Summary
Our HOA has based it's annual financial plans on the following;
- Previous year Operations & Maintenance (O&M) Budget and Actual Expenditures
- Identified changes to the O&M budget for the following year (utilities, contracts, etc.)
- The most recent reserve study projection
What has been lacking has been cost accounting for projects with recognition of current reserve balances compared to projected balances and unfinished work. For example, in 2014 this HOA began a street replacement project 6 years earlier than planned. Yet, if we simply look forward to the expenditures 2015-2024, the reserve study indicates all streets are to be replaced in 2020-2022. A failure to identify the fact that we have replaced 20% of the streets in our HOA in 2014 overstates the future reserve requirements for this project. A failure to identify such expenditures as "complete" or "partially complete" will overstate the requirements for reserves in future years.
To further complicate this, our "trunk line" or major street artery is Lakecliffe. That street carries all traffic of this HOA and is therefor the major street in this HOA. This implies that this street must be built to more costly standards to avoid resident disruption caused by premature street failure. Other, feeder streets which serve only a portion of the residents may require less costly street construction. Of course, all streets should be constructed to a standard which provides at least 20 years life.
To further complicate this, our "trunk line" or major street artery is Lakecliffe. That street carries all traffic of this HOA and is therefor the major street in this HOA. This implies that this street must be built to more costly standards to avoid resident disruption caused by premature street failure. Other, feeder streets which serve only a portion of the residents may require less costly street construction. Of course, all streets should be constructed to a standard which provides at least 20 years life.
The completion of one-half of the major street in this HOA in 2014 should have an impact on future street replacement reserves. Will it? Not necessarily. This will occur only if cost accounting procedures identify this significant infrastructure improvement and future boards are enabled to adjust reserve requirements.
The impact on future fees will be determined by identifying the actual costs to improve the 2014 portion of Lakecliffe and then apply those costs to the remainder of the costs for the streets in the HOA. So too for other capital improvements. This is typical of the cost accounting requirements for all projects, be they streets, roofs, driveways, garage floors or whatever.
A failure to properly adjust capital budgets as determined by current percent completion, actual costs and future requirements will result in less than optimal reserve funding.
One Picture (or two) is Worth a Thousand Words
Here's two charts which provide an idea of what is possible:
Ths chart indicates possible annual funding of reserves for the HOA. This is for reserves only. Operations & Maintenance (O&M) budgets are not shown and are in addition to this:
This chart indicates the same annual funding of reserves as monthly cost per owner.
The two charts are identical, but the numbers are displayed as monthly fees per owner and as annual reserve collections for the HOA.
The reader will notice that the actual monthly fees are lower than the projected after 2014. There is a valid reason. That reason is simply this. Improved tracking of reserve requirements versus actual costs would determine that we were accomplishing more at lower cost. This means lower future reserve requirements. If requirements are lower then fees would be lower.
If this HOA simply and automatically follows the reserve study funding things would be very different. That's the blue line in the charts. However, this HOA is using project management, cost accounting and rigorous fee analysis to determine the budget requirements.
Had we not done so, here is what this HOA would have experienced:
Of course, future events are never guaranteed. Future reserve studies and future boards may alter this plan.
A failure to properly adjust capital budgets as determined by current percent completion, actual costs and future requirements will result in less than optimal reserve funding.
One Picture (or two) is Worth a Thousand Words
Here's two charts which provide an idea of what is possible:
Ths chart indicates possible annual funding of reserves for the HOA. This is for reserves only. Operations & Maintenance (O&M) budgets are not shown and are in addition to this:
This chart indicates the same annual funding of reserves as monthly cost per owner.
The two charts are identical, but the numbers are displayed as monthly fees per owner and as annual reserve collections for the HOA.
The reader will notice that the actual monthly fees are lower than the projected after 2014. There is a valid reason. That reason is simply this. Improved tracking of reserve requirements versus actual costs would determine that we were accomplishing more at lower cost. This means lower future reserve requirements. If requirements are lower then fees would be lower.
If this HOA simply and automatically follows the reserve study funding things would be very different. That's the blue line in the charts. However, this HOA is using project management, cost accounting and rigorous fee analysis to determine the budget requirements.
Had we not done so, here is what this HOA would have experienced:
- 2014 fees per owner for reserves of $117.06 per month per study versus $111.17 actual per owner.
- 2015 projected fees per owner for reserves of $120.04 per month per study versus $93.27 actual per owner.
Of course, future events are never guaranteed. Future reserve studies and future boards may alter this plan.
Hi Norm,
ReplyDeleteWhat did you end up doing with your fireplace?