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.