A walk down memory lane - Reserves

This is from my November 13, 2008 post:

"I'm putting these numbers out here so you are informed, and to provide a service to all of the unit owners. This is from my independent analysis of the information that is provided to us all. What I am doing does not relieve you of doing your own research. If you are angry, I can't do anything about that. However, you need to know that this problem began at least 15 years ago. It is my experience that the recent boards and professional management team have done everything possible to correct this problem, and to keep us informed.

Keep in mind that in 1999 we were paying about $1.15 a gallon for gasoline. I doubt if any of us were saving a $1 for each gallon of gas we put in the tank, so as to help pay for the fuel increases that have occurred since then. So too with our board. They cannot predict what inflation and the price of gas will be in 2015. If in 1999 they had raised our assessments $25 a month to help cover the effects on reserves as a consequence of someone's "predicted" $4.00 a gallon gasoline in 2007, I suspect unit owners would have been irate. And with good reason.

The board could not with certainty have predicted what has happened. What we do know is inflation does occur and it is historically between 3.5 and 4.1% per year over long periods of time. Or I should say it WAS. Because that is what economists do; they give us historical data and we apply that to the future. But who knows what the future will bring? We do know that the price of oil affects the cost of most materials, and even labor, as wages increase to keep pace as costs rise. That's why social security benefits are rising by 5.8% in 2009. We are all struggling with rapidly rising costs and the assessments required to raise reserves. Some of this is way beyond our control or that of the current and recent boards. If you are angry about volatile and rising gasoline and energy prices and the consequences on the economy and our association, that is something all of us are at the effect of. I suggest you direct your anger at the politicians who collectively have avoided a cohesive energy policy for the past 30 years!

Returning to the present situation, during the board meeting and during past budgetary meetings open to unit owners that I have been able to attend, I have been present to complaints about the increases in assessments. The board and our professional managers have done a very good job explaining how we found ourselves in the current predicament. For the nearly 8 years I have been here, the board has been accumulating reserves to make up for the fact that for many years there were either inadequate or NO contributions to reserves. Unit owners have overwhelmingly stated at the meetings I attend that they are opposed to "special assessments". That gives the managers, and our board, little choice.

To demonstrate the consequences of these choices, as of January 1, 2009 I will be paying a monthly assessment of approximately $47.28 to the roofing reserves. And so it is with paving, concrete and masonry reserves, to which in January 2009 I will be contributing $34.15 each month. These items combined are consuming $81.43 of my assessments each month!

If each unit owner contributes at this level of funding, the roofing reserve would accumulate in excess of $2,800,000 in 15 years! That is about 70% greater, or $1,160,000 more that is actually needed for roofs! So why are we today required to make this monthly contribution? It is because we don't have 15 years. We are "catching up" to the funding needs so that imminent roofing work which has already begun can be completed no later than 2014, and before we are all dealing with the breakdowns and expense of failed roofs. That's it, plain and simple. To put it bluntly, I am today putting $47.28 monthly into a roofing fund because 10 and 15 years ago there was $0 being put into this fund each month. So if there is no funding for 7 years, then the funding must be nearly doubled in the final 8 years to accumulate the necessary reserves. As a consequence, our current monthly roofing reserves payments are larger.

How much should the funding have been 15 years ago, back in 1998? If the average monthly assessment of the unit owners had been $25 greater than it was on January 1, 1998 and if that amount were put into reserves and, if each successive year the amount collected were adjusted upwards to compensate for inflation (let's assume by 3.5% per year), as of December 31, 2008 our reserves for roofing would have about $1,144,000! If we had been funding the roofing reserves commencing in 1998, our monthly assessment in January 2009 for roofing reserves would be about $36.50. Our actual payments, because we did not fund the reserves in 1998 will be about $47.29 each month into the roofing reserve fund. So our assessments are $47.25-$36.50 = $10.75 higher each month. [Note: Professionals are currently using 2.5% as the annual, long term cost of inflation applied to capital projects.]

If we use that yard stick for concrete, paving and masonry reserves, which I am funding at the rate of $34.15 each month commencing January 1, 2009, these funds will accumulate in excess of $1,700,000 in 10 years.

If you are a long term owner at BLMH, you can take some consolation from the fact that the board, instead of funding the reserves for the roofing project, allowed you to keep that money all of these years. How much did you keep? I estimate that if the funding had begun 30 years ago, our assessments would have been $14 greater each month than they actually were in 1980 and would have increased at the rate of at least 3.5% each year to keep up with inflation. At that rate, in 1990 we would have been paying $19.75 each month for the roofing replacement fund and in 2000 we would have been paying $27.86 each month for that fund. In 2009 our assessments for this fund would be $37.97 and we would have accumulated $1,692,000 in the roofing fund as of December 31, 2008.

Funding reserves is not an easy task and requires predictive skills and the ability to make adjustments each year. It is necessary to determine the point of replacement, and project the costs at that time. For example, let's assume that roofing must be done every 15 years to avoid leaks and damage to the units. So a second set of shingles can be put on each roof in 15 years. In another 15 years, the two sets of shingles are then stripped and repairs to the wood structure beneath the shingles, new membrane and totally new shingles are installed. If that approach is used, then we could say that we need to save enough to 1) Add new shingles in 15 years and 2) To completely re-roof in 30 years. If that is so, then the annual amounts we would be adding to the roofing reserves should be the amount necessary to shingle in 15 years PLUS the amount necessary to completely re-roof in 30 years. We also need to increase the amounts collected each year to compensate for inflation, as the cost of materials and labor do increase each year.

As for projecting the costs, let's assume that the new roofs will cost $1,650,000 in 2011. How much would such a project cost in 30 years? If inflation is 3.50% per year, and costs rose at the rate of inflation, then the cost of such a project would be $4,474,599 in the year 2040! If inflation were 4.0% per year, then the cost would be $5,145,775! The actual calculations need to include various factors. These may include, but not be limited to the differences, if any, between the interest accrued on the money saved in reserves and the rate of inflation, actual costs which may rise over time at rates greater or less than the basic rate of inflation and, adjustments for current inflation. So having a management company which is good at these types of calculations and keeps a "pulse" on true costs, is essential for projecting reserve requirements. These numbers may seem large, but keep in mind the cost of a unit in 1978 and what they are selling for today. Even automobiles prices have increased. As I recall, I purchased a new compact car in 1969 for the price of $1,800 [ including tax, title and shipping]!

My final comment on reserves and the assessments for them is this. When we as unit owners are inclined to compare our funding requirements and assessments with those of neighboring associations, it is essential that we also determine what the nature of their reserves are and how they got that way. I can imagine a situation 20 years ago, at a time that we were not funding roofs, in which a unit owner in a neighboring association attended a board meeting and said “I don’t know why our monthly assessments are so high! The people over at BLMH, their assessments are nearly $50 a month less than ours!” Of course what that neighboring unit owner did not take into consideration, was that we were not funding some of our future maintenance needs, while their association was doing so!"

Comment: In the above I give boards the benefit of the doubt. In fact, our newsletters tended to gloss over the problems and amplified the mundane. The budgets did give an indication of the magnitude of the financial issues. But no one, and I do mean no one, stated the stark reality. 

"If We Don't Spend It We Don't Have To Collect It as Fees"

I will impact and change this culture. I already have. More remains to be done. This post also includes further information from my 2010 report to the board.

One old but alive attitude at BLMH is "If we don't spend it we don't have to collect it as fees." It is a disease in this HOA which has not yet been eradicated and it won't be. Why? This has a wonderful, logical sound and appeals to the low fee groupies and the flippers. It is simply too appealing for misinformed or financially short-sighted individuals.  It is overly simplistic and it is financially dangerous.

