Another Significant Economic Event

In the recent posts on budgeting and inflation, I stated that it is important to include certain economic information when making assumptions. That includes monitoring certain trends, which include interest rates and employment statistics, as well as the price of certain commodities and energy. However, to get a better idea of the future that we are budgeting for, it is necessary to monitor the activities of the Federal Reserve, as well as the current Administration in Washington.

This goes beyond the political speeches, which are often quoted. Speeches by politicians are designed to get approval and to get votes. They have little to do with achieving results. For example, I think every President of the US since Jimmy Carter has made strong statements about the necessity of the US achieving "energy independence" and then went on to tell the voters how they were going to get us there. 36 years later we are about at energy independent as a two year old, who can say "no" to everything, but can't feed or bathe themselves.


The Federal Reserve Makes an Important Announcement

On January 25, the Federal Reserve Chairman made a significant announcement. He stated that it is expected the Federal Reserve (the Fed) will keep interest rates low for another three years, through 2014. It was also stated that the Fed may begin a bond buying program. In such a program, the Fed prints money and exchanges that cash for the bonds held by others. Saving money may soon be even less rewarding. The Federal Reserve’s announcement Wednesday to keep short-term interest rates near zero through 2014.

The Consequences of a Low Interest Policy

It is probable that this policy will result in still lower interest rates on bank accounts.

The important question to ask is "How low?" Interest on savings accounts may drop closer to 0% over the next 12 to 18 months. At present, the average rate on savings accounts is 0.36%, down from 0.4% in November. One-year and five-year certificate of deposits have an average yield of 0.33% and 1.57%, respectively. Even worse, savers will have to put up with nearly nonexistent returns for at least another three years before they can see any meaningful improvement.

What does this mean for HOAs? It means that owners cannot expect interest rates to help offset the costs of running their associations! They will have to dig deeper into their pockets and pay slightly higher fees than might otherwise be expected.

Do you love "change" of this type? If not, all I can say is, think about this when it is time to vote during your HOA and other elections this year!

Inflation 2012 and Budgeting

Before proceeding with "Part 2" of my post on "Budgeting 2012" it's useful to consider cost increases and in particular, inflation. These price changes obviously have a profound impact on one's financial planning, and one's actual expenditures. Some of the price changes are gradual. Some, however, are rapid changes. Such large swings in prices is referred to as "volatility." When prices go up and down, sometimes in large jumps, this can wreak havoc on budgets. Most businesses have forward looking plans. As a business, and in accordance with the Illinois Condominium Act, our HOA is required to. Before considering how to deal with price volatility and inflation, it's important to have some awareness of what they are and just how excessive these changes can be.

So how profound is inflation and volatility? How does it influence a typical budget, be it a personal one, or our associations? What can I do about it?

Inflation and Price Increases or Decreases, and Choice
I could use my electricity and natural gas costs as an example, or food, or other utilities. For this post, I'll use gasoline. It influences most households and certainly just about every business, and that means our contractors. Gasoline is a significant expenditure for our landscaping and snow removal contractors. It is also so for me.

Let me also state that I attempt to purchase gasoline at the lowest available prices. However, if I am in the northern Illinois area, I will purchase gasoline in the City of Wheaton. Why? Well, as I have stated in earlier posts, I attempt to "buy Wheaton" because a portion of those sales, most notably the municipal portion of taxes, goes to the city coffers to pay for some of the services I use. Of course, I am also supporting many local businesses if I purchase goods and services from establishments in Wheaton.

That decision to purchase in Wheaton does mean that I do pay higher prices for gasoline from time to time. That's an example of a personal decision, and that decision does influence how much I spend. Other personal choices and decisions influence other areas of my spending. This includes, for example, decisions pertaining to the use of cell phones versus smart phones with data lines, the setting on the home thermostat, the food I eat, the number of meals purchased in restaurants, the type of cable or satellite TV I have (none, basic, premium, etc.), the types of appliances (refrigerator type, energy star 32" TV or 60" plasma, the efficiency of my furnace and hot water heater), the use of CFL bulbs versus incandescent, and even my vacation and pets, and so on.

In a budget, while it is useful to consider inflation and to assume that prices will increase over time, it is also useful to keep track of real costs. Not all prices move together and in the same direction at the same time. Such tandem price movements do sometimes occur. But prices may vary at different rates for gasoline, other fuels (natural gas), electricity, basic foods, and insurance or other goods and services. The government and various agencies track and publish this information on a regular basis. Some of this is available in the popular media, but it is a goal of these websites to get one to support the advertisers, as is also true with newspapers and magazines. For that reason, many of the articles have sensational headlines and are long on emotion and short on facts. The writers often have a personal bias, or personal concerns and that is frequently reflected in what is written. So most of us get information that is distorted or half-truths.


Using Gasoline as an Example
Here's a chart of the cost of premium gasoline as consumed in one of my vehicles. This is not a "hypothetical example." This is the actual cost of fuel used in that vehicle, per gallon. There are nearly 500 gasoline receipts to support this chart! The chart begins in February of 2005.

The chart shows a trend line, which indicates that gasoline prices have increased at a rate of about 5.25% per year; we could call that the "average increase" or inflation in the price of gasoline, over the period of time in the chart. That's higher than the actual, government published rate of inflation over the same period. But gasoline prices have increased at a rate higher than the government published CPI-U or "inflation" numbers.

The chart  also highlights how prices can vary quite a bit above and below that trendline. It's a good example of what economists call "price volatility." These huge swings can have a large impact on one's budget and can even stress it when those "spikes" occur. In 2011, the average price I paid for gasoline increased about 31% above 2010 prices!  That is substantially higher than the average annual increase of 5.25%.

Later in this post I'll be looking more closely at the numbers behind the chart, and the dollar value of those spikes.

