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Subject: Budget Question
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JimH29
(Florida)

Posts:28


11/20/2018 6:05 PM  
Our HOA treasurer presented a 2019 budget, increasing the dues from $125 monthly to $135.00. There were no significant changes to expenditures; if fact, our largest line item, lawn care, actually went down a bit. It has long been known that the treasurer likes to keep a significant cash buffer in the checkbook because it makes her feel better (approx 32k after income of 7000 monthly and expenses of (+/-) 6200 monthly.

Our reserve schedule is not fully funded, leaving a 81k gap.

Now that the HOA board has approved the 2019 budget, at the annual meeting in January, 2019, the residents will either accept or reject the proposed/approved by the HOA budget. If they reject the budget what are our alternatives? Can we go back to the previous dues amount and still not fully fund the reserves?

We are in Florida in a 56 unit single family community. Despite having term limits for board members, the treasurer has served for the last 12+ years by coming off the board after two terms and job sharing with another board member. After not being "officially" on the board for a year, she runs again for another 2 2 year term and goes off the board yet holds the reins of the checkbook. This cycle has continued for some time and the concensus of the board is that no one else wants the job so our community is lucky to have her. No audit has ever been conducted prior to her first term and the many years that she has served.

I reviewed the budget and the reserves and believe that if we moved 15k from the checkbook to the already reserved funds and increased the yearly reserves to $8700 ($750 monthly), we could fully fund our reserves and keep our dues at the previous level.

Any suggestions on how to handle this situation? Your comments and suggestions are greatly appreciated.
AugustinD


Posts:1208


11/20/2018 10:26 PM  
I'd like to get a bigger picture as follows.

What capital assets does your HOA have to maintain? How old are they? The reserve account is what will pay for the upkeep and replacement of these assets.

What is the "percent funded" figure for your reserves? See https://www.reservestudy.com/what-exactly-is-percent-funded/

What is the total amount in your reserves right now? How much of your reserves did your HOA spend each year for the last few years? How much has your HOA transferred to the reserves each year for the last few years?

You seem to be saying that your HOA transfers about $800 ( = $7000 - $6200) each month to reserves. Correct? So your HOA is transferring about $9600 each year to the Reserves, correct? If you truly have an $81k gap, it sounds to me like an increase in dues may be appropriate.

Regarding the budget: Is a membership vote required for the budget to be implemented? What do your governing documents say about rejecting the proposed budget? Some of the Florida HOA members here may say more about what Florida statutes have to say on this, if anything.

MarkM19
(Texas)

Posts:159


11/21/2018 5:28 AM  
JimH,
As a former treasurer for 4 years the numbers look in line to me. Most things I have read suggest 3 to 6 months cash in the operating account. She seems to be on the high side bit as long as the money is there it is safe. If you transfer into reserves it is to be used for reserves.


As Augustin mentioned I find it odd that the community would be able to vote on a Budget that they may not know all the details about. That is what they elect a board to do. If that is a Florida law it would be crazy.
JohnC46
(South Carolina)

Posts:7865


11/21/2018 6:09 AM  
Many get confused in that they say they get to vote to approve the budget when in most Covenants, they can only vote to disapprove it. To clarify. In order to increase yearly dues, we have to submit the upcoming years budget to our owners on or before 12/01. Owners can call a Special Meeting (10% to do so) and if 51% of all our owners vote to disapprove our submitted budget we revert back to the prior years budget with a COL increase of about 2%. If no meeting called nor 51% of all owners vote no, the new budget happens on 01/01.

I emboldened 51% of all our owners as many get confused and think 51% of those at the meeting.
JimH29
(Florida)

Posts:28


11/21/2018 1:46 PM  

Thanks for the response...we have 12 line items on our reserve schedule, including a pool, tennis court, centrally located mailboxes and a clubhouse with a tile roof. We also have gates, a well, a wall, extensive landscaping as well as a asphalt road.

Our reserve schedule calls for $241,600 and we have a reserve balance of $27,688. In our schedule we are short funded approx 68000 and some change.

The new budget increase the monthly reserves deposit to $550 when in reality to fully fund it should be close to $725.00 month.

I have no problem with a $10.00 dues increase but see nothing worthwhile other than to increase the amount of free cash. If we could fully fund the reserves that would be icing on the cake and easier to accept.
JimH29
(Florida)

Posts:28


11/21/2018 1:57 PM  
I know I haven't answered all of the questions so I will try to as I go along..

Our covenants say that a majority of the lot owners have to approve any changes in dues assessments. We generally have a January meeting where the budget is discussed (shared) and voted only if the dues increase as the BOD had generally given their nod of approval.

This year (2018) we contributed only $500 a year for a total of 6000. The plan is to increase the contribution to $550 for a total of $6600. Prior to that it was only $450 a month or $5400.

