Reserve Fund Question

So I am trying to show how our current Board of Directors has made a number of missteps (I know some of you don't agree but it get's peoples attention and I already had someone contact me out of the blue telling me they turned in an application for one of the Director spots because of one of my posts), so it is working

I mentioned this before, that several years ago, our old Board spent over $100k on traffic shaping (roadway striping, etc) without really any input from the homeowners. Community was enraged, our streets looks terrible, etc. We got together in 2020 and voted them out.

The people we voted in pledged transparency, they want the community to be involved and will solicit their input, yada yada yada - but they have done the opposite. Monthly meetings have been cut in half (every month to every other month) and when they do place something on the agenda, they don't really indicate anything what it is about. Example, at the last Board Meeting, an agenda item listed 'Acme Signs.' The real topic however, was the installation of stop signs along one particular street - to Slow Down Traffic! That is not what stop signs are supposed to be used for, and if these streets were public, traffic count and accident data would never support the installation of stop signs there.

Getting back to my Reserve Fund question

We had an onsite inspection in 2022 and the topic I want to talk about with the community is the 'repaving project' where every street will be repaved - not just slurry sealed, completely repaved. (I will give the current board credit, they did follow recommendations and hired a company to come out and take core samples and yes, some of our streets did need to be repaved, but not all the streets required it especially when asphalt is a petroleum based product and oil is at an all time high)

So the reserve study indicates the majority of our streets have a useful life of 28 years with 8 years remaining. In the financial section, it lists Current Cost Estimate of $10 Million (example not actual) with a fully funded balance of $7.5 Million (example).

When I look at the shortage - the $2.5 Million (using my example) to me, the HOA just spent $2.5 Million of OUR Money that we don't have and we are robbing Peter to pay Paul. We are going to have to pay Peter back and how do you do that without increasing dues? ($2.5 Million over 8 years is $312K per year)

Is this a valid argument, am I overlooking something?

Jackie - thanks for your input.

That is just thing - we elected this board based on their pledges of 'Transparency' and as I wrote, they have done just the opposite

The repaving project actually started last summer but has stalled due to 'lack of material's several times and also due to the weather. I think they are about 1/4 of the way done, and some streets have remained torn up for weeks at a time. When it comes to escalating costs, again, asphalt is petroleum based and it would be hard to imagine that the price of oil could go any higher, but you bring up a good point

Board decisions look very different to homeowners who are often outside of the process. Unless you have all of the information that went into a board's decision, then "missteps" is an opinion only, not a judgement based on the facts. While the signage issue doesn't sound quite right, it's possible that there have been a series of near-misses in that area, and the association's insurer told the board that if you cowboys don't slow down and something bad happens, your insurance premiums may skyrocket and you won't have any choice but to pay them. That's a compelling reason for unplanned maintenance. Heaven forbid a little kid gets hit by a car. There are *always* unplanned expenses because boards don't have crystal balls.

Many board decisions depend on information and recommendations from professionals. Homeowners usually are not professionals, and while they often have no shortage of opinions, these opinions are often misguided. Reserve studies are educated guesses by professionals and use estimates for things like inflation rates. Because inflation has risen noticeably over the last few years, many associations' reserve studies are out of date and understate future estimated costs. This is why reserve studies need to be redone every few years.

There is also a debate on whether or not fully funded reserves are necessary. You want the money to be available when you need it. Do you need money that will be spent 20 years from now to be sitting around in low-yielding fixed-income investments for all of that time? Responsible folks can disagree, and a crystal ball would be helpful here as well.

Activist homeowners who stage a revolution and find themselves on the board learn three things very quickly:

* How little they know about what they're doing, and that they are making their own share of mistakes. (If they learn to do their jobs well, eventually they will look back and cringe at their newbie selves' overconfidence.)

* That the machinery they put into place to oust the previous board members is still humming along, and now they're the targets.

* That there is never enough money in the budget, and contrary to many homeowners' beliefs, there is no Magic HOA Money Printing Machine. Because of the tight budgets, boards tend toward short-term decision making. For example, they go with the less expensive solution in order to stretch the dollars where biting the bullet and paying more now may actually save money over the long haul. Or they neglect maintenance which accelerates wear and tear, leading to earlier and more expensive repairs. Even board members who want to take the longer view may be forced into short-term thinking because the money just isn't there. This is especially a problem in communities where homeowners can vote down budgets and/or assessment increases.

As with the battle plan that is the first casualty of the battle, would-be board members' good intentions are often the first casualties of being elected. It's not necessarily due to incompetence but more likely is the result of encountering the unexpected facts on the ground. Assuming you don't have all the info is a good approach for everyone, board member or not.

Very good info.

What do you mean when you say "we are paying the contractor the full $10 Million"? Is this hypothetical pavement replacement going to happen this year? Or in eight years?

I think you may not be understanding the meaning of "fully funded." Example:

Assume inflation is running at around 0%. Assume the only reserve component is the association's dozen or so townhome roofs.

New roofs are installed. The estimated useful life is 20 years. The cost to replace is $100,000.

The reserve study directs the association to put $5000 each year ( = $100,000 / 20 years) into the reserve fund.

Percent funded value for a reserve fund = (what is actually in the account) / (what should be in the account, per the reserve study)

Five years later, the reserve account holds $25,000. Reserve specialists and in-the-know directors declare that the percent funded value //at this point in time// is 100%. This means the reserve account is "fully funded." The reserve account does not hold the full replacement cost of the roofs. The account holds only what it should //for this point in time.//

Ten years later, the reserve account holds $40,000. This is because the board got sloppy; operating expenses rose; the board would not increase the assessments; and the board budgeted for less contributions to the reserve account than the study directs. What is the percent funded figure at this point in time? $40k / $50k = 80%. At the ten year point, we say the reserve account is no longer "fully funded."

Ellen

Here is another way to look at it - using your roof example

New roofs are installed. The estimated useful life is 20 years. The cost to replace is $100,000.

The reserve study directs the association to put $5000 each year ( = $100,000 / 20 years) into the reserve fund.

>>>15 years after the roof was replaced - the Board now decides to replace the roof again, 5 years early than the reserve fund estimate. Although the reserve study indicates the reserve fund was 'fully funded' *per the reserve timetable*, the roof replacement has now been moved up 5 years. The HOA does not have the full $100K saved up yet to replace the roof. How do the homeowners keep the reserves 'fully funded' at this point to make up for that shortfall to cover the roof replacement?

James

More than likely, the association has the funds available, just not under roofing. If the roofs have to be replaced, then the association can take out the funds from the reserves to fund the project. What they have to do is repay the reserves within a one-year period. This probably entails introducing a special association most likely requiring a membership. The board can institute an "Emergency" special assessment, not requiring a membership vote. In order to do this, legal would need to draft a resolution allowing for the emergency special assessment.

Thanks Max

I *think* we have enough to cover it, that is the next thing I will be looking at. That is what I was getting at. Somehow the membership is going to have to make up the difference by replacing this early, either a monthly dues increase or special assessment