By now, everybody should be aware that the 2013 budget was posted to the POA web site on October 24th. It is very detailed and contains some helpful notes in the margins.

This post will be in two parts. First: a summary of the “Reserves” situation; which you may find worth reading because my interpretation differs slightly from the Board’s in terms of looking at cash reserves versus total reserves. Second: comments and information on certain budget line items.

Executive Summary (using rounded numbers)

• The budget looks relatively straightforward.  The largest increases have to do with infrastructure maintenance.

• It assumes the purchase of the vacant land outside the front gate will be funded with borrowings.  Yearly loan payments and land maintenance costs are assumed to be $50,000 annually.  But that purchase is not a certainty.

• It does not include the cost of the proposed sidewalk extension to the front gate.

• The total 2012 year end cash reserves are projected to be $1,730,000.

• Bids for the road rebuilding project will be available by the end of the year.  But the current best guess is around $2,000,000.   Assuming that cost, there will be a shortfall in the year end reserves of $270,000.  (Don’t panic; see the next point…..)

• The budgeted reserve contribution for 2013 is $510,000.  Of that amount, $270,000 would go towards the road work to cover the shortfall mentioned above.  The balance would (in my opinion) be available either to cover cost overruns on the road rebuilding project, to start re-building reserves for the next road project or as a general emergency reserve (in line with HOA best practices).

Part One: Capital Reserves

This is arguably the most important issue related to the budget. It deals with how much we have available to pay for the upcoming road project. To recap, the bids for that project should be available near the end of this year, and we expect to start construction in the spring of 2013. To date, an estimated cost of $2.0 million has been used as a benchmark in determining whether we have enough money in our reserves to fund the work.

I explained the nature of our reserves and how they are funded in a background paper on the roads. You may find it helpful to re-read the section on Page 3 headed “How Much Is in the Reserve Fund Now?”  Road Summary

Let’s take this step by step using rounded, approximate numbers:

• It appears we will have a positive operating variance at the end of the year of around $80,000. This was primarily due to savings in snow removal, legal fees and contingency spending; plus one time income of $24,000 from the sale of an easement to AT&T.

• The budgeted 2012 year end contribution to the reserves was projected to be around $300,000. Due to the projected positive variance at year end, it is now expected to be around $380,000.

• That will result in total cash reserves at year end of approximately $1,730,000. (Note that I have only included cash reserves. I will come back to this later.)

• According to the 2013 budget, the expected contribution to reserves will be around $510,000. Since our Annual Assessments are paid in January, that cash is essentially available at the beginning of 2013.

• If the cost of the road project turns out to be $2,000,000 and the work takes place in the spring, you can see that the year-end cash reserves of $1,730,000 will be insufficient. But, we would be able to cover the shortfall of $270,000 from the 2013 budgeted reserve contribution to meet the $2,000,000 cost.

• Then, assuming no other changes, we will have cash reserves at the end of 2013 totaling $240,000 (which comes from $510,000 – $270,000).

That $240,000 would be similar to all the yearly reserve contributions we have made since 2008. It would be the first savings contribution towards the next large road rebuilding project; or be available for unanticipated major, emergency infrastructure work; or cover unanticipated higher costs on the upcoming road project.

You may have noticed that my projected 2012 year end reserve balance of $1,730,000 is different from the figure of $2,050,000 in the Board’s budget summary. Similarly, my projected 2013 year-end reserve balance of $240,000 is different from the Board’s figure of $565,000 in the same summary. The difference of approximately $320,000 results from the Board including in the total reserve number the balance on the loan used to fund construction of the POA building.

To re-cap, several years ago, we borrowed somewhere around $500,000 from our reserves to build the POA building. The Board felt it was better to borrow from our reserves and pay ourselves the interest than to pay interest to a bank. Since then, annual payments of $45,000 plus interest have been paid out of each year’s budget. Those $45,000 payments have, in turn, increased our reserves every year. The balance on the note will be roughly $320,000 at the end of this year.