The Challenge
The problem isn't spending money. The challenge is to spend it well so as to achieve real value and in so doing lower annual costs. I think most owners would agree our new roofs are a good example and good value. We hope to get 20 years of good service without leaks and other issues. Perhaps longer.  I think the reconstruction of the north section of lakecliffe is another. We are in the midst of five expensive foundation repairs, which is another example. The drainage improvements that have been underway for four years are designed to avoid these typed of problems. The buildings with the foundation issues have not yet gotten the drainage improvements, which are being done in tandem with new roofs and exterior improvements. In some respects, I have had a 40 year backlog of some problems here. We can choose to deal with these annually as maintenance issues and spend money every year doing so and forever. Or we can decide if some problems are worthy of solution. Worthy projects reduce annual costs and have a benefit. Or we can take the seemingly low cost route, deal with consequences when they arise and feel a false confidence that we aren't spending money needlessly.

In the first decade of the existence of this association it's my understanding there were a lot of construction issues, inducing some defects to deal with. The boards must have worked very hard to deal with these, and finances were a mess. But something happened. In the 1990s things seems to come to a crawl and some repairs simply stopped. Was it board burnout? Malaise and apathy on the part of the owners? I don't know, but that decade resulted in some very costly decisions. We are again in momentum. Is this but temporary and another flash?

Kill the Vampire
If I have but one lasting achievement in this HOA, it will be to put a permanent stake into the heart of the vampiric attitude which is the title f this post; vampiric because it sucks the life out of the association. I am convinced this belief was the basis of this HOAs lack of reserve funding for decades. The symptoms included owners who argued "our fees are too high" and boards which "kicked the can down the road"  to defer reality. For an extended period boards and owners did this. Year, after year, after year with minimal or no contributions to reserves. At BLMH this has had financially serious consequences for current owners. It is precisely why our fees are what the are today. Currently we have 336 owners contributing an additional $50 per month toward reserves. thats about $200,000 additional per year. I remind the reader that this HOA had about $222,000 in reserves in 2002, had just embarked on a major roofing project and a street project.

As I have previously stated on this blog, that's to make up for past shortfalls, past shortcomings and past lack of vision. The owners complained about "too high fees" and the board acquiesced, or simply didn't do the numbers.

I doubt I will ever get anyone to admit they were a part of the problem. The standard excuse is "we didn't know." Ignorance truly is bliss, until the bills come due. And the bills did come due in the first decade of the 21st century.

This attitude or philosophy can infect newer boards, too. The experienced board members may say "it worked before" while ignoring current reality; i.e. why exactly are our monthly reserve contributions what they are. Over the years, it seems irrelevant how much education our board members have; it's my understanding we've had at least one PhD candidate on the board of BLMH. Clearly, education has not been the impediment. So what is the problem?

An Example
Here's an example of "kicking the can down the road." In October 2010 I prepared a 9-page analysis of a reserve study for presentation to the board of BLMH. Only the president was willing to discuss this over coffee at a nearby neutral location. Every other board member did not, but I provided a copy of my report to each; I'm persistent. When owner fees are at risk, I think persistence is a virtue and an absolute necessity. There was a very limited discussion during the following HOA meeting and I suspect some board members didn't bother to read the report; some of us have limited capacity for bad news, or anything contrary to our beliefs. Yet, owners at BLMH wonder why their fees are what the are. One could say I wasted my time. But I did persevere.

Our streets are but one visible example. Some of our owners wonder why I am seemingly angry about some of these issues. Let me see. As an owner, I attempted to point out the financial issues in 2008, but that board was committed to running this HOA into the ground (a former treasurer came to an annual meeting and declared "I don't want to live in a ghetto." Very melodramatic! Shortly thereafter she sold her unit). After two years of continuous pressure, I had gotten the attention of a sufficient number of owners to create a vital shift. During that two year period I did a ton of research, published 200+ articles, attended all meetings, etc. as an owner. I'm sure I put in more time than the board did. In fall of 2010 after arriving on the board, with a debacle of a reserve study, my first task was to clean that up. That was the first of many messes created by others that have occupied far too much of my time on the board. Finances is another one. We do have a plan. This HOA has always had a plan. Unfortunately, many of those plans were inadequate, had long term financial and infrastructure consequences,  or had serious side effects (such as much higher future fees, or deferring maintenance for 5 of more years, which created a serious maintenance backlog and higher future fees). It is not a coincidence that many of the plans created higher future fees. That was deliberate on the part of owners, the most visible and vocal of which pressured the board for the lowest possible current fees. Such an approach ignored or understated reserve requirements.

Have things changed? Yes they have. However, that financial disease remains forever popular and it can and will resurface and at the most inopportune time. Remember, in a HOA each and every owner is qualified to be a board member, and in our HOA we have had serious delinquencies, foreclosures and so on. My concern? In a HOA the financially challenged individuals can be on the board and can make all sorts of decisions, or they can influence the board. Some decisions are good, and some terrible. It has taken me six long, hard years to get things to where the are today. I clearly did not do this alone, yet it was an uphill battle, literally and figuratively, each and every step of the way. It will take a few more years to reach stability.

That "stability" will be transient and temporary. It will require recommitment each and every year. In a PUD nearly 40 years old and with at most 7 board members and about 60% of the owners who don't even bother to vote at the annual elections I can be assured there will be breakdowns. "Planning and preparation" are the only things that will save us, the owners. All of us, voters, non-voters or whatever!

Here is an excerpt from my October 2010 analysis to the board. I also remind the reader that 10 months prior to the analysis I had sent a strongly worded warning about the impending failure of a portion of Lakecliffe to the HOA president. That is the section we replaced in 2014.

Asphalt Projects - Streets
"According to the survey, Asphalt streets have a useful life of 15 to 20 years (20 maximum). The report states that the streets are in “Good” condition, with “minimal surface cracks or deficiencies.” The report states that “Indications of pavement deterioration due to structural causes are typically exhibited by compression of the paving (rutting), slippage cracking, delamination of overlayment surfacing, etc. Partial or complete replacement of the pavement is often necessary to correct structural or deficiencies.” (highlights are mine).

The report also states that “Periodic maintenance of the asphalt pavement surface to repair cracks, re-seal the surface and repair and (sic) deteriorated areas is necessary to achieve maximum useful life.” 

Comment: The report author stated the condition of streets to be “good” and also stated in the table on page 30 that the streets have an age of “2 years”; this is incorrect. Actual age is approaching 8-10 years [in 2010], and using his descriptions, some street sections are “poor.” The “cash flow tables” are therefore incorrect as they assume replacement in 13-18 years. For example, the comments of the author contradict the photo and text on page 60 of the report. The photo subtitle states “The streets look to have been recently repaired and patched, but cracks and missing sections is common throughout the property.” (emphasis mine). Also see the photo on page 62. The {north] section of Lakecliffe. is 8-9 years old, and has experienced some severe problems. It has 4 years remaining warranty work by the original contractor. When the street reaches 13 years of age, all repairs will fall on the association. This street will not reach 20 years lifespan without extensive repair, and perhaps not even then. The author states a street replacement cost of $458,000. If the streets have approximately 50% useful life remaining, then we should have current reserves of $229,000 for streets and we should be adding about $28,625 each year to the reserves for streets. We do not have these funds.

Streets - Summary and financial implications:
a. Estimated current age = 15 years
b. Maximum remaining useful life [as of 2010], portions of Lakecliffe = 5 - 8 years.
c. Maximum remaining useful life, other portions of streets = 10 – 15 years. (Study P. 38 indicates 18 years remaining)
d. Expenditure to replace = approximately $458,000.
e. Maintenance Interval 5 years, $34,000 = $6,800 per year
f. Amount in reserves = $10,000 if all other diverted to driveways.
g. Estimated funding annual requirement, to achieve replacement in 10 years = $45,800 per year.
h. Estimated funding annual requirement, to achieve replacement in 18 years, per study = $25,428 [per year]
i. Projected (2011) funding = $10,000?
j. Estimated funding shortfall each year commencing 2011= $25,428 per year, assuming maximum 18 years life remaining."

