Article by Tom Kelley
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At a recent board meeting a homeowner asked a very sensible question. He wondered if dues could be reduced given the progress made resurfacing the roads. I tried to stumble through an explanation as to why the answer was probably “no” and I’m sure left the man more confused than ever. I thought it might make sense to organize and write down my thoughts in the hopes that it might be clearer so here goes.
In 2018 we collected $440,000 in dues payments from 238 association homes which cost each homeowner $1,850. These payments are allocated each year to fund (1) routine and recurring costs of operations and (2) Contribute to a fund for expenses of a longer-term nature which do not occur each year e.g. the roads. We refer to this as the “Reserve” fund, but it might more appropriately be called a savings account for the purpose of paying for road and other facilities that will need replacement. In round numbers, last years dues were allocated to these two places as follows (if you are reading this in email, go to the website to see article with images):
The easy part of this to explain is the $250,000 operations cost. These are costs we incur every year and they are reasonably predictable. These include among other things, landscape and pool maintenance and repairs, water, electricity, trash collections, social events and the inevitable accountants and lawyers. Detail of these costs can be seen in any of the monthly financial statements filed on the website. They have been running at a consistent level for several years now and we believe that trend will continue IF inflation remains in check and we are able to attract more volunteers to continue to provide the free labor we have always enjoyed. More on that at the annual meeting.
The part that is hard to explain and gives rise to most homeowner questions is the Reserve contribution which relates to the homeowner’s question about the roads. I find it’s best to think of this the way I think about Social Security. We put money into the Social Security fund in the form of payroll taxes and we take money out in the form of monthly benefit payments. The HOA puts money into a cash reserve by levying dues on homeowners ($190,000 in 2018) and takes it out to pay for road replacement and other capital projects ($159,000 in 2018). The key thing to remember is that dues are driven by the contribution to the fund not by the payments out of the fund.We always want to make sure that we have enough in the fund to pay for projects as they become necessary because unlike Social Security, we cannot print money if we run short. Instead, we would have to levy a special dues assessment which we want to avoid as tar and feathers is not my best look.
The obvious question therefore is how to determine what the contribution should be. In order to make this determination the board hired a firm specializing in such things to help us. They provided us with the following:
- A list of 62 capital items that will need to be replaced together with an estimate of when they will need to be replaced and the cost of replacement by year (over the next 30 years). Costs in those years vary from a low of $26,000 to a high of $440,000. You can see that study here.
- An estimate of the total cost in todays dollars to replace all 62 items today. This amounted to $1,700,000. Road resurfacing constitutes approximately 60% of this amount. Various pool/recreation center items account for around 30%.
- A recommendation as to a reserve contribution for each year. The 2018 contribution ($190,000) was based upon this recommendation.
At the end of 2018 there is approximately $458,000 of cash the reserve fund invested in certificates of deposit. The activity on the fund for the year was as follows (if you are reading this in email, go to the website to see article with images):
After all this, the obvious question on everyone’s mind is what will happen to dues in the future? As you know, the board has concluded that dues will remain the same in 2019 at $1,850 per household. After that, it’s impossible to predict with accuracy what will happen, but it will clearly depend on several things:
- The rate of inflation and other potential price increases particularly for water
- Our seeming inability to attract volunteers which may necessitate outsourcing more management functions.
- Our actual experience as we complete capital replacement projects. As Steve Struck pointed out in a recent web article, road resurfacing is about 50% complete for this cycle. Once we have actual cost and useful life data for all the roads (which again is 60% of the total of all our capital project cost estimates) we will have a better basis to assess our annual reserve contributions.
I hope this has been both clear and helpful. If not please don’t hesitate to contact me.