The huge price drop that occurred in the fall of 2008 was during the "Panic of 2008." So who says economic disasters are all bad? Premium gasoline was nearly $4.50 a gallon before the Lehman Brothers and government orchestrated financial disaster. Immediately thereafter it had decreased to less than $2.00 per gallon! So for about 2-1/2 months, prices fell until again increasing. The price of gasoline is determined by the price of oil, and a large part of that is controlled by the OPEC oil cartel, which currently prefers that a barrel of oil be priced at $100. However, consumption, which is to say "demand" also influences the price, as does anticipated consumption. Those who produce or trade in oil are willing to pay a higher price for the raw material if it is expected they will be able to sell it and the products (fuel oil, gasoline, diesel, lubricants, etc.) at a higher price; the opposite is also true:

The above chart is a useful example of the necessity of using methods such as cash savings to adjust for volatile situations, or contracts to hold prices steady, or both! Taking such protective measures is "good business practice." Individuals can't enter into contracts, so we have to rely on budgeting and saving for the future. More on that in Part 2 of the budgeting post.

The Numbers Behind the Chart
My average cost of fuel was about $2.504 per gallon in 2005, and was $3.908 per gallon in 2011. As can be seen in the chart, fuel prices peaked between April and July of 2008, decreased thereafter and began rising at about the average trendline rate, but surged or spike again in 2011, and have decreased since then.

So, while the average price increase per year was about 5.25%, the actual costs to purchase gasoline in any year was sometimes higher than expected from that average 5.25% increase. Why then use longer periods? Because we're making long term plans, and if not, we should be. We will have to deal with short term price changes, but we will also have to deal with the longer and more far reaching consequences. Every one of us expects to retire some day. That means, we will have to replace wages with pension, social security benefits and savings. It would be best to begin such planning early in life.

If we look at the price of gasoline in the most recent two years, that most recent price spike beginning in January 2011 contributed to an a change in price of 24% per year over that two year period!  This is important. So when one begins measuring, and when one ends, will have a profound impact on the data, which means the decisions made from the data. Politicians love to pick and choose data to support their positions. This is intellectually dishonest, but it does win elections. However, there is no place for politics in an HOA. Being a board member most certainly is not a popularity contest!

Here are the costs for gasoline in each of seven years, for 647 gallons of fuel per year, which was about my average annual consumption over that period. I am using a fixed quantity of gallons so that the annual cost below reflects only the changes in the price of gasoline purchased:

1. 2005 = $1,621.
2. 2006 = $1,777.
3. 2007 = $1,966.
4. 2008 = $2,097.
5. 2009 = $1,986.
6. 2010 = $1,930.
7. 2011 = $2,531.

As you can see above, the cost per year sometimes increased, sometimes decreased, and that increase or decrease was sometimes larger than the trend line increase of about 5.25% per year. So what was the annual price change as compared to the previous year?

1. 2006 = +  9.63%
2. 2007 = +10.60%
3. 2008 = +  6.68%
4. 2009 = -  5.27%
5. 2010 = -  2.83%
6. 2011 = +31.12%

What can I observe from this information?

1. Prices invariably increase over longer periods of time.
2. Such increases may come in "spikes or surges" and may not increase at a steady rate. 
3. Prices sometimes decrease for a time, but eventually continue their increase.
4. While economists might talk about "average" price increases, or inflation, the actual annual changes can be much larger!

What conclusions might I make from this information?

1. If I want to plan a budget for the future, it might be a financial mistake to use "average" numbers for determining how much that future annual gasoline bill might be. Or any bill, for that matter!
2. When planning a budget, it's necessary to take into account macro economic data (what is expected to occur with gasoline in the next 12 months, or 24 or 36?).
3. When planning a budget, it might be prudent to build a cash cushion for things that are more volatile, gasoline for example, the price of which can skyrocket for short periods. How "short" is a "short period?" It might be a year or longer! But eventually, costs will revert to a trend line. 
4. Making annual adjustments and calculations and using them to update the information can support the decision making process. 

How Much Did My Gasoline Purchases Actually Change from Year to Year?

Looking at the actual gasoline purchases, how much money am I talking about? Using gasoline expenditures for each year, 2005 to 2011, how much did I spend to purchase 600 gallons per year? I'm assuming that in each year, I would adjust my driving so it would not increase or decrease and would be the same for each year. So how much more or less did I spend each year to buy that gasoline, as compared to the previous year?

1. 2006 = +$156.08 more than in 2005, or $13.01 per month more.
2. 2007 = +$188.49 more than in 2006, or $15.71 per month more.
3. 2008 = +$131.25 more than in 2007 or $10.94 per month more.
4. 2009 = -$110.57 less than in 2008, or $9.21 per month less. 
5. 2010 = -$  56.29 less than in 2009, or $4.69 per month less.
6. 2011 = +$600.71 more than in 2010, or $50.06 per month more!

On a monthly basis, my gasoline cost in 2011 was $50 a month more, each and every month, than it was in 2010! Why such a huge difference? Well, prices had been decreasing for three years. So by 2010 we were below that "trend line" in the graph, which is the expected price at the usual increase. So if I used only one year of data, and assumed in 2010 that prices would "only" increase 5.25% in 2011, and ignored the trend line, I would have been making the erroneous assumption that prices would stay low for another year. Having access to some economic data, which includes the policies of OPEC and oil consumption figures on the planet, as well as long term prices, would have contradicted a "price decrease" assumption.

There are web sites which provide historical gasoline pricing information. These can be used to determine 5- and 10- year trend lines, from which personal decisions can be made. I've included a few sources in the notes at the conclusion of this post.

Using the Information to Plan my Gasoline Budgets

One thing of interest is that while gasoline increases were a reasonably steady rate in 2006 and 2007, that increase was lower in 2008 than in the preceding two years. In 2009 gasoline actually cost less than in 2008, and so too for 2010.

Was that a good thing? Well it did reduce my expenditure for gasoline in 2009 and 2010. Was that a time to celebrate and purchase a new iPhone? Or was it an illusion? In 2011 my gasoline expenditure was nearly $600 more than in 2010! Gasoline prices came roaring back! That $50 monthly increase certainly stressed my budget. Or did it? The extent to which it impacted my budget was influenced by my spending habits, and the budget I used.

I had some choices to make in 2008, 2009 and 2010. My gasoline expenses each month was less than for the previous year. So what did I do with that cash that wasn't spent? Did I save it for the costs next year, or did I spend it? What would happen if instead of spending it, I was rigorous in my budget and saved the difference?