That concluded my report on streets.  The above was one small part of my long report provided to the board in the fall of 2010. The board did nothing. I assert they were operating consistent with the philosophy "if you don't spend it, we don't have to collect it as fees."

Since 2012 I've had various owners pummel and attack me as the current board member for A&M because of the street problem on Lakecliffe. Of course, previous boards put that street in place, and the board from 2008-2010 put their head into the sand. The game for owners is to always put the blame on the current board. Which is precisely why I am angry and why I say "I've spent most of my time on the board of BLMH cleaning up the messes created by others."

It remained for me and the current board from 2010-2014 to figure out how to resolve the Lakecliffe street problem, do it within our financial means and do it right, so we don't replace our streets every 10 years.

Who really created that problem? The owners in 1994-2004 who argued "our fees are too high", the boards who facilitated them by failing to save the necessary reserves and the boards of 2001-2003 who decided to save money by not hiring an engineering firm to prepare proper specifications and provide proper project management and oversight.

Who was held accountable for this fiasco? The boards of 2012-2014. That's the way it works at BLMH. However, I will impact and change this culture. I already have. More remains to be done.

Why I May Not Be a Good Fit For BLMH

I've concluded that the problem might be that I'm not a good fit for the mores at BLMH. In other words, it really is my problem and I may not belong here. The definition of "mores" is "the essential or characteristic customs and conventions of a community."  Some of us really don't belong and I may be one of those.

Here's an excerpt from a recent post elsewhere which may provide a glimpse into my perspective, and why I have a concern that I really am living in the wrong community; one which is not a good fit for that community or for me. Somewhat like attempting to mix "oil and water."

Posted elsewhere on June 1, 2014
"On Friday, May 30 I received a call from a client. It seems their production facility had experienced a massive breakdown. They requested that I come to the facility on the following Monday, Memorial Day. Apparently they could not ship any product and needed to resolve the issue before shipments resumed on Tuesday morning. A team would be available as of 3am to begin remedial action. 

Okay I said. So on Monday (Memorial Day) I arrived at the facility at 7:15am as agreed. I began looking into the problem, but after a number of tests and trials I concluded that a critical part had failed, a spare was not available and I could not fix this. However, [it was determined that] shipments could and would resume in the morning using an alternative means of material transfer. 

After concluding this, and after discussing with remote (400 mile distant) management what was essential to get this problem resolved I was given their blessings and I prepared to leave for the day. (There is always a way).

While wrapping it up, a worker at the facility (a 20 something; aka a "Millennial") asked me a few questions about my life and in particular, why I had bothered to respond and was there on a holiday Monday. I replied that this was, in fact, my 51st year of employment, but I had somewhat serious and unusual skills and so I felt it was appropriate to provide these when asked. In this case, there was no alternative. He then asked about my spouse. I said that she was on year off of employment, while she dealt with some health issues. However, she really, really wanted to get back to work. 

At that point, I was told "You people are weird." 

I laughed and explained that it had taken 50 years of constant effort for me to get to this point in my life, which included having the particular skills I possess. I don't think he understood at all, but he will learn. 

On Tuesday I was on site at 7:15am, UPS Red overnight early morning arrived on site at 7:30am with the necessary part. A technician installed it and voila, shipments resumed at 8:30am. 

Yes, there is a strata in society and there is a difference, which some now declare to be an "inequality." As I like to explain to people, I have worked continuously and diligently for 50 years to hone my skills. Where I am today was not an accident. It took some luck, a lot of very hard work and many, many good decisions and some sacrifices.

That may be weird. "

My Reply To Comments To the Above in a Thread Posted on June 3, 2014     
"I would take it a step further and suggest that we be "true to ourselves." To do so requires discovering who we are and what our purposes might be. In my experience it takes a lifetime to do this. It also requires some courage of conviction to act in accordance with what we discover. One could say we are operating consistent with our integrity. To do otherwise we are disloyal to ourselves and untrue. 

I've striven to be true to myself and it is taking a lifetime to work the kinks out. I've used work as the playing field because like it or not, I concluded I would spend at least 40 years working. So why not put that time to good use? I began "working" in 1963, but I started my first real business in 1978, after one aborted attempt in 1966. I have worked in companies of my own creation ever since. However, no matter if I was the President, I always considered what I was doing to be work, and I always describe it as so. I always wore two hats, and I seldom used the business card that had my corporate title on it. I used the other one, the one that described my role in systems and process control. I never hesitated to get into the production plants and did spend time literally in the trenches (actually, they were ditches). It is true that some thought I was a bit odd, but there are many paths to empowerment. 

.....it is also true that I've got thousands of hours of learning and training under my belt. Some was formal, some was via focus coursework, some was book learning and a lot was by doing. Getting an education while working was one way to pack more into the day, although some of those days were really long. 

I've worked at three companies other than the ones in which I was a major stakeholder. But by 1978 I decided that my third employer would be the last in which I was merely an employee and that I was ready to move on, and so I embarked into creating my first true business. That was 36 years ago. It was a post recession dole-drum. It was very difficult. The economy sucked, but that was why I ventured forth in the first place. Banks were useless and so I had to be very creative and was internally funded until 1984, at which time we finally moved out of the 1980's recessions.

We were an industrial automation firm and so we purchased and used all sorts of high tech gear in systems we programmed and assembled, providing sensors, computers, controllers, software, actuators, commissioning, training, etc. etc. To minimize risk I made it a point to test everything in the real world and so we built entire systems in the shop and ran them. "Smoke and mirrors" was rampant. Nevertheless, even after testing and so on the firm found itself on the "bleeding edge" from time to time as things didn't always go as planned. Our designs included various margins for error or unknowns in the event the impossible happened. Determining what the weak links might be and then providing for that gave great insight. Everything that was learned was applied. I was and continue to be a continuous, incremental improvement buff, and people do make the difference. 

Some of those systems continued to perform reliably for 20 years, and were performing leading edge, state of the art at the time they were retired. Some continue today, after 30 years. 

It was all very challenging and there were real financial risks. Invention is not a precise science, and the things that we use don't always work reliably. It was challenging to select and build on technologies that would be maintainable and reliable for 20+ years while performing sophisticated tasks. There are unknowns and that means cost overruns, time overruns, breakdowns and so on. My annual pay was less than that of my administrative assistant during difficult times. Fortunately for me, it was never, ever about the money. Money was simply another tool and it is the long term averages that count, or to say it differently, the area under the curve. I established a reputation for integrity. What is that? We did what we said we would do for what we said it would cost and we delivered on time. In other words, those production plants went into operation as planned. If there were issues we made it right. That hurt but there is no lesson learned like the one that stings. It goes deep, deeper than short-term memory. I gets into the sinews and to one's core. 

So why did I do it? To be true to myself and to achieve my real potential. I also wanted to see the results of my labors. I provided a real opportunity to some talented people who become even more talented as time passed. We all grew and got better. We made a difference and we saw with our very eyes that difference. It was tangible and real. Our clients businesses improved, the conditions for their workers improved. Safety improved. There really is something to be said about conceiving, designing, installing and then training others to use a sophisticated product which leverages their talents. 

Why do I continue to work today? So I can continue to grow, develop and make a difference. True, there are financial benefits, but my fees are reasonable. 

Yes, there are other things to do and there are benefits to volunteering and so I do that also. But in my experience, too many volunteers view their tasks as a hobby. There is sometimes no need for urgency. Nevertheless, there can be a sense of fulfillment and accomplishment. 