While the balance on the note is technically part of our reserves, I subtract it when considering projected spending; because it is not cash. (We can’t pay the road contractor with the note.) That is why I used the term “cash reserves” in my analysis. Technically, the Board’s reserve account figures are correct. But I believe it is prudent to look at actual, available cash. And, to avoid any confusion, I think it is better to leave that note balance out of any discussion of total available reserves.

As an aside, the balance on that note will be around $275,000 at the end of 2013. It will then be paid in full after six more years of $45,000 annual payments.

Now that you have seen how I look at the reserve balances, you should understand that the Board might disagree with my interpretation. I have heard Board members comment that the loan should be considered part of the reserves because we can always obtain a bank loan on the POA building to replace our loan from the reserve account; which, in turn, would generate cash. However, I disagree with that assumption, as I do not believe a loan secured only by our building would be readily obtainable. At the end of this post, I have included an explanation of my reasoning. Those that are not interested can skip that portion.

Part Two: Comments on Budget Line Items

I have gone through the budget and tried to anticipate questions that might be asked on different line items. I have not commented on matters addressed in my previous posts or within Board communications.

Except for two comments, none of this is editorial in nature. I will not comment on every item. Rather, I have focused on a few reasonably significant numbers.

To follow this, you will need to have a copy of the three page budget in hand or on your screen. You can easily print off the budget from your computer. Click here:  2013 Budget

I will reference account numbers shown on the far left hand side of the budget. Some of the accounts are un-coded. In those cases, I have shown the nearest account number followed by a plus sign.

6000   Gatehouse Labor

When the manning of the Lystra gate was modified, the expected labor savings was supposed to be around $40,000 annually. Based on 2011 figures, the projected savings before salary increases is $46,000. After the 4% rate increase, the savings is around $35,000. It is noted in the budget that there has been no rate increase since 2010.

6070   Gate Maintenance

Apparently, we have had increased costs over the past several years. The 2013 number assumes costs will continue to be incurred at those levels, but that remains to be seen. I have been told that this is not a result of impatient residents destroying the gate arms with their cars. Apparently, those who cause such damage pay for the repair (when they can be identified).

6670+   New Property Maintenance

This $5,350 represents an estimated cost for maintaining the vacant land which is currently under contract to be purchased by the POA. That assumes the purchase takes place; which is not a certainty.

7400   Admin Note Payment

I am highlighting this for information purposes only. This is the account that shows the payment on the note where we borrowed from our reserve fund (the borrowing that funded the POA building). This is the $45,000 payment I referenced in the reserve account discussion above.

8020+   Land Purchase Debt Service

Assuming we buy the vacant land outside the front gate, the Board is assuming that we will borrow the necessary funds. This is the Board’s estimate of the yearly debt servicing cost for that loan. Adding the $5,350 in projected maintenance means that the total projected cost of acquiring this land would be at least $50,000 per year. Again, the purchase of this land is not a certainty.

8020+    Community Activities Committee

I referred to this in the last meeting summary and promised to provide additional information on the $4,400 allocation for “community wide” events. But the situation has been somewhat fluid. While the Board has since stated that “future events will be self-funding”, that does not appear to be entirely true. Either that; or the statement was very poorly worded.

The $4,400 allocation will remain in the budget. In response to my inquiry, I was told that this amount was requested by the committee to fund quarterly open houses for art displays, six “new resident welcome” social functions and one holiday party at the POA building. Therefore, contrary to the Board’s statement, these eleven “community wide” events will be funded with POA money.

Committee meeting minutes state that this new, re-named committee was “invited by the POA Board to expand its horizons to promote community wide activities”. So, it appears the impetus for this change came directly from the Board. It further states that “The idea sprang from the Focus Groups where the Comments included the desire to have more opportunities to meet other neighbors via community wide activities”.

(Editorial Comment: This move, along with some other information, raised questions in my mind as to whether it is appropriate for the Board to make policy decisions based on these small focus groups. I did a little research and came up with some very interesting information. I have distilled what I learned in a separate paper.  However, since it contains some opinions and suggestions for the Board, it is posted in the editorials section of this site.  Please feel free to ignore it if you wish.   But, if you are interested, it can be found here:  Focus Groups vs. Quantitative Surveys

I also question whether the proposed events will accomplish the stated goals as well as our existing systems. I am still working on that issue and will post information at a later date.)

