Owners and Boards - Part 2

This post is one of several on a broad topic. This post, number 2 in a series, will look at communications, touch upon financial aspects and owner attitudes. It will look at how these are influenced by the board and how boards are influenced by,  or are a reaction to, owners.

How did Owners and Boards Cooperate to Get This HOA Where it Currently Is?
Before proceeding, it is necessary to remind the reader that 1) Owners elect the boards, 2) Boards are comprised of owners, 3) Owners do their best to influence the boards and 4) The current situation at BLMH  was achieved over decades with many elections, by many hundreds of owners and various boards. It required the cooperation of boards and owners to achieve both the positive results and the negative ones.

I also want to point out that any Operations and  Maintenance activities, as well as any Financial Reserves were all achieved by the boards with the support of owners.

Some of the events that resulted in the current situation were determined a decade or more ago; owners were intrinsic to the board decisions over those decades. A variety of boards were elected and they made the many, many decisions that have resulted in this HOA being precisely where it is, at this place and time and with the current financial and maintenance successes and issues. Yes, there have been some failures along the way. However, it is also useful to point out that this HOA has been able to provide most maintenance successfully. It is also useful to point out that are fees are what they are because of a necessity to catch up and save for the current roofing project and driveways.

The many decisions over decades have also shaped owner attitude. However, board members are owners who were elected to a board position by owners. The exceptions have been appointees, who filled a place vacated by leaving board members or never filled via elections. These appointees were also owners, and boards are inclined to select appointees who will be compliant with the board.  In summary, I suggest that the boards have been nothing more than a reflection of owner attitudes. The owners are ultimately responsible for the outcome, and if is may seem to be too good to be true (low fees = well maintained property), well, as the saying goes "If is seems too good to be true, it probably is."

The relationship of boards and owners is synergistic, and it can have both positive and negative aspects. Should boards operate as owners? No, they are fiduciaries and are held to a higher standard. However, it is also true that many board members fill a position for only a a year or so. They then return to the ranks of the other owners, and as several board members have stated about some of the other owners "These are my friends and neighbors." So board members are certainly caught between operating as fiduciaries which is to say, operating for the good of the entire association which I mean to be all present and future owners, or operating as an owner, and in accordance with their personal whims, wishes and complaints, or those of their close circle of "friends and neighbors." By deduction, I have the opinion that over the years a variety of board members have operated for themselves and for, or under the advice, of a variety of small groups here at BLMH.

Some years ago I made the decision to avoid such entanglements. One must choose between popularity and fiduciary. It's not an easy decision and there are consequences. Based upon my experiences here at BLMH, I have come to some conclusions and I have made other decisions. Those will be in future posts.

Shaped by Decades
Our finances and the condition of infrastructure have been shaped by decades of owner and board decisions. It takes 15-20 years to save sufficient funds for streets, driveways and roofs. It can take longer for garages, entrances and tree replacement. If savings are insufficient for a decade or more the resulting reserve shortfalls or maintenance lapses will result in higher fees for years. Another consequence  is a flurry of activity when reserves finally become sufficient to accomplish needed maintenance. I've written at length about the consequences of a "kick the can down the road" approach in HOAs. However, I would say it is the most recent 5 years that can have the greatest impact on the present situation. Nevertheless, the decisions made today will also impact the situation 5-10 years hence.

Have Various Boards Attempted to Influence Owner Attitudes?
I would say they have, but with varying degrees of success. The primary means of communications is the Newsletter. This is augmented by letters and other mailed correspondence. Owners who attend HOA meetings will be made aware of much of the content of the "Management Packet" and I do provide management and the board with an additional monthly report spanning 4 to 12 pages and one or more spreadsheets. The contents are discussed before the owners. The exception is sensitive issues which cannot be discussed outside of executive session; e.g. who is delinquent, who is foreclosing, who is suing us, etc.

What's been done to better involve owners? The content and character of the BLMH newsletter has changed dramatically in four years. It took a lot of hard work to do this. Believe me, no board member wants to write this stuff, which can be time consuming. Creating meaningful reports, spreadsheets and charts are also very time consuming. So too is taking photos, editing and cropping them and inserting them into the newsletter. Each newsletter also has to be formatted, and my articles are edited to fit within the available space. When other board members send in a long article or articles mine is edited and shortened. A breakdown occurs when a board member or management submits an article after the newsletter has been completed, or after telling me "the article is in the mail" it never arrives. I then get to rearrange everything. The reader may notice white spaces in the newsletter from time to time. It was supposed to be occupied by someone's article. I simply move things to spread that space out. At other times the newsletter is filled completely with text. It's reasonable to assume that my article was shortened to fit the space and has been edited.

Informing Owners
I think most owners would prefer to be informed, but it is true that a very few have complained about the content of the newsletters. The complaints have diminished. Perhaps the complainers simply gave up. A few owners have no tolerance for "bad news" or what they construe to be "less than cheerful" news. I suspect that has been one of the impediments to a more informational newsletter. Not everyone on the current board is enthusiastic or in agreement about the current newsletter.