Looking back, do I have regrets? Yes I do, and they have been very useful. They and various failures possibly made a greater impact than the successes. They did show the way to some transformative decisions. The regrets don't run me, I think I'll probably die worn out and that's something I can live with.

For my younger worker, I think what made him think of me as "weird" was the realization that I was there and working on that holiday as pure choice. I suspect, based on his comments that he had difficulty understanding why I was there as I had no real need. In time I think he'll figure it out. Eventually we all do. Hopefully we do so earlier than later. "

Owners and Boards - Part 5 - A Better Way

"Water Fowl at BLMH - Are We Sitting Ducks?" That's the caption for the photo on the masthead. 

.
This post looks at the finances and strategy behind a possible "bright future" for this HOA. This post suggests a better way to achieve our financial future while avoiding the "fee whiplash" which has been often imposed upon our HOA owners. I am of the opinion this "better way" will also achieve the "lowest possible fees" while avoiding the much higher future fees accomplished by past plans and it will maintain the property. When I say that I am looking specifically at 2014 fees compared to 2004 fees.

The work I have done in my four years on a board in this HOA has been simply what is necessary to create such a future. It has been for the specific purpose of setting in place a foundation; I had a plan in 2010. That plan is a long term plan, The real work, creating that future so that it can be realized, has not yet begun. What I have accomplished is merely the clearing of a space. The stakes in the coming HOA election are very high for the owners at BLMH. Much, much higher than most realize.

These charts from Part 4 indicate a possible fee approach. In fact, I could improve upon this, and I could do it without penalizing future owners or current owners. But it won't happen unless I get help for this very specific purpose. So what's more important? I do know what is easier. I can assure the reader that long term planning is far, far more difficult than being a reaction and chasing the PODs on the property. However, the rewards of good long term planning are real and will show up in the pocket book of every owner. That can be accomplished with improved infrastructure while avoiding such disruptions as occurred on Lakecliffe, or with 1000% fee increases to support our reserves. So what are the real duties and responsibilities of boards? Is it chasing stray dogs and picking up trash? Or is it managing this HOA?

I suggest that we really do need a change here at BLMH. I call it "A Better Way." Which approach will owners prefer? Will it be "A Better Way" or the "Old Way" and a continuation of "Fee Chaos?" With an election coming this month, we'll soon know.

The Alternative
"Water Fowl at BLMH - Are We Sitting Ducks?" That's the caption for the photo on the masthead. 

I suggest that if this HOA decides to avoid "A Better Way" then the owners and board have decided to be "sitting ducks." 

The current plan of this HOA cannot and will not accomplish everything set forth in my "Better Way" plan. Why is this? There has been no board consensus for this and therefor no directive to accomplish it. There has been insufficient allocation of resources and planning to accomplish it. Recent boards have not seen the possibility and I've been too damn busy with current projects, dealing with the clean up of the breakdowns created by other boards while being jerked around by some of the owners. The other reason is simply because most owners have been uninterested. Not interested that is, until there is a breakdown.

The fact is, if owners demanded that boards do this with as much fervor as they showed when they thought their dogs would be fined via a special fees, why, this would already be done.

A few years ago (2008) my spouse attended a HOA meeting wherein the board spent an inordinate amount of time deciding how best to change a light bulb. My spouse decided this HOA was nuts and prefers not to attend HOA meetings. In the past year, this HOA board has spent an inordinate amount of time attempting to decide how to deal with "doggy bags" on the property. Some things may never change.

Current and recent boards have been very busy dealing with dog poop, light bulbs and simply keeping this behemoth running while avoiding larger disasters and keeping certain disruptive owners at bay. I extend the definition of "disruptive" owners to include foreclosures, delinquencies and any owner who repeatedly breaks the rules.

Some are of the opinion that "a better way" isn't necessary. Their position is "What we did worked before." No it didn't, and it doesn't. How anyone can say that with our current fee levels is beyond my comprehension. I assert there was a facade of work-ability and our current fees are the proof.

However, some of our owners and that includes various members of boards are in complete denial about this. Some are so far in denial that they cannot and will not accept that there really is another way. That poses a real problem. If we are sufficiently incapable of admitting what didn't work and our roles in this, then I think we are incapable of making good decisions. This is the primary reason I have considered selling my unit. The other reason?  I have concluded I might be wasting my time here.  There really is a "Better Way" but if this HOA is disinterested and prefers the "old ways" and fee chaos, then I will "move on" if not literally, then figuratively.

Reserves - The Achilles Heel of BLMH
Our HOA is a PUD. We have streets, street lighting, water mains and sewers to maintain. In the 1990s a "kick the can down the road" fee plan gave owners until about 2004 much lower fees. This was accomplished by minimizing the fee contribution to reserves, which were called a "replacement fund." While possibly legal, as fiduciaries boards should not operate that way. Since 1990 the Illinois Condominium Property Act, Section 9(c)(2) provides that an association shall, under certain circumstances, allocate a portion of the assessments to capital reserves. There have been numerous books published for decades on the subject and even more articles. For example, “Reserve Study Guidelines for Community Associations, Planned Developments and Condominiums”, Richard Wyndhamsmith, Windhamhouse, Inc., 1989.

Boards, as fiduciaries must certainly realize the future will become the present. One of the primary financial reasons for reserve planning is to avoid special assessments and the necessity of bank loans. A secondary reason is to plan for capital replacements. In a PUD with streets and water mains this is even more important. It is vital to the financial health of the HOA and the well-being of owners.

As an afterthought, boards may consider the disruptive effect of large upward changes in fees caused by the collection of reserves.  Conceptually, various boards have understood that this HOA will be here "forever." In practice, boards have a great deal of difficulty translating that into the planning and decision making process required to support a HOA. 

I do really understand the position of many owners. Why should any owner put even a single nickle into something they may sell in one, five or ten years? The operative word is "may" and that is where most owners fail. Understanding the difference between "will" and "may" is all the difference between financial success and failure.  Wishful thinking is not indicative of reality. This is true for owners, boards and entire HOAs. Boards are held to a much, much higher standards than owners. Not all boards are capable of the level of achievement required. That's why each and every owner at BLMH is today paying about $600 more in annual fees than should have been required. Kudos to the past boards. You saved yourselves a lot of money. I'm sure you were popular at the time. Those owners who sold their units prior to 2007 are most grateful. Of course, they are not here today to pay the current fees. Did you do your fiduciary duty?

A Different Path Leading to A Better Way
Part 4 of this post looked at some of the underlying realities. That post and other recent posts looked at the facts behind both the recent financial successes, but also how this HOA experienced failures, the extreme difficulties required to alter that, and our consequentially higher fees today.

I look at the past for several reasons. It is in part to counter the argument "What we did in the past worked." Most importantly, it is to raise the awareness of HOA owners about the stark realities caused by the decisions made by owners and their elected boards. These decisions do make a difference, and there are both good decisions and poor decisions to be made. Making poor long term decisions will have serious financial consequences.  At BLMH we got to this place and time because of past financial and infrastructure maintenance decisions.

Currently, this HOA has taken the initial, tentative steps for a different path. The plan is not yet complete nor is it understood by most owners or the entire board. If you think it is "cast in concrete" then you are mistaken. Just as the owners are learning by this experience, so too are the boards. To get to this particular place on the path has been expensive and much of that expense has been born by recent owners from 2000 to the present. But we do now have true reserve savings. We do now have some financial "breathing room." I caution that current stability may be deceiving and temporary. We need to do more to achieve stability. I do not suggest higher fees. I suggest that boards do more work (planning and preparation) with the guidance of management and the support of the owners.  We all want to succeed. We all want improvement. It's stupid to spend one's time in a cage, like a gerbil, running in circles and doing the same stuff over and over and over. Yet, the gerbil may be totally oblivious to any other mode of existence. Our boards have frequently operated like the gerbil in the cage. Confined to a never ending treadmill with no apparent HOA future. That's the consequence of a lack of vision and it is a fact that boards had no vision.