So what was the monthly impact to my gasoline budget in the period 2006 to 2011? Here's how my budget would have looked, and this is how much extra I would have had to find in my budget each month, to pay for the gasoline because of those price "spikes:"

1. 2006 = $5.91 monthly over budget
2. 2007 = $7.98 monthly over budget
3. 2008 = $2.32 monthly over budget
4. 2009 = $18.42 monthly UNDER budget
5. 2010 = $13.36 monthly UNDER budget
6. 2011 = $41.64 monthly over budget. 

It looks like 2011 was a bit tough! But if I had kept to my budget plan, and cut back slightly in some areas in 2006, 2007 and 2008, I probably could have easily made up that $2.32 to $7.98 per month from other areas in my budget. If I went to the further step and saved what I didn't spend in 2009 and 2010 that could have been used in 2011. How would it have turned out? That's a personal decision, but it begins with knowing what our personal tolerance for budget problems might be. Most of us can make some adjustment to handle a monthly budget problem of $10. I do realize that this is an example and in the real budget, all costs would have to be accounted for. But some are discretionary. Vacations, for example. So these can be adjusted, and more on that in Part 2. 

What Else Could I Have Done About My Gasoline Budget?


So what strategy should I use? Could I have saved more, and should I? If we say that gasoline increases at the average price rate of 5.25% per year, then I would need to design a budget that accommodates that price increase, or save some money this year to help pay for that increase in the next. Businesses may adjust their fees annual to compensate for these increases, which are a part of the overhead of any business. Individuals don't have that option. The employed will earn whatever the employer decides is a reasonable wage for the services provided. Retirees will get whatever social security COLA increase that is determined. How businesses and individuals spend their income is a personal choice. As with most choices in life, some can end badly. There is no excuse for poor planning. There are times when we do everything right, and it doesn't turn out. The nature of wisdom is to know the difference.

So in 2006 and 2007 when gasoline prices fell, I could have adjusted my spending habits to put a bit aside for gasoline increase in 2008. So also in 2009, 2010 and so on. All I needed to do was look at the chart, and say "Prices have dropped, and they will recover at some point in the future. Prices will always increase over the long term."

So, how to go about this? That's a personal choice. I can:

1. Use the "average" price increase as a starting point. For example, in 2012 I should expect that gasoline will be about 5.25% higher than last year, if it follows the trend line in the chart. That will cost me about $10.53 a month more. (See Note 1).
2. However, I'm currently paying less for gasoline than I did during the "average" in 2011, because prices are currently lower. How much less? I'm actually spending about 5.36% less per month than I did in 2011. How much is that? About $13.09 less per month. Would it be prudent to put the amount I'm not spending aside each month? Yes, it would be! 
3. How much would be set aside if I did? About $23.62 each month ($10.53 + $13.09). This for the probable gasoline price increases expected this year that I'm currently not spending because of current lower prices.  
4. I can shop around for a gas station at a lower price. (See Note 5).
5. I can also adjust my driving habits. (Drive less, combine trips, car pool). 
6. Of course, I might already be doing these things!

What else can I do, when sudden price increases occur? 

1. If I cannot adjust my driving habits and lower my costs, then I must move money from somewhere else in my budget.
2. I can give up something else, and reduce my spending to compensate.
3. I can take money from savings. 

Conclusion

Budgeting for inflation may appear to be arduous, if one uses the gasoline example and attempts to account for each and every penny. However, there are shortcuts which can help, and there are tools. One thing that cannot be avoided is organization. I would also say that the first year of establishing a budget can be the most difficult. If one has no budget, but simply pays the bills when they arrive, or until there is no money left in the checking account, then planning for the future might be an overwhelming undertaking. If that is so for you, then you probably aren't ready for a position on the board of your HOA! On the other hand, joining your HOA's financial committee might provide you with a wonderful learning experience, and empower you in your personal finances.

Budgeting requires some flexibility to accommodate price changes. There will be more on this in "Budgeting - Part 2."

Here's something to think about. Taking on financial obligations, be it a 2-year cell phone contract, purchasing a car at 1.0% financing, a 2-year satellite TV contract, or even purchasing a condominium establishes a financial obligation. When signing those contracts, there is an assumption that earnings or earnings plus savings will be sufficient to pay for all of those purchases. Be that true or not, the bills will roll in each month until the debt is paid off. In a condominium there will be real estate taxes each year, and there will also be monthly fees. Those will be never ending until the condominium is sold. A question to ask when considering these purchases after making an honest appraisal of one's finances is "Am I mortgaging my future," which is to say, "Am I getting into debt over my head?"

Let me also state that the current economic situation is not a pleasant one. In the past few years, I have heard some say "You have it easier than I do," or "I live on fixed income" implying that others do not. There are other complaints, and I sometimes think many of the complaints of owners can be traced to general concern, great uncertainty about the future, and even fear. The truth is, we're all in this, and we are each aware of our experiences and our personal feelings. Each of us has some empathetic capacity, and every owner at BLMH has paid their dues. As a former A&M director once stated during an association meeting, we each "have skin in the game." I suggest we each honor ourselves and our fellow owners by acting in accordance with that reality.

See Part 2 of budgeting 2012 for the continuation of budgeting.


Inflation Today
So where is inflation today? According to a recent article in Morningstar, by Robert Cahagan and William Martin of American Century Investments: "Inflation has increased notably in recent years. The government’s consumer price index, or CPI, actually declined 0.34% in calendar year 2009, rose 1.64% in 2010, and is up 3.5% for the 12 months ended November, 2011..." That information is easily corroborated by US data, and is why the Social Security Administration has increased benefits by 3.6% for 2012.

So the downward economic slide may be over. Is there bad news? It's probable that price increases will occur. What does that mean for you and I? Well, it's probable that things will cost a bit more in 2012 than they did in 2011! It is useful to consider that the last period inflation was as low as it was last year, and for such a long period of time, ended in 1964!

Low Interest Rates and Stagnant Wages
Another thing to consider is that many of us are not getting a 4% income or wage increase in 2012. So that will squeeze our budgets. Can we dip into savings and take the interest earned? The banks are only offering about 0.74% on one year CDs, and a pittance on normal savings accounts. So money kept in the bank is losing at least 2% per year. All of this is planned by the government and it will keep mortgages low, so people will buy those units that are for sale at BLMH, and elsewhere. The owners at BLMH are paying a price for this government policy. It shows up in your monthly association fees. The association did not earn a normal $155 for each and every owner last year, on its savings. If the association could get a reasonable short term return on "safe" savings, your fees could be about $13 a  month lower than they currently are.

