Where does our money go?

I have heard multiple people say they aren't sure where their HOA dues money is going. And while our HOA makes multiple fianancial reports and studies available to Owners, these can be hard for people to understand if they do not have frequent interactions with them. As a director, I would augment the official reports with a recap in layman's language. Hopefully, that would give everyone the insight they need to really understand our financial affairs, and to ask whatever questions or suggest whatever changes may make sense to them. Below is a summary of the most recent quarterly financial statement of the HOA that I received after making a special request to our management firm (Concord Consulting). I have followed that recap with a summary explanation - an example of what could be produced for the Membership on a regular basis if I were elected to the Board.

Income / (Expense) Category	Q-1 2022 Actual	Q-1 2022 Budget	Better / (Poorer)
Monthly HOA Dues Income	$17,415	$17,415	$0
All Other Income	$107	$25	$82
Total Income	$17,521	$17,440	$82
Management Fees (Concord)	($1,200)	($1,200)	$0
Insurance Premiums	($376)	($1,304)	$928
All Other Gen & Admin Exps	($586)	($1,064)	$478
Utilities	($773)	($781)	$8
Repairs & Maintenance	$0	($348)	$348
Contract Services	($2,547)	($4,868)	$2,321
Transfers into Reserves	($7,885)	($7,874)	$11
Total Expenses	($13,368)	($17,439)	$4,071
Net Income / (Loss)	$4,153	$0	$4,153

My comments regarding the first quarter (Jan-Mar) of this year: Revenue from Member dues came in as expected at slightly more than $17 thousand. Of that, we transferred almost $8 thousand into our reserve bank account to cover future large maintenance projects, leaving us roughly $10 thousand to run the HOA for the quarter. The good news is we only spent $6 thousand of that $10 thousand , leaving us a surplus for the quarter of slightly over $4 thousand for that 90-day period. That will get tucked away for use later this year, in case our expenses start coming in heavier than we budgeted. But why did we have that excess? Roughly half of the $4 thousand favorable variance was because we spent no money at all on oak tree trimming, entry plantings, and irrigation repairs. A much lower than expected insurance expense was also helpful. Oddly, we also saved $250 in the quarter on the annual HOA party budget - this was the result of spending zero in a quarter that had $250 budgeted to spend. This last items points out one of the gremlins that can afflict budgeting - the error of timing. We all know that the annual party occurs in the fall, and the board typically budgets roughly $1 thousand to cover that. It appears that whoever did the budget just did a straight-line spread of the $1 thousand over four quarters, generating an expected spend of $250 per quarter. In fact, if you look carefully at the budgeted expenses for the first quarter, you see that EVERY ONE of them is exactly one-quarter of the budgeted annual expense! This means whoever did the budget was simply spreading everything evenly throughout the year. This points up the limitations of budget analysis - if the budget doesn't try to properly anticipate the expected timings of expenditures, it can be quite misleading. From my current vantage point, I can't tell you if the first quarter favorable variance of $4 thousand is good management, good luck, or just bad budgeting. If elected, I will do my best to make sure our budgets are thoughtfully calendarized going forward, and our ongoing financial performance against those budgets is clearly explained.

Unraveling The Mystery of Reserves

Background Some of you may have pricked up your ears when you read in the prior section that we transferred $8 thousand to our reserve bank accounts in the first quarter. What's this all about? Under the rules of HOA's, we have to put money aside on a regular basis to provide for the future major maintenance and repair of our common area assets. As of December 31, 2021, we had $286,627 in that reserve account, most of which was earmarked for road-related expenses, with the balance evenly split between fence and landscape maintenance. According to the rules of reserve accounts, as set forth in the law and calculated by our consultant (J. D. Brooks), our reserves are judged to be 91% funded, which sounds like a very good level. But what exactly does 91% funded mean? The funded level calculation is based on a formula described in Civil Code section 5570. It is basically a three-step calculation. First, you determine what the current-value straightline depreciation is for each major asset covered by your reserve. Then, you calculate how many years those assets have been in service. Finally, you take the depreciation rate times the number of years in servicefor all the assets, and you get your "Ideal Reserve Balance". The percent funded figure (in our case, 91%) is simply the ratio of our current reserve fund balance divided by the Ideal Reserve Balance. A Significant Calculation Surprise A little tedious, but not rocket science, right? And when you have a paid expert consultant doing the work, it is reliable, right? Wasn't it Ronald Reagan who said, trust but verify? so, I took it upon myself to recreate all of the consultant's calculations, and I discovered something odd. When Mr. Brooks multiplied the annual depreciation values times the years in service last fall, he multiplied by the number of years in service, plus one. This caused him to overestimate the Ideal Reserve Balance by $29,146. In fact, when calculated correctly, our funded percent is not 91%, it is actually exactly 100%! Now, one could argue that Mr. Brooks was not making a mistake, he was just being conservative. But the reserve calculation is clearly defined in the statutes, so it is impossible to escape the conclusion that the calculations we have been using have tended to underestimate our reserve adequacy. Overfunding Among other things, the reserve study shows that we plan on spending $25,750 in 2022 on a landscaping project. The only wrinkle with that is, there is no such project on the drawing boards. How can that be, given that our landscaping useful life was clearly coming to an end, per the ten-year depreciable life ascribed to it in the reserve study? It turns out that the reserve study is not always a perfect match with reality. As a result, we have some very conservative numbers in our calculations: 1. Landscaping: Our reserve study says that we will need to replace our landscaping every ten years, at a current cost of $25,750. But who replaces everything every ten years? The trees are barely getting started at that point. So, maybe we should put our landscaping at a twenty-year life? If we did that one thing, our calculated reserve adequacy goes from 100% to 104%. 2. Fences: Our current vinyl fence replacement schedule says the whole fence will need to be replaced in the year 2035, when it reaches 40 years in service. But I see our HOA fence line every day when I walk Camo, and I think the benefits of our climate and good maintenance are going to let it go 50 years. If I make that change, then the 104% grows to 108%. 3. Streets: Two years ago the whole development got a slurry coat, a reconditioning step that helps preserve the life of the pavement. The cost of that was just under $100,000. Repaving is scheduled for 2026 at a cost of $232,376. However, if you look closely at the reserve study, you see that it is forecasting that we will spend not only the $232,376 for repaving in 2026, but another $92,951 for a slurry seal. Why do a seal the same year as a repaving? Good question. If the seal is not needed that time around, that will mean our reserves in 2026 will be at 175%! Buying Power Of course, it could be the case that things may cost more than we anticipate. And our reserve studies presume we will be earning interest on our reserve funds at a 1.00% rate, while in actuality we are only getting 0.05% from our current bank. So prudence is always a good thing. But we have significant "buying power" in our HOA. For example, if we needed to buy a 30-year life asset that cost $100,000, that would work out to just $6.46 per Owner per month. Given this buying power, in combination with the fact that our reserves are in significantly better shape than we may have thought, we need not worry unduly about the HOA's financial future. In fact, if the Owners as a group decided that they wanted to make some capital improvements, the costs would most likely be very manageable.