Breaking the Treadmill
I think more planning and far, far less "knee jerk" reacting to events is not only desirable but achievable. It is the path to breaking the treadmill. Staging an annual budget meeting is not planning.

Planning however, goes hand in hand with preparation. Preparation requires knowledge. That is precisely why I have studied several decades of finances. It is also why I have studied and observed every driveway, every roof, darn near every foot of street, the streams, walks and so on. Not once, but over and over and over. Perhaps this HOA has become my private treadmill?

With this information in hand, I've provided hundreds of pages of reports to the board, constructed hundreds of spreadsheets, made hundreds of projections, life cycle studies, cost studies and so on. In 2010 I somewhat reluctantly made my own reserve study of the HOA. It was enlightening. I did publish a few of the charts that I constructed and I also provided many more to the owners and the board.

What Have I Learned Since January 2010? 
Our annual budgeting process should be improved. We currently have created a real opportunity. This window of opportunity is closing. A decision must be made to move forward or to stagnate and move backwards. For example, would you like to know what your fees will be three years from now?  Would you like to know what infrastructure work will be done in 2015, 2016 and 2017? I do know the answer to these questions. How is it possible I know this? I suggest owners ask why our past boards didn't know the answers. I also suggest that owners ask why have they not been provided with a formal plan about this? There are a variety of reasons. Past boards were unwilling to make a commitment.  The current board is not in agreement. Boards generally remain forever stuck in whatever the current year is. That "tunnel vision" includes this year only.

Because of the current process the owners and boards cannot see more than 12 months forward, and that is only in October when the annual budget session is held. After that each year is pretty much a planning free fall. We can improve this process, but we don't have to. No one can force us to do better. Some of us many not know how. These are the primary reasons we continue on our same, old, weary financial path.

Management will support the board in any worthwhile endeavor. Is such planning worthwhile? Here's are several examples. We now recognize "bad debt" in our finances. We now discuss a spreadsheet at each HOA meeting which indicates the current state of delinquencies and graphically indicates all important delinquencies since 2008. By "Important" I mean delinquencies above a specific numerical value.  An owner fine or a $.06 delinquency is not of any serious financial consequence to this HOA.  We have added a "contingency" item to the annual budget. That supports boards in addressing critical infrastructure failures, notably our water mains. I argued for this for several years. These things did not simply occur. There has been resistance. Management can prepare any chart or table the board wants, but cannot do it for free. So some of this is prepared by me. Some of this has been an uphill battle as are most things here at BLMH. The old, largely unsuccessful ways are really ingrained here. That's what happens in a nearly 40 year old apparently successful, but in reality what has been a financial disaster of a HOA. Am I being harsh? Not at all. We are each paying more than $600 annually in higher fees because of past decisions. I think I am being kind. I've had it with political buzzwords like "fees as low as possible" while boards act to the contrary and take actions which will guarantee higher future fees. Each and every owner should be wary of politics and simplistic phrases. If we haven't learned this by now, then I must assume we never will. A failure to learn from the past and put what we have learned into consistent action is the real rain on this parade.

Is Making Such Improvements Worthwhile? 
Is the security of knowing our HOA has a plan to address such a reoccurring problem a good thing? Is avoiding special assessments while addressing our O&M and infrastructure repairs a good thing? Or would our owners prefer to roll the dice each year? Not me. Every 13 year old Boy Scout understands the meaning of preparation. If they don't they will be taught and will learn. After all, "Be Prepared" is the Boy Scout motto. At BLMH we have those who can't or won't. It is what it is and all owners reap the benefits and the costs, including the higher fees. Know it or not, our owners are gerbils in a cage, controlled by our boards. Some on various boards have said "It worked before, so why should we now change?

If We Fail, Then What?
If we fail to shift then our future boards will have the benefit of the current savings and a very rough plan for replacement of much of the critical infrastructure of this HOA.  Driveways, roofs and drainage improvements should be completed in 2016-2017. After that? If we fail to improve our planning process then future boards will continue to be stressed and there will continue to be unnecessary disruptions for residents and more uncertainty about finances. We really can do better. What would you prefer?

Currently, reserves are accumulating for the completion of these projects and also for entrances, garages and the next phase of the street project. The reserve plan includes proper provisions for a more distant future including certain aspects of the next cycles. The first roof was replaced in 2002 and if it survives 20 years it will be replaced in 2022. Where will that money come from? If the reserve study is followed then we are gradually saving about 1/18 of the price of that roof each year. If future boards continue on that plan, then the money will be there when needed for this purpose. If they don't the it won't be there. This HOA will then face special assessments of monthly higher fees.

The plan is imprecise and the current board has made a commitment to the financial portion of the plan. There has been no commitment to adhere to the infrastructure goal of the current reserve study and plan. What the board has done is collect the money necessary for the plan and that is a good thing which is why we today have our fees.

The street project began in 2014, 7 years earlier than anticipated. Future boards will be faced with some difficult decisions. In 2015 it will be vital to look closely at the streets and decide how best to properly extend the life of the existing streets while avoiding disruption to owners. A plan must also be decided on how best to undertake the replacement and/or resurfacing of the remaining streets.

How to do this while maintaining financial stability? It will not be easy and there will be opportunities for failure. Failure will mean deferring projects such as the improvements to entrances. Failure will require higher fees than would otherwise be necessary. That is the real tragedy of the 2014 replacement of Lakecliffe. This post presents a better approach.

A Financial Foundation
The current plan establishes a financial foundation, a significant toehold. It is nascent and incomplete. This HOA has commissioned an engineering evaluation of the streets. It has also commissioned a reserve study update. These two things when combined will complete the foundation and will provide a powerful tool for the board of 2015.  This tool will be a significant aid to determine how to approach the infrastructure projects from 2015 to 2025. I hope the board and owners will properly and fully use it and incorporate it into a more thorough planning process. Many past boards have attempted to delay financial unpleasantness and made poor choices. Doing so was a mistake then; it would be a mistake now and into the foreseeable future.

I hope our HOA does not squander what it has been given or has taken from recent owners via those substantial fee increases. I have confidence in management and our other professionals. I have less confidence in our owners. Why? There will always be the desire to cut fees now and deal with the financial problems later. Some current owners will be inclined to say "I won't be here in five years and so why should I fund any of this?" Boards are comprised of owners. Enough said.

The Critical Five Years - A Radical Departure in Budget Planning
The condition of our HOA infrastructure and our immediate financial well being will be largely determined by how this HOA manages infrastructure projects and finances for the next 5 years. It will be determined by the quality of those plans. It is unfortunate, but the planning process continues to emphasize immediate, annual fees. This includes immediate Operations & Maintenance needs as well as identified and acceptable reserve requirements. It currently emphasizes fee collection while pushing longer term problems away for a future board and future owners to deal with.

The approach that has been taken is an extension of the tried and true BLMH budget process. Each year the board agonizes over the numbers for the coming year and then adds in the reserve requirement per the tables, or the dart board. That determines the fees of each owner for the coming year.

However, in 2012-2013 a subtle but radical change occurred. Radical for this HOA, that is.  I proposed the board consider the benefit of adjusting infrastructure replacement dates to smooth reserve collections. This was not "pushing things back as far as possible" for someone else to deal with and pay for.  It is the taking of a flexible approach for the commencement of certain infrastructure improvements, as dictated by infrastructure condition, reserves and current fees. I did include changes to the infrastructure costs, which I have determined from the actual costs of roofs, entrance walks and drainage improvements. Doing these things provided the board with a degree of financial control never before experienced in this HOA.