I was instrumental to have the treasurer increase it to $500 although I wanted it a bit higher. I also was able to convince her to add a line item for the asphalt roadway. The reserve schedule had 22 items on it and was cumbersome to say the least. We were able to agree to combine and reduce the number of line items to 12 this past year. I am convinced we can combine a couple of others but have received resistance (gate and gate motors are two separate line items, for example.)

Hope this helps with the questions.
KerryL1
(California)

Posts:5950


11/21/2018 2:19 PM  
Sounds like you're making progress. But some reserves components should be separate because they have differing useful lives. Your gates may have a useful life of 20 years, but your motors only 7, for instance. Gates may be on e line item for "repair," and a different line item for "replace." Gates cost one amount and their motors a different amount.

Similarly, with your pool, there are pumps and motors that should separate line items from resurfacing it every 8-10 years. The pool deck and drainage (perhaps) around it also should be separate items. And then, of course, the poolside furniture has a different useful life than some of the other components involving the pool. There are ladders too, and perhaps lighting. Is the pool enclosed with screening? Is your HOA responsible for no exterior lights--grounds or streets, maybe??

Your clubhouse alone comprises several line items: carpeting/flooring/window coverings; furniture; window upgrades?, kitchen appliances, etc. And tennis courts???

Look, and we're a high rise, but we have over 80 reserves items.

I think you need the opinion of a certified reserves analyst to establish realistic useful lives, replacements costs and remaining useful lives. the analysts will tell what your % funded really is and set you on a path to become fully (70-100%) funded. It doesn't seem you know what it is.
JimH29
(Florida)

Posts:28


11/21/2018 2:50 PM  
Kerry - you have raised some good points and will be useful in setting the sails straight on our reserves. Thanks.
KerryL1
(California)

Posts:5950


11/21/2018 4:32 PM  
For a fairly small HOA, you have a ton of amenities. I can't do math, but it appears to me that your dues are way too low to adequately fund your reserves.

Some HOAs set aside funds in reserves for landscaping, some don't at all, and some just for large items like mature trees. Much of your landscaping might be in your operating budget instead of in reserves.
MarkM19
(Texas)

Posts:159


11/21/2018 4:44 PM  
Jim,
I was thinking the same thing as Kerry stated. It is not a good idea to combine reserve items for all the reasons she stated. Every year when you are looking into upcoming expenses some items will get pushed out further and some will have to be done sooner that expected. One bucket of many gives no visibility.

I am so confused by your funds in reserves. Road resurfacing can cost over 100K and needs to be done every 5 to 7 years. You have many other big ticket items that you may not be aware of as well. You definitely need to get a detailed reserve study done by a licensed professional. This is normally done every 3 years with minor studies done the 2 years in between. They typically cost under 2k for the Major one and about $600 for the Minor ones. It is worth it because it protects the board and the community from big surprises and homeowners from wanting to hang the board when it happens.
AugustinD


Posts:1208


11/21/2018 5:04 PM  
Posted By JimH29 on 11/21/2018 1:46 PM
Our reserve schedule calls for $241,600 and we have a reserve balance of $27,688. In our schedule we are short funded approx 68000 and some change.


Do you mean that the total cost of replacing all your capital assets in today's dollars is $241,600?

Are you saying that the reserve schedule (usually a spreadsheet) states the HOA should have about $95,688 (= $27,688 + $68,000) in its reserves at this point in time but has only $27,688? If so, then your HOA's percent funded figure is $27,688 / $95,688 =~ 29%.

If you count the roughly $32,000 that the treasurer uses as an operating account cushion, then your HOA's percent funded figure is about ($32,000 + $27,688) / $95,688 =~ 62%. A percent funded figure below about 70%, like yours is, is a cause for concern and argues for a dues increase.

Like Kerry and Mark suggested: Have you had a professional reserve study done, by certified professionals? It is worth it. Respectfully, I am not quite sure you are up to speed on how reserve funding is handled.
GenoS
(Florida)

Posts:2518


11/21/2018 11:11 PM  
Jim, when your homeowners vote on the budget do they also specifically vote to waive or underfund the reserves? With statutory reserves (FS 720) only a vote of the homeowners (majority of those at a meeting with a quorum) can waive or reduce required reserve contributions. It is not and should not be at the board's sole discretion.

In fact, with statutory reserves the board must prepare two budgets: One that provides for reduced funding of the reserves and one that fully funds them. Unless the homeowners vote to approve the reduced-funding then the one that provides full funding must be adopted.

It sounds like you're trying to do right by your reserve funding requirements and I commend you for that. Unfortunately, Florida does not require periodic professional reserve studies and if people are against spending money for one there are a lot of squishy reserve funding decisions that can be detrimental long term. Good luck.
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