think that your personal philosophy and position on this should be stated. I most certainly want to know what it is. Is it to be through annual fee increases, or special assessments or both? What does prudence dictate? Do we ignore recommendations and/or defer fees and assure special assessments at some time in the future? Is that a responsible course of action? Can our owners afford a special assessment or assessments? If they can’t afford such today, what makes any of us believe they can tomorrow?.......[As] for myself, and as I have repeatedly stated, IN WRITING, I am opposed to special assessments. That means that I am committed to finding financial solutions that result in the smallest possible incremental fee increases and satisfy our association’s funding requirements at a minimum cost to owners over the entire life of the various programs."

I take my responsibilities as a director and as a fiduciary very seriously. That's why I have spent an extraordinary amount of time with this reserve study. I intend to "squeeze as much juice" out of it as I possibly can and derive full measure from the money this association spent to get it. Should you, as an owner, expect anything less from any board member?

Comments, Corrections, Omissions, References, Miscellaneous News
Note 1. This budget meeting will be "act one" of a multi-part action on the part of the board. There are some aspects of the reserve study that will require additional research, and some of the longer term implications won't be resolved this week. However, given a few months of time to proceed and a willing board, we could have a good plan in hand to present to the owners.

Note 2. Our Treasurer and CD responded and declined to attend the pre-workshop "workshop" because of previous commitments.

Note 3. Independent of the study, there was a “step change” in asphalt prices in 2009. I’ve read reports attributing this to the government “low sulphur diesel fuel” mandate. Whatever, the reasons, asphalt prices tripled and have not “returned to earth.” This was evident in the driveway bids for 2009. It appears prices may not return for some time and they may never. That has a profound and significant impact on our street and driveway programs. That’s why, as a unit owner, I stood up at the annual meeting and asked some questions about the percentage completion versus percentage expenditures for the driveways.

Note 4. In a letter to the board, I stated in very straightforward language, that I will not be a scapegoat. To put it bluntly, I was not involved in the evaluation and selection of the vendor, I did not vote, and I did not interview the author or review the rough draft or drafts. Nor did I exert any influence on the board. Getting to where we are today was a board decision. It will take the entire board to find a funding solution. Management stated to owners and the board at several meetings over the past three years, that there might be unwelcome consequences to a reserve study. The board decided to go for it. The board now gets to decide how to deal with it and the matter of the fee increase recommendation of management. As I am now a member of the team, I will be a part of that decision making process. We'll sort it out and we will, collectively and as individuals figure it out. In the end, I hope that each member of the board can own the result completely and speak of it as owners, and as creators of whatever plan it is that we design.