This shift in our budgeting process indicated our fees could be lower in 2014 than would otherwise be possible. It was a subtle change and the board agreed. If this had not been done your fees in 2014 would have been higher than they were.

Why do we really need a better way? In 2010-2014 we were caught in a vice created two decades earlier and promoted for 20 years. We are today replacing roofs after the end of their "useful life." This also what occurred for the north section of Lakecliffe Drive. Doing things that way affords no flexibility, puts management, the board and our budgets into a mode I describe as "no choice but to do it now at whatever cost." Owners of course bear the total brunt of those costs. Boards now struggle to get the job done while attempting to reduce the cost. We sometimes succeed. However, there is no flexibility.

My Proposal
I am proposing a more flexible and thorough, but very realistic approach to budget analysis. It does require a more thorough analysis than calculating the increase in contracts, electricity and so on and then deciding how much this HOA must collect. The approach I am advocating is one I have used. It is more difficult to achieve but it has real benefits.  Smoothing finances is something that is required. Doing so demands that boards have solid long term plans in five year increments. Such plans accomplish these things.

1. The plan creates a series of glide paths to stabilize and smooth finances.
2. The plan recognizes all O&M and infrastructure requirements. 
3. The plan prudently spends money to uphold owner value.
4. The plan prudently spends money so that the property is properly maintained in a fair and equitable manner for all owners. 
5. The plan minimizes property disruption and resident inconvenience.
6. The plan prudently spends money to avoid fee disruption. 
7. Determine best practices for the HOA. At what point should infrastructure replacement occur? When does the annual cost to repair exceed the cost to replace? What about the hidden cost of owner disruption? Boards will be inclined to repair indefinitely because maintenance costs are hidden among the thousands of work orders this HOA processes each year. However, the real costs do increase year, by year, by year. 
8. Establish project plans, set in place project management and minimize the disruption to the property manager(s). In this manner the HOA gets better quality. Better quality equates to lower long term costs and better results. 

These charts from Part 4 indicates a possible fee approach. In fact, I could improve upon this, and I could do it without penalizing future owners or current owners. But it won't happen unless I get help.

Contracts

T&M versus Fixed Fee Contracts
I'm going to interrupt my series on "Owners and Boards" because before continuing it is necessary to point out the existence of these very different contract types. They do influence the costs, operations and achievements of the HOA. Boards must take this into account as part of the planning process. Delaying infrastructure replacement will increase maintenance costs and can influence other contracts. These things combined will also influence owner fees.

Some have difficulty distinguishing the critical differences of "T&M" Time & Materials contracts and "Fixed Fee" contracts. Simply stated, there are very different levels of service provided by these types of contracts. They each have their place, but it is poor business practice to compare the performance of "fixed fee" and "T&M" contractors without recognizing the contract differences. It should be the goal of all boards to get the best performance from all contractors. To do so requires paying people for the work they perform and recognizing that there are performance limitations built into these contracts. "You get what you pay for."

1. "T&M" contracts favor the contractor. The contractor is paid for all materials and labor expended in the performance of the contract. It is a completely open ended contract. We have a number of contractors who operate with a "T&M" contract. Our maintenance contract is this type of contract. It does include an estimated number of annual hours, but each and every hour expended on the property in performance of the contract will be paid. I have advised the board to expect a possible 25% maintenance increase in 2014. This is in part due to the unusual winter.  We used more hours in 2014 and we will pay for those hours and any materials required. Our snow removal is a similar contract. It also includes a predicted or base amount for a certain number of "pushes" of snow each winter. However, a winter which dumps more snowfalls than per the contract will increase the costs. 
2. "Fixed Fee" contracts favor the association. The contractor is paid a lump sum for work. It is a closed ended contract and just about everything is included in the base contract. However, certain "extras" are identified as payable above and beyond the contract. Our management contract is an example of a "Fixed Fee" contract.  One disadvantage is quality. "Fixed Fee" contractors are under constant pressure to do things as quickly as possible. How many "water main failures" should our management be involved in each year? How many foreclosures? How many evictions? How many floods, or legal suits? Obviously, each of these things takes manhours.   Most of our annual project contracts are also fixed fee but do identify certain "extras" which are paid at additional cost over the base contract amount. Roofs, streets, driveways, concrete, etc. usually are accomplished via specific fixed fee contracts. 

It should be obvious that "T&M" contractors have no incentive other than good business practice and integrity to reduce hours expended. For example, every door closer that fails, every exterior door that fails in winter will be repaired and the contractor will be paid.

A "fixed fee" contractor will be more likely to point out inefficiencies which absorb manhours than will a "T&M" contractor. It falls upon the management and the boards to monitor the expenditure of time and material in "T&M" contracts. Management and the boards must also decide at what point maintenance dollars are not achieving the desired results.  One example is the replacement of entry doors, sills and frames. So too for brick window sills. These can probably be repaired indefinitely. But should they? The reserve specialists in 2011 said "no, they should be replaced." Furthermore, when failures do occur, repairs can be quite costly. Brick sills, for example will fail and the result will be interior leaks and damage to the interior of units.

Obviously, resident inconvenience and disruption also should be considered when making a "repair versus replace" decision. However, the only impact this has on T&M contracts is to increase the scope of work of the contract and our annual costs.

Owners and Boards - Part 4 - A Bright New Day?

On August 8 I received this comment:

"BLMH is a lot better than it used to be, and I think there's a bright future ahead for this association. Not all associations are perfect, all of them have their issues. As for my own experiences, these past few years have been a lot smoother than the 'hope and change' board from 2008. I can only imagine how the fireplace issue, lakecliffe repaving, roofing projects etc. would have gone with that board in place."

I appreciate the author's comments. Is there a "bright future ahead" for this HOA? That's a good question. I assure the reader that is what I've been striving to accomplish since 2008. I want each owner in this HOA to get value from their fees. I am concerned that our fees are higher than necessary. I have not been alone in this, but there has been resistance and owner apathy. Politics does have an impact on each and every one of us. In all candor I'm surprised I remain here.

There are several aspects to the question "a bright future." We have the well known financial and infrastructure aspects. I'll be looking closely at this later in this post. Another aspect is this HOA as community. In recent years, owners have expanded their demands. A significant percentage of owners have been delinquent. Yet, all owners expect results, some demand service and nearly all avoid assisting as board members or on committees so that the potential of this HOA can be realized. Some of our owners now insist this is a retirement community while others insist it is an apartment community where owners pay their monthly fees and do nothing more. They will say "I paid my fees so I've supported this HOA and I've done my fair share."

I consider all of these positions to be aberrations. They do not reflect the reality of what is required to run this condominium HOA, what is available or what is possible with the resources of this community. These opinions nevertheless may be representative of the majority. These opinions do reflect what owners are willing to provide to their HOA. In other words, for about 85% of us "I'll pay my fees." Wow, thank you so very much! To extract their pound of flesh, some owners have had no hesitation in telling board members exactly what they think, demand and expect. That has been mostly  a demand for "lower fees" and special treatment. "What do I get for my fees?"  With so very little owner involvement and demands over decades for lower fees, is it any surprise our fees are higher today than would otherwise be necessary? Is it any wonder our infrastructure funding plan was failing in 2001? Is it any wonder in recent years that owners have had to pay the piper?

A View To A Future
To look into the future we also need to look at who are these owners on our boards. I'd suggest to owners that "the motivated" are on the boards. In the past, "the popular" were also on the boards. Neither of these approaches may be the best way to run a HOA, and there is evidence that motivated boards are not necessarily the best boards. In recent years with board vacancies, anyone who showed up at BLMH was given a position. Is that any way to run a HOA with a $1 million annual budget? Apparently, our "apartment" mentality owners decided it was completely adequate. Well, those duly elected boards spent every dollar you gave them.