While it is easy for the politicians and the talking heads to vilify the banks, the fact is, with 30 year mortgages available at 3.25%, it is difficult to lend money with the expectation that inflation will be so very low for those 30 years! If a bank or credit union earns about 3.5% on a mortgage, which is money lent using your and my deposits, it's very difficult to pay me what I would consider reasonable interest on my deposited savings. Further, new government regulations require banks to hold more of those savings instead of lending them, and that held money doesn't earn much. So everything seems to be tilted toward very low returns on savings for everyone. In fact, we are at the point where lending at 3.5% with inflation at 3.5% is a losing proposition. If one considers that normal, "long term" inflation may be about 4.0 to 4.5%, then why should anyone lend money for 30 years at less than 4.5% ? This is something that the politicians and others like to gloss over when they make their grand statements. I say it's something to think about.

Returning to the present, it is probable that inflation will "spike" in the future. We don't know precisely when. That's my perspective as a board member. Saying this isn't about being right. It's about financial planning as a fiduciary so as to keep fees "as low as possible" as some like to say, while avoiding special assessments, and maintaining the property. Believe me, in an economic environment with some foreclosures, some delinquent owners and very, very low return on our savings, all of the factors are designed to create havoc with the finances of any HOA. So too for personal finances.

So what about inflation, and future planning? That's a darn good question!

Here is the bottom line; just about everything will cost more in the future than it does today. Is that a terrible thing? I think not, if inflation is "moderate." Why would I say that? Well, the alternatives, which include deflation or hyperinflation, are the consequence of destructive economic events. So if inflation is "moderate" that means that the economy and that includes much of the world economy, is humming along in a more or less normal fashion. No catastrophes!


Notes:

1. Determining the annual increase in gasoline prices can be difficult. In 2000 gasoline cost about $2.00 per gallon according to the Department of Energy. Currently its about $3.50 a gallon. This is in today's dollars. That's an annual price increase greater than the 5.15% annual price increase I used in this blog. If I used 6% per year, then that short fall in 2011 would not have occurred, had I saved the difference each year. On the other hand, I might have had too much in the budget each year. It's a matter of choice, as is all budgeting. 
2. According to Inflationdata.com, the average price of a gallon of gas from 1918 to the present is $2.45 in 2011 inflation adjusted dollars.
3. For a gasoline annual price calculator for your automobile, go to: http://www.csgnetwork.com/annualmpgcalc.html 
4. For gasoline price information, go to:   http://www.fueleconomy.gov/feg/gasprices/
5. For current Wheaton gasoline prices go to:  http://www.illinoisgasprices.com/Wheaton/index.aspx

State Candidate's Forums

What Else Can We Do?

Tonight at the Wheaton Park District Community Center 777 S. Blanchard, Wheaton IL the League of Women Voters is hosting the first of two consecutive nights of Candidate Forums. The event will start at 7:00pm and end about 9:00pm. Here's the agenda:

1. TUESDAY, JANUARY 24 Candidates for State Representative and Senate
2. WEDNESDAY, JANUARY 25 Candidates for County Board and Forest Preserve

The current economic situation is not the fault of the board or management, who have to find a way to deal with the current reality and inept politics, just as you do. We live in a state (Illinois) which is technically bankrupt, owes its current creditors about $7 billion, has underfunded pensions by about 45% and was declared last week to be in the WORST financial condition of all 50 states! Our state politicians raised income taxes about 67% and still cannot stop the increase in spending. Our state representatives are the one's who vote for these spending programs, so it might be wise to attend and see what the candidates think about this.

On the national level, if you have an opinion about the financial direction of this country, send a letter to President Obama, and to the heads of the Democratic National Committee, the Republican National Committee, and of course, your Senators and members of the House of Representatives. These are the people responsible for the policies in this country. They designed these programs and the policies that support them. Our association has to deal with these issues, just as you do. However, BLMH can't vote in the next federal or state election. Your association is powerless to influence the Congress of the USA and your President. Only the owners at BLMH, who are registered voters, can do that!

Budgeting 2012 - Part 1

It's that time to look at my personal budget for the year. This is part 1- of 2- part post. Are there some similarities between our association and the decision making of my personal budget? Let's see.

The "Chicagoland Cooperator" has an article in the January issued entitled "Striking a Tough Balance - Revenue vs. Reductions." The article begins:

"It's the same dilemma that households across the United States are facing. How much money can we afford to pay for the services we want? And should we stretch ourselves thin taking more out of our bank accounts to pay for private schools and that desperately needed vacation? Or should we cut back on restaurants and renovations to add more savings to our bank account?

The same goes for condo and co-op buildings." (Note 1).

I seems the Cooperator does think there are similarities!

Readers of this blog are aware that this association has struggled to maintain a balance. Typical questions might include: Should we spend down the association savings, with the hope that future owners will "ante up" and replace those reserves? Should we risk the need for special assessments? Should we stay the course on roofing and other vital projects, or delay? Certainly if one has a new roof, it might be tempting to say "you can stop now, I'm okay!"

There are and have been a range of opinions among the owners.  Several years ago, in the middle of the recent recession which had the period December 2007 to June 2009, an owner came to an association meeting and argued "What do we get for our money?" That is one question. Others have been of the opinion that we were spending too much and the simple solution was to fire management and maintenance, and replace them with a small army of "handymen." The argument was based on a position that "Anyone can manage a 40 acre association!" Still others argued for continued standards, but at lower costs to owners, which is to say, at lower fees. I guess that implied a desire to spend the savings for reserves on daily maintenance, and put reserve "saving" on future owners.

I have asked in recent years if an austerity program was warranted. I said it this way "What are we willing to give up?" This was generally met with silence, which I construed to mean "nothing," and I said so. That is a really difficult question and I am of the opinion that it might be the "third rail" or at a minimum a polarizing issue at many HOAs. "What am I willing to give up" is also a question when I am pinched in my household budget. It becomes most difficult when one is unwilling to give up anything, or states that everything is essential.

