Reserves of $86,321- Assessments and Budgeting

This is another post in a continuing series on HOA budgeting.

"In 2014 the reserve contributions were 312.4% higher than they were in 2001. The Operations & Maintenance (O&M) budget in 2014 was 14.9% higher than it was in 2001."

In other words, in 2014 the average monthly owner fee for the O&M budget at BLMH was $28.56 greater than it was in the 2001 budget. In 2014 the average monthly owner fee for the reserve budget at BLMH was $83.68 greater than it was in the 2001 budget.

The above is why I pay so much attention to reserves at our HOA and why you should at your HOA. Our reserve contributions climbed nearly four times that of the O&M budgets.

".....we need to live in the present."

"I have made a general statement that I think it is a mistake for a HOA to move forward with 0% annual fee increases. However, the actual budget each year should be based upon the actual finances and not some general theory or knee jerk, emotional reaction. The problems at BLMH can all be traced to the condition of reserves. In recent years boards have dramatically changed the approach to this very significant component of fees at BLMH.  This change has had a profound impact upon our HOA finances."

In February 2010 I sent an email with five links to the Architectural Director of the Board of BLMH. These had to do with fees and budgeting at our HOA. Four of these links are contained in this post.

As I have stated elsewhere in this blog, I had been doing my own research about the finances of the HOA since considering a purchase in 2001. All I had at that time was the information provided by the various boards to each of the owners and the most recent newsletter; that information (excepting the 2001 newsletters) is adequate and included published budgets and balance sheets.  Some of my research had been completed prior to purchase, but there really isn't a lot of time to delve deeply into this prior to making a purchase commitment. Of course, back then it was a seller's market. Today it might be easier to take one's time to do sufficient research. I had legitimate concerns about reserves and fees.

The first budget I was given was the 2002. It showed a reserve contribution of $108,000 for the year 2001 and a 2002 budget with a $148,108 contribution for reserves.  However, I later discovered that the total reserves at BLMH in 1998 were $86,321. The average annual fee increase had been 2.59% over a period of 10 years. This changed when a new management firm came on board in December 1998. Commencing in 1999 there were large annual fee increases of 11%, 11%, 9% and so on. Owners had become accustomed to very low annual fee increases in prior years. But those budgets were inadequate.

At BLMH the Operating & Maintenance budgets (O&M) were not separated from Reserve requirements in the percent changes to fees provided in the "Welcome Packet." Nor were reserve fund balances provided year by year. I suspect that a few owners might have become alarmed had that information been provided in that form. But it was in the "Balance Sheets" for the HOA and not flagged. But then, as is the case today, owners are largely uninvolved in the affairs of managing this HOA. Today, most owners prefer to let another owner in a board position do the work. When things are not to their liking a few of the "owners' will show up to express their displeasure and make demands upon the board of volunteers. Boards will frequently be inclined to acquiesce. That's the way it was, and that is the way it is today in our "entitlement" society.

Returning to my financial concerns in 2001. This information was available in the prior balance sheets. This HOA had less than $100,000 in reserves in 1998 and yet would begin a multi million dollar roofing project in about four years, and a complete street replacement in four years. Simple arithmetic would indicate that there would be insufficient reserve funds to do these projects unless drastic action was taken.  Boards had no choice and so fees increased at an average annual rate of 7.41% during the period 1999 to 2008. Projects were delayed to allow the accumulation of funds to do the work. A significant amount of the money collected for these capital projects was spent as soon as it was collected.

But no one at this HOA read about this in any letter and any newsletter. So most of the owners were blindsided. They didn't know that the boards prior to 2008 had thrown us under the bus, spent money on a defective street project and, with about $250,000 had embarked upon a $2 million dollar roofing project commending with the building which housed the president of the association.

This history is why so many boards have struggled for nearly 20 years with annual budgets at BLMH. This history may also be why some board members have been so averse to 0% fee increases in recent years. They may remember the pain and the owner angst and they want to avoid it.

But as 2016 approaches it is important to realize that this HOA is not operating or being managed the way it was in the 1980s and 1990s. I am of the opinion each and every owner is better for it. Anyone who disagrees needs to state their case rather than simply gripe, or make derisive remarks under their breath during HOA meetings. A few probably prefer the "good old days" when we either didn't know what was going on, or we were fed "pap" with articles about architecture in England. Either way, ignorance may be bliss until reality sets in.  In HOAs the blissful hope they sell their unit before the reality sets in.