A few years ago, the rumor was promoted that there would be a special fee for dog owners. That got a lot of people to swarm the management office. As a consequence we also got that "change" board of 2008. I think we would all agree we got "change" but did we get a better run HOA? In 2008 the owners of this HOA got exactly what they wanted, demanded and elected. It happened then and it will probably happen again. Do you or I want to be here when it again occurs? Who will play the part of the "little dutch boy" with their finger in the dike when it again occurs? I assure the reader, it will not be me.

I don't know what the motivation of future boards will be. I don't know what their skills will be. I do think that motivated owners will vote and put in place like minded boards. Will we become a "retirement community" or a "rental community" or something else? Is that a problem? Not necessarily, if we can pay for it at current fee levels.  However, at BLMH many of the motivated owners have expected someone else to pay for their grand ideas. Many have exhibited no financial acumen. They voted for anyone who promised lower fees.  In other words, these owners and their elected boards are willing to mortgage your future. Owners and boards did it in the 1990s, failed to match reserve savings to infrastructure requirements in the early 2000s, attempted to cut fees in in 2008 and if allowed they will do it again, and again, and again.

A Financial Reality
Will this HOA have a "brighter financial future?" Some see our recent reserve balance of $1,754,285 as announced by our treasurer to be good news. In fact, this HOA will use about $600,000 in reserves this year, and most of that had been committed by July 2014. It took about two years to collect and save that amount. The funds for the street replacement project will require about four times the total 2002 reserve savings of this HOA. I provide this information to indicate how far this HOA has actually come in 10 years. Yet, in 2008 at about the half way point, the owners folded and this HOA turned back. It took extraordinary effort by a very few to avoid a financial disaster.

The financial well being of this HOA, and the fees required of current owners will be largely determined by how this HOA manages it's finances for the next 5 years and beyond. The condition of our infrastructure will be determined by how and when our boards spend the fees that are collected. There is a plan and current fees collected for reserves are intended to fund that plan. Boards may adjust the dates of certain infrastructure repairs. There are good reasons to do so, including my goal to achieve a glide path for fees. Future boards may discard all or part of any plan. Some will be inclined to. After all, with election to position comes financial power. With election to the board of a HOA does not come good judgement, wisdom or financial acuteness.

To determine our current financial position requires knowledge not only of the check book balance, but also of the financial commitments that have been made and are required to maintain this HOA. Our reserve balance on December 31, 2014 will probably be about $1,250,000. That is not a trivial amount, but it is a lot less than our current $1,754,258. In my projection I include the remaining reserve collections of 2014 and the estimated financial commitments made in 2014. I assume all financial commitments made in 2014 will be paid in 2014.

For the period 2015 to 2025, this HOA will spend about $3 million in reserves on infrastructure replacement. Most of this will be spent after the completion of the current phase of the roofing project and driveways.

What would you prefer as an owner? A snapshot of our checking account from time to time, or a reliable description of our plans and our financial ability to achieve those plans? These are the things that determine your fees.

What should owners demand of boards and management? What support of management and boards are the owners willing to provide? In the dark days I made a reserve study and created many charts for presentation to the owners during an official HOA meeting. Fewer than a dozen owners attended and that included several board members. Have things really changed at BLMH?

A Possible Financial Future
Financially, I'd say this HOA has turned a corner. Politically, I am less optimistic; many of the same owners who elected that board of 2008 remain here. I don't trust any of them. They did their bad deed, and then sat back and said "How could this happen?" How indeed!

I am of the opinion a financial "bright future" while possible cannot be achieved automatically. Six years ago this HOA stumbled badly. I am of the opinion that BLMH does have another 5 years to go before we can say that our reserve program, infrastructure work and finances have stabilized. That's based upon what I currently know and have generated. We'll have moved beyond the fireplace problem, beyond the dam study and we'll know how Wheaton proposes to responsibly run their retention system.

My personal financial projections assume this HOA will continue to be run as a condominium community. That is not assured. If voting owners decide they want the amenities of a "retirement community" then we will quickly run out of money. If voting owners decide our fees are too high and decide to cut back on reserves, then we will also quickly run out of money. I emphasize "voting" owners because those are the owners who control this HOA.

"Financial stability" cannot be guaranteed. I'm cautious and cautiously optimistic. Current reserve funding levels may be adequate and annual fee increases for reserves may not be required. How is that possible? We've gone from 5% of our fees dedicated to reserves to 33%. In other words, this HOA today collects nearly 7 times more each year in fees dedicated to reserves than it did a few years ago. It allocates twice as much per year to reserves than it did a less than a decade ago. In fact, I think in 2002 it saved nothing for reserves.

It is true that this HOA has been spending some of these reserves as rapidly as they were collected. It had to. Remember, in 2001 the total reserves were slightly more than $222,000. In 2002 they were $258,735. Yet we needed new streets and driveways and began a $1.7 million roofing project. The "replacement fund" was spent as fast as the money came in.

The combined, total reserves of 2001, 2002 and 2003 were less than we will spend this year on the roofing project. With a $1.7 million roofing project beginning in 2002 this HOA was cashing checks which it couldn't pay, yet the owners were oblivious. In 2003 the board of this HOA had no choice but to increase fees simply to cover immediate infrastructure requirements. In other words, many boards had delayed far too long. They kept fees "as low as possible." The owners loved it. Some boards obviously refused to save for reserves. It was a facade and the bill had come due.

Why do I remain cautious? Many of the owners who facilitated the "smoke and mirrors" budgets of the past remain here today. They will vote. They did so in 2008 and the results were a disaster. Their "hand picked" board attempted to reduce fees even with about $2 million in near term reserve spending facing this HOA. What were they thinking? Who knows? It was a near miracle it didn't happen. We are proceeding with roofs, driveways, a major street replacement and the removal and replacement of 40+ dead trees.

Some Financial Details - My Educated Opinion
It's possible that there will be no fee increase for reserves in 2015 and any fee increase will be that required by the Operations and Maintenance (O&M) budget.

It is my opinion that this HOA is catching up and has finally built a true savings reserve; it only took 37 years of trial and error! The current reserve funding means that this HOA will probably have $1,250,000 in reserves on December 31, 2014. With the identified plans and at current reserve fee (funding) level that is sufficient to pay for those street replacements from 2014-2021 which began 7 years earlier than anticipated as well as current identified reserve requirements. It is probable that this HOA will be able to complete all necessary and anticipated infrastructure repairs from 2015 to 2026 with no further increase to fees for reserve funding.

It's my personal opinion that we will probably be able to maintain at least $780,000 in reserves each year from now until 2025. In other words, fees may increase to deal with changes in Operations & Maintenance budgets, but I see no need to increase fees to accommodate reserves.

I want to emphasize that with the current reserve fee levels and savings this HOA should be able to do all infrastructure replacements, including our entrances. It will remain  for future boards to properly spend those fees which were earned the hard way by each of our owners, and provided by most owners to this HOA as demanded. Asking boards to do this is not a lot, if they are provided quality professional management and frequent reserve study updates. (About once every 5 years). If there are significant infrastructure changes or changes to reserve requirements, then a more frequent reserve update would be necessary.

The chart below depicts one possibility and includes my funding glide path. This chart allows for the completion of roofs and drainage improvements between 2015-2017, the completion of driveway replacements 2015-2017, the continuation of the replacement of garage floors, perhaps four 4-stall garages per year, the completion of all streets in 2017-2022 and the continuation of stream concrete repairs 2015-2020. It also addresses the problems of entrance doors & doorways, intercoms and mailboxes. It also includes longer term funding for the next phases of roofs, driveways and so on.