There has been recent feedback in the association but generally it's about expanding programs rather than reducing them. In 2011, it seemed that some owners preferred more extensive landscaping; others would like every scrape or piece of peeling paint immediately touched up. Others want a more extensive mosquito abatement program. Some want every conduit on the property painted. Some want the streets seal coated. Others have been impatient with drainage improvements. It goes on and on.

There is no doubt the association is to be maintained, and with the current board, it will be. We are in an inquiry to sustain a balance. Questions posed include, at what point is such maintenance conducive to unit sales and maintaining of owner property values? At what point have we dipped below minimum standards, and at what point are we overspending? There are a range of opinions among the owners. At one extreme there are those who would say "once my personal issue or agenda is resolved, then spending should cease." I suspect that there are also those who would argue "lower the fees so I can sell my unit." But then what? What about the owners who live here, or the new owners who purchase? What about the 70% of the roofs, or the driveways, or the streets scheduled for repair or replacement?

The question I live in is "How to stay the course, and maintain the balance?" This applies to my personal budget, as well.


Facing 2012
I think the board is very aware of the issues. However, I am a proponent of doing what I can in my own life as a beginning. So in the fall of 2011 I again reviewed my personal budgeting for the coming year, 2012. Of course, part of good budgeting is good record keeping.

In my personal life, there are several aspects to budgeting and they mirror some aspects of the budgeting of the association:

1. Operations and Maintenance
2. Reserves

There is also a third category in my personal budget which I would call "discretionary spending." This includes such things as personal communications, eating out, entertainment, vacations, clothing, automobile, etc.

Here's an example of a discretionary spending decision. I can choose between a $49 cellphone on a $70 monthly plan, or I can go for a "smartphone" such as an iPhone, with full internet access at 4G, etc. An Apple iPhone 4S "no commitment" plan at AT&T is $199 to $399 for the phone with a two year service commitment. Data (email and internet) is another $15 to $45 per month, depending on usage, and unlimited voice is about $70 per month, for a single phone. So I have a choice of monthly fees between $70 and $115 plus a phone cost of $49 to $399. This is for one phone, and family plans are more costly. At additional cost, I can also have a "landline" phone. But at what point are having both cell and landline phones a "necessity" or a "luxury?"

In my case, I have decided to have both. But as a compromise, the family cellphones are not "smart phones" but the basic $49 models, and there are three. One for me, one for my spouse and one for association use. I pay for all of them. We attempt to keep our cellphone usage within the package minutes, and have been successful for about 35 out of 36 months.

In my case, we traded off something else to pay for these cell phones and the monthly services. The argument "I've got to have it" isn't a rational basis for purchase of anything. "Can we afford it" is a rational argument, and "What are we trading off to get this" is another.

This same approach can be applied about internet service, cable or Satellite Dish TV, restaurants, vacation, additional entertainment such as movies, a Netflix subscription and so on. Another question; "At what point do I replace the car with a new one?" That's a thorny issue, because of the "cache" surrounding what one drives. Yes, it's useful to acknowledge this as a "consumer driven" society. $250 a month for car payments may not sound like a lot, but that's $3,000 annually. It's almost guaranteed that the insurance for a new automobile will be more costly than an older one. My "oldest" auto is 8 years old, but it does not cost me anywhere near $3,000 annually to repair, and that includes brakes, tires, battery, air conditioning and heater, and dealer service every 3000 miles or 90 days.  At what point is a vehicle not maintainable? At what point is it a rusting hulk? Is is reliable and does it get me where I need to go? Are the safety features functional? What were the annual maintenance costs last year? Those are some of the questions I ask. Yes, at some point there will be honest "no" to some of these questions, or maintenance may reach replacement cost. At that point, a replacement will be considered, and replacement may be a necessity. Until then, it's another "discretionary" expense.

This approach also applies to eating in. I can prepare really nice meals at less cost than most of the "prepared" stuff, and much, much less than eating out. But eating out is more fun. My spouse and I have a competition for "30 minute dinner meals" which include a range from pastas and stir-fry, hot dogs, hamburgers, steak, chicken breast, fish, etc. and freshly prepared vegetables including mashed potatoes, carrots or green beans sauteed with mushrooms and onions in olive oil, spinach, and of course, frozen vegetables. We do cheat, with previously prepared squash, spaghetti sauce, chili, soups, meat loaf etc. which are readily thawed and heated. We also toss in semi-prepared from Trader Joe's, and organic soups and even macaroni and cheese and the occasional can of baked beans and smoked sausage. A little cowboy food is a good thing!

Not everyone can do this, and I appreciate that working families may not be able or all that willing to cook dinner after a day at work and the after school activities of the children. But these are decisions to be made, and they are elected, not forced upon us.

How we each answer these types of questions will determine our monthly and annual  personal budgets.


Notes: 
1. Link to the Chicago Cooperator Website: 


www.chicagocooperator.com

Announced City Water Rate Increase

Chicago announced a 25% water rate increase to take effect in 2012. This will be reflected in our monthly water bills, because Wheaton gets its water from Chicago. However, it was reported that both water and sewer rates will increase. 

On Monday, January 2 the Wheaton City Council passed this vote, as reported in a local news outlet:

“Wheaton residents will start the new year with a 30 percent increase to their water and sewer rates in their next bill.

In a 6-1 vote Monday night, the Wheaton City Council approved the hike from $2.65 to $3.45 per 100 cubic feet of water. The combined rate for water and sewer services will be $5.50 per 100 cubic feet of water used. According to city documents, the average Wheaton customer’s water rate will increase by $9.60 per month, based on an average use of 9,000 gallons per month.”

It was also reported that the commission is expected to increase its rates by 20 percent in 2013, 18 percent in 2014, and 17 percent in 2015. "These increases are purported to be necessary to pay off a $70 million debt."

Well, I got my personal water bill yesterday and the rate for water did increase by 30%. So my water bill for 600 cubic feet was about $10 more than the previous month. 

Is Happiness a Worthy Pursuit?

As I enter a new year, I think it is useful to get some perspective for what lies ahead.