Of course, bad news isn't easy to handle. Here's a question. Would boards sometimes gloss over uncomfortable facts? Would boards avoid giving "bad news" to owners, and why could that be? For example, could a board or boards be inclined to avoid communicating long term financial issues, statistics about delinquencies and foreclosures, or avoid dealing with other HOA problems such as rules violations? I assert that's why newsletters from time to time look like a "feel good" doily taken from a restaurant. It's not what is said in the newsletter that has been disturbing to me. It's what is unsaid that is the problem.

I do realize that there are differences of opinions about what should be published in a public newsletter. Fine, then let's discuss and provide that information to the owners who attend HOA meetings, or send it via a letter. That too seems to be a problem and one prevailing argument is the cost of postage to the HOA.

On reading the newsletters and other correspondence over the years, I'd say a variety of boards did their best to avoid providing bad news, or avoided news that might put the board or the HOA in a bad light.  I've attended many HOA meetings and I have observed such avoidance by boards. The "Great Recession" began in 2007. Discussing delinquencies, foreclosures and so on was steadfastly avoided while owners were present. Some board members seemed to think all such information including statistics was privileged, and at least one told an owner just that.  Even today, there seems to be a tendency on the part of various board members to avoid this.  Other "bad news" topics include reserve shortfalls,  "bad debt",  lawsuits and legal judgments. Of course, if one doesn't have this information available then statistics beyond the most recent financial report data is impossible. Problem solved!

In terms of finances, there has been an emphasis over the years on the current total saved. There is no question owners do feel better and more secure knowing we have larger balances. However, the bank balances are misleading. To determine if that balance is sufficient also requires knowledge of expenses and in particular, long term expenses. Reserve funds accumulated must be compared to reserves required. Otherwise, erroneous conclusions can be reached. a few years ago I enrolled a few concerned owners here at BLMH and a letter was composed and sent to each and every owner, at our personal expense. That letter provided a realistic view of the financial situation. The next post in this series will look more closely at reserves and long term finances.

Communicating Financial Status
In a HOA there are financial assets, but there are also financial liabilities. Using the "Balance Sheet" is an inadequate indicator of financial health for a HOA. The funds saved as reserves will be offset by the costs to maintain the infrastructure we are saving for. Those costs will occur in the future and our HOA is required to build adequate reserves. The determination of adequacy is the ability to fund all known capital items for the next 30 years. Balance sheets do not provide that information. I have concluded that owners and some board members look at the reserve balances, see a large number, and are inclined to assume they are adequate. Unless opposing costs are also provided, we have absolutely no idea if the numbers in the balance sheet are adequate or not.

In 2010 I and a few owners did provide a simple analysis of only two components of our reserves via letter to each of the owners. That information was generated with no board or management involvement. It is possible and that letter was a wake-up call.  I do think these things need to be consistently communicated. Not all board members have agreed with me. I have consistently taken the position that:

1. The balance sheet is an inadequate measure of financial health for a HOA. I was once undecided (2008-9) but on reflection and analysis I decided that quality reserve studies are a necessity and should be updated with regularity. 
2. Providing data and providing information are not one and the same. I am of the opinion that most owners will appreciate quality information. A few won't but the well being of all of the shareholders and the association is paramount. 
3. It is a duty and responsibility of boards to determine realistic costs, set realistic budgets to achieve a savings (reserves) to pay for these costs, and to design fee structures to accomplish this. It is also their duty to communicate this to the owners. Telling owners "We have sufficient funds" or "We have enough money" without providing substantiating documents is insufficient. 
4. Quality information requires not only telling owners how much we have saved and are saving, it also requires that we, as board members, provide statistics about the HOA status to achieve financial targets, both immediate as well as medium and long term. 
5. Boards should also provide the owners with information of the current status of targets for reserves. The question to be answered is this: at the current rate of accumulation, will this HOA be able to replace the capital items (roofs, streets, driveways, entrances, patios, garage floors and decks and so on?). If not "at the end of service life" then when? Some boards and board members take the position "never." That's one way to keep fees "as low as possible" for current owners. Such an approach is unacceptable to me, and has put me at odds with some board members, both past and present. 
6. It is important to be aware of the answer to these questions: Will such replacement occur in accordance with a timely schedule based on realistic projects of the remaining life? Do the current reserves and realistic, projected, future expenditures agree, or will there be a shortfall or overage?
7. Boards should provide owners with both the current state of reserve savings and the projected costs of the infrastructure to be replaced using those funds.
8. In the absence of quality information, elections become at best popularity contests and at worst crap shoots. Some owners will always vote for whomever promises the lowest fees. 
9. It is important to be aware of what is not included in future projections. For example, are entrances included or do we expect those doors and foyers to last forever? Anything not included in reserve calculations will be replaced via the annual Operating and Maintenance budgets. A failure of boards to plan and prepare for this will result in higher fees or special assessments. For example, we can ignore the condition of garage floors, but at some future date replacement will be required. 