I could provide a chart to 2042, but the farther ahead we attempt to project the infrastructure and O&M fee requirements, the more difficult such predictions become. I think for the purposes of this post a 10 year projection is more than adequate.  Note: This may be adjusted by the reserve study update that is underway. I have no idea of the outcome of that study; the following is based solely on my financial observations and the studies of 2010 (mine) and 2011 (HOA). (click to enlarge):

Fees - What Is Being Attempted? A Glide Path into the Future
A financial glide path has been one of my personal goals for this HOA. What is that?

Our fees are determined by the condition of the infrastructure in this HOA, by our annual Operations & Maintenance budget and by the percentage of owners who do actually contribute their fees each year.

Our O&M budget is based upon annual operating realities. The cost of electricity, water, insurance, oil and so on. We don't directly pay for gasoline in our HOA budget, but our contractors and supplies do. Material costs will rise with the price of oil. Inflation takes a toll. Health insurance costs impact our contractors and suppliers. It is necessary to increase our O&M budget to deal with this, and such increases occur annually and are determined by the current reality.

Our HOA provides owners with the details of annual fee increases. This information is displayed on the HOA website. What most owners are unawares of is the true impact of infrastructure repairs on our fees. That information is provided to owners via the budgets and balance sheets.

In the recent past (2000 to the present), reserve contributions were called "replacement fund" and that is how these fees were used. In some recent years there were no contributions made to replenish these funds. We today have a fund called "reserves" and these are collected annually, accumulated and saved for near future infrastructure replacement. We no longer have "zig-zag" fees which vary from year to year to pay for infrastructure. In other words, this HOA has achieved stability in reserve funding. This achievement is having and will continue to have a profound impact on owner fees.

The board has set a minimum for reserve savings balances; that's prudent. It is possible to adjust fees for reserves and infrastructure replacement to accommodate this. Of course, if a street requires replacement, then it must be done. The challenge for all boards is to anticipate these things and set the required fee levels and savings levels. This anticipation must occur over decades. It cannot be properly done year by year. In 10 years our reserve contributions went from near zero to over $400,000 per year.  In other words, in 10 years our fees for reserves went from near zero per month to about $100 per month. That's what happens when boards fail to set fees and save for reserves.

The good news is we've passed beyond that.  We're currently nearing the completion of driveway replacements and roofing replacements. These could be completed within three years. We have begun street replacement this year. These are each major infrastructure projects.

Other aspects of our infrastructure are approaching 40 years of age. Reserves will be required to pay for these. Many of our garage floors and building entry doors, for example. There is a plan underway to replace garage floors a few each year. The failure and maintenance issues of entrances and exterior doors has been recognized and there is also a plan for these. If we begin today it will require 10 years for these projects.

One of my goals has been to stabilize fees, establish priorities, maintain the property and give owners value in the process. I also want to achieve a glide path for fees, in which spikes or significant changes can be avoided. This HOA has been largely successful at managing Operations & Maintenance fees. The past problem has been Reserves, which in recent years have been as little as 5% of the fees and as much as 33%. In other words, it's been my position that additional emphasis must be placed on the accumulation, managing and spending of reserves.

One of the current challenges is the creation of a "glide path" for reserves, in which fees for this purpose match reasonable and realistic infrastructure requirements while avoiding financial issues. In the past, these swings were from 5% to 33%. For a number of decades in this HOA the emphasis was on the lowest possible fees each year and reserves fell where they may. I prefer a glide path approach which emphasizes the achievement of reserves, addresses contingencies (water mains) and which anticipates requirements in five year increments, with close attention to the needs of the next five years. Large infrastructure projects must also be accommodated. A failure to do so is precisely why our reserve budgets had to ramp up beginning in 1999. Our new roofs will again require replacement in 25-30 years and it will require more than $2 million to do this. Saving a small amount each year is a necessity and preferred by current owners who do not want special assessments.

I assert that a good glide path can stabilize fees and it is possible our annual fees increases will remain moderate for a decade. This can be accomplished while also accomplishing the identified infrastructure replacements and repairs. 

Not everyone has had the confidence that our HOA can achieve this. A former treasurer, who declared at an annual meeting that she "did not want to live in a ghetto" decided to sell her unit in 2010.

I do think the necessary tasks can be accomplished and that includes some infrastructure work that has been avoided or delayed. To do so will take more owner involvement via fully staffed and competent boards to do this.

Possible Fees For This HOA to 2032
Here is a chart of possible fees. The increases are attributed completely to O&M budget requirements. There are no fee increases required to accommodate reserves for infrastructure. In other words, this chart indicates financial stability. With good management and foresight, it is possible that our fees will not exceed what is shown on this chart. With really good board oversight our fees could decrease in the future. Would that be a good thing? Not if it means shackling future owners with the onerous burden of excessive fees. Our greedy owners did it before and I suppose they may do it again. (click to enlarge):

Here are a few things I consider in this post:

1. Major infrastructure replacements for the current phases are not yet complete. This includes drainage improvements, roofing and driveways. The streets are failing earlier than expected and the next street replacement phase, scheduled to begin in 2021-2022 actually began this year. This work must continue to avoid resident disruption. 
2. We do have a professional, unbiased reserve study. It was prepared in 2011 and it will be updated in 2014.  However, boards must use these studies as the tools they are intended to be. 
3. We do not yet have a course of committed action. We really do need a long term plan that the boards can agree upon while preserving flexibility. For example, our building entrance doors and frames, mailboxes and intercoms are about 40 years old. They will not last forever. Replacement should commence as soon as the roofing project is completed. It will require 10 years to do this. Yet, each board picks and chooses projects and initiatives. That approach is why garage floors, concrete patios, brick sills, masonry repairs and even a building foundation lift and a truss repair were delayed. 
4. We took serious steps to deal with delinquencies in 2011. Boards must continue this. It is not easy, it can upset a variety of people, and it can take a lot of management and board time. Boards should allocate the funds to accomplish this. However, a failure to do so can increase fees by hundreds of dollars per owner per year. Allowing delinquent owners to absorb the fees of the other owners is reprehensible. What are the priorities? 
5. It is true that our reserves have improved significantly. A recent newsletter article implies we have adequate reserves ("We have a good plan"). Do owners know what that plan is? How would you define a "good plan?" My recent post provided a lot of information on funding versus spending. What is important is the amount of reserves and the funding requirements ahead, while maintaining the property. I've provided additional insights in this post. 
6. It really has been very difficult. Difficult for owners, more difficult for boards and most difficult for me; I'm ready to sell or rent my unit and "move on." I've had enough of this. My experience in this HOA has not been a good one. There are many thousands of quality places to live in the U.S. I've traveled extensively and I do know reality, nor must I live here. 
7. There remain some serious obstacles for this HOA. One is the lack of consensus about what is a "good plan," Another is a hesitation to use and pay for qualified professionals, another is a desire to avoid programmed maintenance in preference of micromanagement, and yet a fourth is understaffed or struggling boards. 
8. A "cookie-cutter" approach to some aspects of maintenance and landscaping will not work in a HOA with 40+ unique buildings, three meandering streams, 15 acres of bermed and landscaped turf, about a third of a mile of walks, etc. It does require serious attention to detail and we have not had the board members to accomplish this. 
9. Communications has improved via a reinvigorated newsletter. However, most newsletters don't include a report from every board member. There is a real difference of opinion about what should be communicated in the newsletter and why. 
10. Some owners continue to view BLMH as a retirement community or an apartment complex. In recent years owner involvement has been very low. I include participation on boards, committees and voter turnout. In order for this HOA to succeed, more involvement will be required and certain opinions and positions cannot be the prevalent ones at BLMH. We are a condominium HOA. Nothing more and nothing less.