"The purpose of life is not to be happy. It is to be useful, to be honorable, to be compassionate, to have it make some difference that you have lived and lived well."- Ralph Waldo Emerson.

I'm not a big proponent of New Year's resolutions, but I will attempt to post weekly here, in 2012.

End of Year Summary - 2011

Well, it is the end of the year and the beginning of a new!

So, how did things go here at BLMH in 2011?? Well, I'd say it was a "mixed bag." For the most part it was good, and some not so good. Overall, I'm very satisfied with the achievements of the board in 2011; that includes myself and my "partners." This did not occur in a vacuum and it took considerable effort on the part of management, our loyal and hard working contractors, and of course, the board. This was also accomplished with the support, agreement and good will of our owner/shareholders, the majority of whom kept their agreements with the association. This meant paying their fees in a timely manner and keeping the rules and regulations. Thanks also to those owner/shareholders who took the time to attend association meetings and ask the hard questions! My hat is off to all! This is my personal perspective as a member of the board in 2011, as one of a small group who is truly "of service" to the association. It is also a looking forward into 2012.

When I took on this commitment, it was a two year agreement. I approached it as one which will end in 2012. I'm not saying I will not run for the board in 2012. What I am saying is, I have a finite amount of time to accomplish whatever it is I will accomplish on this board. My term will expire in September of 2012, and that is the time I have. Of course, events may occur which will limit my time of service. An irate owner  made a comment during an association meeting shortly after the election of 2010 and wanted me off the board, immediately! I publicly suggested that there was a mechanism in the bylaws to accomplish this. Their retort was "getting everyone in this association together to accomplish something would be impossible." So here I remain, until I am removed or other events transpire.

In 2011 the economy continued to sputter along. This placed several types of stress on all owners. It placed additional stress on those owners who would like to sell and the Realtors who represent them. It  was a buyer's real estate market, if one could arrange the financing. Some did and we had a modest number of unit sales. Of course, some owners have been frustrated by the prices offered. We're definitely off the peak which occurred in the spring of 2006. For owners who purchased real estate in 2006 with the anticipation of a wonderful investment, and a "seller's market" forever, it has been frustrating. For those with a longer term view and who compare the costs and benefits of ownership to those available when renting, and are able to maintain that perspective, it hasn't been as painful. What can I say? The economy is what it is! For those with a bit of savings, I'm sure they too are frustrated by the lack of reward, or return, for those savings. So this cuts across all finances. Not only did housing take a hit, so did other, generally accepted assets. Remember the "good old days" when your money could earn 5%?

I've checked the government sources. So what are the "official" number for houses "underwater" in the U.S., which is the term for those homes in which the owners owe more than the property is worth? It was 17% as of November 2011. So most of us in the U.S. are "above water." I can't state the numbers for the association. That information is not available to the board or to the public at large.

Do we like this economy? Of course not. There is a lot of uncertainty at present. The economy is beyond the capacity of the board and management. Some owners seem to have taken a position that it was "the fault of the board and management." How they came to that conclusion, I'll never know.

As for the things the board can be accountable for, or the things we can influence, I think 2011 was reasonably successful. If you think it was stressful as an owner/shareholder, believe me, it was an order of magnitude more difficult for the board, and even more difficult for management.

Assessments and Fees
We did get the new reserve study. Not an easy decision, spending money. However, this is the only unbiased method I am aware of to provide a board with long term financial planning information. That information is vital for determining fees, and fee increases for reserves. It is true that management can provide part of this, but a bona fide, independent reserve study consultant firm staffed by professionals who do this, and only this, is the only way. That's my opinion, and there is evidence to support this opinion.

The board has been committed to finding methods to avoid special assessments, and keep fee increases to reasonable levels. This while simultaneously performing the fiduciary duties of maintaining this association. It's my perspective that I approach these problems and issues as a true owner. I look at the spending of money as if it were from my personal checkbook. But it is actually more difficult than that, because of the very high expectations of the shareholders. I can state that in this, I'm not alone on the board.

Entanglements
There were some differing perspectives on the board and between the board and certain owners. Earlier in the year it was pretty "rocky," but as 2011 progressed I think it smoothed out. On an association board I do understand and agree that diversity is a good thing, if held within the context of being a fiduciary. Owner/shareholders have no such restraint or responsibility. So an owner can promote their personal agenda. Board members are also owner/shareholders, but we've supposedly agreed to set aside our personal agendas for the length of our terms. We are held to a higher standard. It is sometimes difficult to step back and ask "what should a fiduciary do" in any specific situation. To ask that question intelligently requires some knowledge of fiduciary duties, the Illinois Condominium Act (ICA), the Rules and Bylaws and any other covenants of the association. It also requires a willingness to openly communicate, frankly and honestly, with others. It's not about looking good. There were times in 2011 when I am sure I looked somewhat stupid to others. That's the price one pays to sit on the board. However, if there is trust present, then it isn't a big deal. My commitment was, is and remains to the association. That is a distinction from the wants and needs of individual owners. So in 2011 I attempted to serve the association, and in my opinion that meant that the owner/shareholder body was well represented.

I've taken a position that owners are shareholders first and owners second. Why is that? As an owner, they are responsible for their units and the elements so defined in the bylaws; in their units they have substantial freedom and responsibility. However, as members of the association, they are shareholders, and the board as representative makes the decisions for the common and limited common elements; essentially everything outside the units. From the perspective of maintenance, the board is responsible for decisions affecting the maintenance of the entire property for the shareholders. Owners may want certain things done on "their" building, but in fact, it isn't "their" building in the literal sense. The owner/shareholders are merely inhabiting a specific building. If all owners are truly equals and there are no permitted subgroups, then decisions affecting one building should have a rational basis determined by weighing the needs of the entire association. In 2011 I approached this as anything accomplished at one address should be part of a program for all addresses. In other words, we can only afford to do certain things and should do them if we can and will do them at every address with similar circumstances. That applies to roofs, driveways, drainage improvements, landscaping, and even paint touch-up, etc. There are programs in effect at BLMH, many are on a preset schedule, and some are determined by physical condition. Roofs which are in good condition are put behind those in poor condition when selection for re-roofing is made. In 2011 a long piece was written for the newsletter about the method of "grading" garage floors. This was provided as an example. Even so, there are owners who complained about "transparency." I encourage such owners to apply for committee, and volunteer for the board. However, I will ask them to leave their personal agendas at the door!