Some owners won't like what is revealed. They may move to replace the board and that is certainly their right. However, boards are held to a higher standard and must operate as such, no matter what! In other words, it is entirely within the right of owners to fire any "bad news" board and to elect "good news" boards. There is no confusion about our status as individual owners. Owners may do as they please as long as they uphold the rules. One of the rules is "Pay your fees." 

I assert this type of financial planning is a necessity and aspects should be communicated to owners, including:  percent completion of projects, percent remaining, the time (years) required to complete, the remaining life of the infrastructure before completion is mandatory, the amount of reserves collected per category, the amount remaining to be collected per reserve category and finally, project reserve shortfall or excess.

Of course, it remains to be seen who is to provide this information. With a board 20% understaffed, it could be argued there is no one to do this. Or should we simply add it to the tasks of the Treasurer or Architectural & Maintenance Director?

Information Reality 

Do our owners get this quality information? They do get quite a lot and more each passing year. So why is this a gradual change? There are a range of reasons and it is because of the owners and the character, make-up and capabilities of boards since 2007, and earlier:

1. Boards may not have this quality information available. Some have never done the necessary work to produce this information. It has to be generated by someone. This HOA did not have a quality, unbiased reserve study until 2011. That was the decision of many boards. 
2. Boards may not have the tools and skills. I have an office, four printers including a duplexing high speed color laser printer, copier, scanners, multiple computers, mobile hot spot, landline based high speed internet, digital cameras and video equipment, digital projection equipment, all kinds of software tools including video, graphic, spreadsheet, publishing, wordprocessing, project management, CAD, etc. I also have the skills to use them. That is not certainly the normal for a volunteer board. 
3. Our board is and has been chronically understaffed for years. By chronic, I mean 20% or higher vacancy with no committee members to support such financial activities. At best, three board members have been involved in these financial types of financial activities, and that was in addition to their other volunteer duties. At worst, none were involved and most times only one board member was involved. The duties of a treasurer goes beyond signing checks. 
4. The requirement to provide this information may be more than a board considers to be normally required.
5. Some board members may think owners don't care, so why take the time.
6. Some board members really don't know this information, don't ask, won't spend the money to get it and refuse to generate it. . 
7. There may be a concern of a "run on the bank" as owners may choose to leave the HOA in the face of bad news, if it were provided. 
8. Board members are volunteers. There are real limits to the amount of time a volunteer should be required to spend on running this HOA. In light of that, boards do deal with things on a priority basis. 
9. Boards may be reluctant to provide this information. 

Avoiding Uncomfortable Questions
Owners do have the right to ask the uncomfortable questions. Most don't. For it's part, boards may be hesitant to communicate uncomfortable issues to the owner body. Why would that be? From my experience observing a variety of boards for about 10 years, it is because:

1. Boards are comprised of owners. We each bring our skills and limitations with us. 
2. Some owners, on achieving a seat on the board feel it is their duty to operate so as to maintain their popularity. 
3. Boards are elected representatives, and elections are sometimes based on popular agendas. There is a tendency for boards to tell owners what they want to hear; a failure to do so can result in dismissal as owners put in place more "suitable" individuals. 
4. A board failure to achieve objectives may also result in owner criticism such as "How could this happen" and "How could you allow this to happen?" We all want to look good, don't we?  To achieve this some boards will gloss over things that might be detrimental to their image. The attitude is "These problems can be solved later by someone else, can't they?" 
5. Owners do express interest in sales and property values. As fiduciaries, boards may do things to put the HOA in the best possible light. 
6. Board members are owners too, and as several board members have said about their relationship with other owners "We are all neighbors" or "These are my friends." That may make it very difficult for a board member to be really forthright with owners about unpopular issues. How would your friends feel if they discovered you weren't minding the store and the delinquencies were now in the tens of thousands of dollars? Or it was necessary to raise fees? Would they feel let down, or even betrayed? 
7. Board members are required as fiduciaries to deal forcefully with delinquencies and rule violations. It's their job to keep the fees rolling in; however, a variety of board members have also stated "We're all neighbors." So how to press our neighbors to pay their fees?
8. So too with rules. How to enforce them with our "friends and neighbors?"
9. Board members are owners too, and may have a legitimate concern about the financial health of the HOA. Our property values are also at stake here. As board members, the board has the benefit of professional counsel and should be more aware of a variety of issues, both short and long term. However, boards may or may not share that information with the owner body. 
10. Board members may be operating as fiduciaries and altruistically. They may want to be "of service" but how that is accomplished is subject to interpretation and is also based on ability and work ethic.
11. Board members may have a legitimate concern about the financial health and physical condition of the HOA. Dealing with these concerns may take years, and the only way to deal with them and have a real impact on the outcome is as a board member. 
12. The only way to be instrumental in shaping a HOA is to be a member of the board. In other words, to play the game one has to be on the field. For that reason some board members may be inclined to do whatever is necessary to achieve a board position and to stay there for as long as possible. However, as individuals, board members may have their own agenda.
13. Board members may be distrustful of some owners and some sub-groups. 

Part 3 of this post will look at reserves and certain financial realities.