I do recall the newsletters of 2002. Back then the "big deal" was the winter tips. Reading those newsletters, one would assume the board had everything under control and we were in great shape. It was a sham and nothing could have been further from the truth. But one of the favorite expressions of the leader of the board back then was about "throwing people under the bus." And so they did. But for as long as possible boards and the board presidents of this HOA did what they could to keep up the facade. Reality intervened then as it does now. But today it is a different reality. The newsletter is no longer a facade or a "feel good" piece of paper. We do have reserves and we do know what they really intended to accomplish. The HOA is aging, but it is no longer falling off of a cliff.

I cannot go back in time and fix the past. We can and do address identified issues in the present, while planning a 30 year future. That is not the way it was, and those who participated in those years should take responsibility for their actions. That includes owners and former board members.

We today have owners who have lived here for 30 years and remember "the good old days" when annual fee increases averaged 2.59% and for many years the fee increases were 0%.  We also have one current board member who was on the board back in "the good old days" and experienced it all.

However, we need to live in the present.

I have made a general statement that I think it is a mistake for a HOA to move forward with 0% annual fee increases. However, the actual increases each year should be based upon the actual finances and not some general theory or knee jerk, emotional reaction. The problems at BLMH can all be traced to the condition of reserves and several projects began in 2002, including an incredibly costly roofing project.

In recent years boards have dramatically changed the approach to this very significant component of fees at BLMH. This change has had a profound impact on our HOA finances. These changes began slowly in 1999 but became more sophisticated by 2011. But until the roofing project is completed and the redo of the streets a lot of money will continue to be spent. Unfortunately our streets began less than 10 years after they were replaced in 2002 or 2003.

In 2014 the reserve contributions were 412.4% higher than they were in 2001. The Operations & Maintenance (O&M) budget in 2014 was 14.9% higher than it was in 2001.

The percentage of fees for reserve items has increased from about 0% in the 1980s and 1990s to about 31% or more in recent years. Reserve contributions via fees peaked at 33.9% with the 2012 budget. In 2011 there was a 7% increase in assessments to owners. All of it went to contributions for reserves. In fact, the budget for O&M items actually decreased that year by 1.1%. In 2012 the budget called for an approximate 3% fee increase. Of that increase nearly half went to reserves.

In recent years the boards temporarily shifted to a multi-tiered approach for reserves and very closely monitored requirements for the 10 year future period while also considering 20 and 30 year requirements. Had this been done from 1985 to 1998 there would have been no need for me to do the work to create the information contained in the links later in this post. I also probably wouldn't be providing about 450 to 700 hours of free services to the HOA each and every year.

The earlier approaches of low fees with minimal reserve contributions created the financial problems of the 2000s. The grandiose or poorly executed projects which began in 2002 sealed the fate of this HOA for the next two decades. It was the available funds that probably dictated the approach used for the street replacement project in 2002. That is understandable if a HOA lacks the funds to do it right. Understandable, but not excusable. However, for a time the HOA owners did get the low fees they wanted. This could not continue and owners from 1999 to 2008 paid for this and got average annual fee increases of 7.41%. That's 3 times the fee increases each and every year as compared to the earlier period 1982 to 1998. Most of the money for the annual increases after 1998 went into reserves and to pay for immediate capital projects including the 2003 street replacement and that $2 million roofing project.

It is only since 2010 that this HOA made the huge leap to more sophisticated and realistic reserve requirements. This has not been smooth, either. But boards are getting better at this. A lot of time has been spent by a minority of boards members since 2011 looking into reserve requirements and implications for finances. This was necessary because of the condition of Lakecliffe and other streets, which were not predicted for retopping until the 2020s. Instead we found we had to completely replace Lakecliffe Blvd. Other projects and surveys which had been delayed are finally being addressed. 2014 and 2015 have been very different years as compared to the preceding ones. This needs to be considered when preparing HOA budgets at BLMH.

Here are the links I mentioned at the beginning of this post. Yes, we can plan and prepare. Yet, it is true that some can't, some won't learn from the past, and a few expect a totally different outcome no matter what they do. Yet, boards are supposed to muddle through. History can be a great teacher if we are willing to learn the lessons it provides. The reader may not agree with all of the following, but it does include some eye opening information:

September 2008 - Assessment History


November 2008 - Where Our Fees Will Go in 2009


March 2009 - A Method for Arriving at Assessments


June 2009 - Unit Owner Budget