8210 & 8220     Road and Storm Water Drainage Maintenance

This is a very important maintenance category. Expenditures in 2011 were $266,000. Projected expenditures for 2012 are $255,000. The 2013 projected expenditure is $325,000; an increase of $70,000. From what I have heard in meetings, two important items should be noted.

First, it appears we have barely been staying on top of critical maintenance issues and postponing too many needed projects to subsequent years so as to avoid running over budget. Second, it appears we had stopped our program of regular maintenance sealing of road joints. This work helps extend the life of our roads by limiting subsurface water damage. Of the $70,000 increase, $30,000 is for the re-institution of road sealing.

(Editorial Comment: Maintaining our infrastructure is critical to maintaining our property values. Postponing work does not make it go away. It just costs more later on. And, if the delay results in an emergency expenditure, it can then cost a great deal more. Properly maintaining infrastructure allows us to control the timing and scope of remedial and repair work. This is not always true with emergency repairs; which often tend to leave you at the mercy of the contractor. I believe it is in our best interests to stay on top of this work as much as possible. In the long run, it will be cheaper and also help preserve our property values.)

8360+    Pond Engineering Survey

The Infrastructure Committee advised the Board that silt has accumulated in the pond located at the intersection of Morehead and Franklin Ridge. It will need remedial work. The Board has allocated $10,000 in the 2013 budget for engineering studies to determine the scope and estimated cost of the work. It anticipates doing the actual work subsequent to 2013.

8360+    Disconnect from GCR

This $30,000 is the estimated one time cost of separating the POA building utilities from the GC Realty building. The old POA building had its utilities run off of the GC Realty building; which is not an uncommon move on the part of developers looking to save money. Those connections carried over to the new building; essentially postponing the issue to a future date. Well, the future has arrived. Now that the bank is trying to sell the GC Realty parcel, those connections must be severed, and the POA building will have its own utility connections.

Item not Mentioned – New Sidewalk

The Board is considering an extension of the sidewalk from Governors Square either out to the front gate or to Mt. Carmel Church Road. It has been proposed that this work be done in conjunction with the rebuilding of the road along this same route. The cost of this sidewalk is not in the 2013 budget, and I do not believe it is being included with the cost of the road. I believe the cost will either have to be included with the road or handled as a special assessment. The Board is in the process of estimating that cost.

That’s it on the budget. All that follows is the supplemental information I mentioned above regarding the feasibility of obtaining bank loans.

 

Supplemental Information – Obtaining a Loan

This will refer back to my comment that having the POA borrow money is not as easy as one might think.

First off, all reading I have done suggests that borrowing by a POA should only be done as a last resort. Common sense might also support that view. What is clear from my readings is the importance of building adequate reserves for capital replacements and emergencies. For those interested, here is one such reference article:  HOA Borrowing

But, for arguments sake, let’s assume we want to borrow money.

Before loaning our POA any money, a lender will want security (collateral). The only reasonable security that the POA can offer is an assignment of our annual assessment (dues) income stream. And the problem there is that, practically speaking, the income stream can only be provided as security to one lender.

Let’s use the POA building as an example. If we borrowed against the building, it might be taken as security. However, it is a special purpose building and thus has limited value in the open market. In other words, ask yourself who would buy the building if it was for sale. And it is possible there may be other legal reasons why the building would not serve as acceptable security. Frankly, it probably doesn’t matter. What matters is that, in either case, it would not be sufficient.

Therefore, it is reasonable to assume that any lender would want the additional security of the annual assessment income stream. In those circumstances, the loan would probably be obtainable. However, once one lender has that income stream as security, it is not likely that the same income stream can be used for another loan; for example, a loan to buy vacant land outside the front gate.

I strongly suspect that we would be precluded from using the same security to get a second loan (although it might work if the loan came from the same lender). So, the note that represents our borrowing from the reserve fund may technically be an asset in the reserve fund. But I don’t see it as readily available cash. Because I don’t see it being such an easy task to replace it with a bank loan; especially when the Board appears to want the flexibility of being able to borrow for other purposes.