I really don't want to get entangled with any owner or members of the board. There were times when that became unavoidable in 2011. It is my perspective that it is important to set boundaries with other human beings. This is a business and for the most part, it is run as one. It is not a hobby. Frankly, I have better "hobby" uses for my time and I separate work from play. In 2011 some owner/shareholders didn't see it that way. I expect that 2012 may be more of the same. However, most owner/shareholders are aware of these distinctions and limitations.

Communications
In 2010 on joining the board I purchased a cell phone and published the number to the owner/shareholders via the newsletter. However, that number is also published in web, via the newsletter. I prefer to use email because I think that there is a different level of responsibility. I, or the other person on the line can say just about anything, but to put it into writing is preferred. In 2011 I usually sent emails where appropriate, with copies or bcc to management and other board members. I view much of what goes on in communications as a dialog, and a conversation. I am somewhat hesitant to make commitments, but some owners attempt to force an agreement.

I prefer email for such a conversation because everyone on the board is included and receives exactly the same information. Since the ICA prohibits subgroups in associations, I have taken that to apply to the board as well as to owner/shareholders. It would be particularly undermining to the association to exclude management and/or specific board members. To make quality decisions requires quality information, and a range of opinions from various experts as well as the board in general. When someone asked me in 2011 "why did it cost so much" I hope that there was ample information to make a conclusion. Somewhat lengthy emails not only provide a "why" but the "how."

In this I was reasonably successful. I was however chided because some of my emails are lengthy. In my defense, I'll state that it take a lot longer to write these than to read them, and I am a busy man. I prefer when dealing with other responsible parties to provide the basis for my decisions. As we all know there are three levels of communications; opinions, assertions and facts. When I make statements, if I don't provide substantiation, then it is reasonable for the listener to take my statements as opinions. The problem with opinions are, any opinion is valid. For example, if I were to state that the world is flat, and the sky is green, these are both completely valid opinions. For most of us such statements are not factual. Decisions need facts.

In 2011, when working with the board, management and owners/shareholders, I attempted to avoid unsubstantiated opinions. I was reasonably successful. To do so required providing more detailed emails, somewhat detailed monthly reports to the board, and more information in the newsletter.

I do understand that others may not agree with what I was doing, but I intended that they be provided with a basis for understanding; WHY I was doing it. In my capacity, I am empowered to make certain decisions. I think it's appropriate to share my rationale. Why does it sometimes take a bit of time to present a technical position? Well, it is somewhat of an art to cull useless information but not lose the readers, who have differing backgrounds and capacities.

I pressed for a shift in the newsletter, and the board permitted this to occur. To accomplish this I prepared spreadsheets from which I made graphs and charts, as well as expanded articles. This accelerated in 2011. I was once taught in a "communications" course that "everything can be resolved through communications." BLMH is a wonderful opportunity to put this into action. However, resolution does not mean that "one gets their way," or that people will be completely satisfied, and that includes me! Resolution means having or making a firm decision. There is nothing in resolution about "keeping people happy" nor is that a board's responsibility. Furthermore, it is mandated by the Illinois Condominium Act that there be only one class of owner. Expanding the type of information provided in the newsletter is a means of enforcing such single ownership class. Knowing me, or others on the board should not be a privilege, nor should privileged information be provided by a board member to a specific group of owner/shareholders. I think to a certain degree, the newsletter has been successful in this. It has also provided information in about as transparent a manner as is practical.

I did have some apprehension about the newsletter, because it is the association's decision to publish it on the web. So I think it's important to present an even handed presentation of the association to the world. Some of the readers may be interested in a purchase. Some information should, however, be reserved only for owner/shareholders. It's our business and no on else's. We have paid for that privilege.

Of course, not everyone was "happy" and in 2011 there were a few complaints about the identity of the owner of the photographs in the newsletter. In my case, any photos I take are my property. I provide them to the association as a service and for a specific purpose. I have abstained from copy-writing these photos, but I do earmark them. The photos aren't a hobby, are provided for a purpose, including providing visual explanation, or substantiation of statements.

The revised newsletter became less of a neighborhood bulletin, and had a more business like tone. I realized that too was probably not going to make everyone happy, and apparently not everyone was happy with the result.

In 2011 I decided to provide the board with a monthly "Architecture and Maintenance" report. This provided summaries of projects, provided information about problems, photographs, stated timelines and made requests and provided "by when" dates. It was partially successful. I say that because when the "by when" dates came, they sometimes "went" as new concerns were raised by other member(s) of the board.

For 2012 I am re-considering having (as in, paying for) a separate cell phone so owner/shareholders can reach me. For the holidays it was "off" because I was on vacation and because I pay for all received calls. I would prefer email communications, but not all of our owner/shareholders use email. As stated earlier, I prefer written communications. Most emails I receive are forwarded with comments to other board members and management. I can't do that with voice communications, and with voice communications it is always possible for a person to say "I said this" while I insist I heard something else. Or vice-versa.

Maintenance
In 2011 we did accomplish most of the maintenance tasks which were identified. We have a few driveways that are on the list which were not resurfaced. However, it's important to do the garage floor work before the driveways. If we don't, then we spend money twice; once to do the driveway, and again to patch after the garage floors are done. For this reason, in 2011 I made it a priority to survey every garage.

Because the concrete work was to be done late in the year, it became impossible to do the driveways; not really a serious problem. None are in very poor condition; the worst were done in 2010. So we'll resume this in 2012. In 2011, it was expected that asphalt prices would be stable in 2011-2012. So there was little price urgency.

The landscaping director has been dealing with some thorny issues regarding the willows on the property. The removal of one cluster in 2011 has now created the opening to deal with the below ground stream pump located in that area. That too will be considered in 2012.

Overall I'm satisfied with the maintenance programs in 2011. Was it perfect? No it wasn't. We must balance expenditures with cash receipts and coordinate projects. It is not possible to do everything in the current budget, so we established priorities. Not once, but ongoingly throughout the year. So some things were postponed to 2012. That's the way it is with human beings which at our best remain "perfectly imperfect" beings.  We did get most of the items on the agenda completed, but it was a press to do so. Coordinating exterior painting, roofing projects, garage projects and driveway projects as well as drainage improvements can be difficult when some of these are identified and anticipated to occur on a single building, in a single year. So some items were "tabled" at certain addresses and will resume in 2012. However, all critical projects were completed.

In 2011 several possible projects or improvements were identified, but did not occur. I'll be taking another look at these in 2012. A list is being made, and plans formulated this winter, so that, when the board makes the decisions of what to tackle in 2012, we will be ready to begin when spring has sprung!

Time-lines
One of my frustrations in 2011 was the length of time it sometimes takes to accomplish something. Some of this is beyond the capacity of the board, which is to say, out of our hands. Some simply is the nature of the association, and what I would call a project cycle. Some problems have to be identified, then a solution discussed with specialists, management and contractors. This solution, or perhaps several are then presented to the board. If the board agrees, then and only then can the solution go forward. If the board disagrees, then the process begins anew. In such a case, 30, 60 or 90 days can be lost.

As an example, the survey of all garage floors was made in April of 2011. Using this information, discussions were then held in May with the board and management about which floors to replace in 2011. During subsequent meetings, the board agreed. On this basis, specifications were prepared, reviewed and then were revised. The specifications were presented to the board, after revision and the board approved the specifications. Bidders were then selected and presented with the bid documents. After receipt of bids, which had differences, the bidders were questioned to assure that all requirements were met, and clarification achieved. A summary document was prepared and presented to the board with comments. The board made a selection and the bid was awarded and contract documents prepared and signed. Permits were then acquired by the contractor. After receipt of permits the work began, and was expected to occur over about 4 weeks. However, while doing the work several problems were discovered (literally uncovered) at several of the addresses. This required a delay while the problems were assessed. A decision was made about the best method to address these problems which were beyond the initial scope of work. With the agreement of the contractor, management and the empowered board member, the city was approached for approval. Approval was delayed while the city reviewed the problem. Approval was made, but then was rescinded. A second approach was presented and was approved by the city. How long did it take for this entire process? The necessary, additional work was performed and finally completed nearly 7 months after the initial garage survey had been made! Of course, while this project was going through the phases of determination through completion, there were also roofing, driveway sealcoating, drainage improvements, stream pump replacement, etc. going on at the same time. For good measure throw in a few "emergencies" and then financial planning, reserve study, tree removal, etc. and the board had an incredibly full agenda! This was all above and beyond normal association operation and maintenance!

In an association in which outdoor related maintenance work can only occur during about 8 months of the year, a 2 or 3 month delay makes completion in a calendar year difficult or impossible.  Once begun, some projects must be completed in a single year and while weather is good. In some cases, if not a critical item, it can be completed in the following year. That however, presupposes that the board of the association in the next year will pick things up where they were left off. There is no assurance that will occur. In 2010/2011 I made it a priority that there would be continuity. So we will continue as planned unless the board majority decides otherwise

In 2011 there were other delays, and some affected the roofing project. One was a board member request about which roofs were on the list, based on current events. Another was some code issues discovered in the attics of several buildings. Another was window delays, sometimes by owner approval, and another the discovery that the wrong window had been ordered, or shipped! These accumulated to delay the project beyond what I declared to the board as "by when" dates, including bid release and actual beginning date for the roofing project tear offs, and final completion. However, Mother Nature cooperated and all work was completed during moderate and acceptable temperatures. For 2012 we've identified and discussed some improvements to the process.

Of course, for all of these projects, only after the board agrees on a course of action and a specification is written and approved, do we go for bids where that's appropriate. We then evaluate the bids, award the contract and finally the work can begin.

In certain emergency situations (loss of water, plugged piping, roof leaks, etc.) there is no opportunity to bid. There are also realistic minimums. I've watched earlier boards argue about $500 concrete work. There are practical limits.

Time Limitations
There are only so many hours in the day. Boards are comprised of volunteers, and we each have differing responsibilities and that limits our availability to the association.  It is also true that one person's "mandatory" is another's "optional." Sometimes things simply didn't occur in an order that resulted in a reasonable timeline. If information arrived after an association meeting, that frequently resulted in a 1-month delay. Giving the appropriate time to thoroughly read and analyze a 90 page management report also can be challenging. We are supposed to be fully prepared for each association meeting.

It is my opinion that an HOA such as ours presents an oxymoron. People purchase to have some "ownership." On the other hand, the attraction of an HOA also is the limitation of responsibility for individual owner/shareholders. We would like to have the best of all worlds. Apartment style living with many services provided, while getting the financial and decorative/self-determination benefits of ownership. Unfortunately, ownership in an HOA sometimes requires involvement beyond occupying one's unit. At BLMH perhaps 10% of the owner/shareholders attend a monthly meeting. That was the driving force to expand the newsletter. In the absence of most owner/shareholder involvement, beyond personal issues or complaints, how to present more about the day to day workings? I was surprised when a water main break was stated by an owner to be "a city problem." They did not understand WE own those mains, and I discovered this was the position of more than a few. So how to address this? It could be addressed through better communications and education.

In 2012, this will continue as the board directs. However, there are real limitations to the total amount of time that the board volunteers can provide for the association. Tasks will be prioritized and  those at the top of the list will be completed. If there are ample board and committee people available, then all tasks will be completed. If there are not, then some will not be completed. That's the way it works. It has been said that people get the leadership they deserve, and so it is!

Disagreements
In 2011 there were disagreements. Some involved owners, and some involved board members. Dealing with these issues can be time consuming and costly, in time and in money. I can state so based on my personal experiences last year. As the year went on, the disagreements became less and less. Perhaps on the part of some owner/shareholders, there was concern about a perceived "slow start."

Will 2012 be better? I certainly hope so. We can disagree, but we should be civil. We should also keep our focus on the prize, which is running this association as a business and doing an adequate job. Board members as well as owner/shareholders should work together to make this association a fine place to live. In general, I think we, and by that I mean all of us, are succeeding.


Notes: 
1. I'll be putting more information about all of the plans for 2012 in the newsletter, unless the board prevents this from occurring.