SCA MAIN RESERVES! ARE THEY ADEQUATE?
SCA’s CFO, Chief Operating Officer and Board Majority seem to believe they are. They have misrepresented to you their justification for under funding the Main Reserves. According to them our Reserve Specialist has used the cash flow method( different than previous years) and blessed everything and you should sleep well at night. You shouldn’t.
First of all the funding of reserves is there to protect the homeowner from future costs by planning for them. And funding is usually expressed in a percentage. 100% Funding is used by many HOAs as it provides the maximum protection. That’s what I supported when I served on a board as a Director and it had a secondary benefit of keeping money away from the “ pet project” spenders. SCA used to have a 90% standard for funding the Main Reserve and that has been eroding due to overspending and under funding by recent past boards.
The January 1, 2024 Funding level begins at 74.91 % but by 12/31/24 it drops to 68% and that includes a 10% raise to the Reserve Funding for 2024. Then for the years 2025-2028 homeowners get a 15% increase each year while the percent of funding drops to 66%. In dollars 2023’s Main Assessment was at $2.1 million( divided by 7144homes) and grows to $4.05 million in 2028. This is exclusive of the operating budget needs.
This includes approx $4.5 million to spend in 2024 but the board has failed its duty to plan for 2024 Reserve Expenditures. There is no announced plan. That’s a lot of money to not have a specific plan for especially in the current 2024 operating plan.
ACCORDING TO THE RESERVE SPECIALIST:( straight from his report)
“Readers of the reserve study report should consider the significant assumptions, excluded components, and general exclusions in forming their own conclusions regarding the reserve study report.”
“Sun City Anthem Community Association January 1, 2024 General Exclusions from the analysis are: 1.Building code or zoning violations or upgrades
- Structural stability or engineering analysis Environmental conditions
- Geological stability or soil conditions
- Soil contamination
- Hydrological conditions
- Mold or fungus
- Termites or other pest control
- Risks of wildfire, flood or seismic activity
- Water quality or testing
- Illegal or controlled substances
- Building values or appraisals
- Adequacy of efficiency of any system or component
- Information not provided by the association necessary to identify all components
- Asbestos, radon, formaldehyde, lead, water or air quality, electromagnetic radiation or other environmental hazards. “ “Financial Analysis The financial projection was prepared using the pooled cash flow method. Under this method, aggregate expenditures are projected to future estimated repair or replacement dates considering inflation at 4.00%. Actual expenditures may vary from estimated expenditures, and THE DIFFERENCES MAY BE SIGNIF ICANT!”
In other words things can go wrong and often do. There are so many unknowns. The best protection for homeowners is to move RESERVE FUNDING LEVELS closer and closer to the 100% funding level over the years and not to go backwards. And the board owes it to homeowners to be transparent about its 2024 reserve expenditure plans.
Until next time….Robert
Are you saying Homeowner’s get 15% increase years 2025 – 2028 on our HOA fee?
Tom
There are two parts to the annual assessment. Operating assessment and Reserve Assessment. For 2023 the Operating base Assessment was $9.7 million and the Reserve Assessment Base was $2.1 million. So divide each component by 7144 for per unit. And Yes to your question of 15% to the Reserve Component only. That’s the plan per Reserve Study but Board is not bound to these numbers. The $2.1 in 2023 grows by 10% in 2024 to $2.31 and then in 2025 the 15% increase is on the $2.31 base if board proceeds as planned. The Operating Assessment base increase for future years is unknown until future budgets are approved.
Robert, I reviewed much of the information you posted on various topics and have some comments with respect to them. With regard to the income taxes, this question was raised at the Finance Committee Open Meeting. Based on the increased interest income being earned on the Reserves, Management is accruing an estimate of the taxes that are likely to be owed when SCA files its tax return. On the 9/30 Balance Sheet is a liability of $60,000 for federal income taxes. Unpaid Assessments have increased, as you stared, but you only included those that are being collected in-house. There has been a decrease in the amount of third party collection receivables of almost $15,000 during that same time period. So, on an overall basis, the net increase is $12,560. I agree that an answer as to what happened is needed, but it could just be that people are having a tougher time this year due to the increased cost of everything. I note that you did not mention Prepaid Assessments have increased by over $103,000 year to year. Taking the two items together, on a net cash basis, we have $90,000 more in the bank. Regarding the unbudgeted reserve expenditures, the details of those amounts are and have been presented with the financial statements. The majority of the $1.2 million was for the restaurant (about $860,000) with another $164,000 for computers which was mainly the upgrade of the wi-fi system. The 2024 budget includes the roughly $4.5 million of reserve expenditures as presented in the Reserve Study. The details of the $4.5 million can be found in the Supplemental Schedules for the Main Association Reserve Study. As has always been the case, depending on what happens between now and the end of next year, we may spend more or less than that. Some assets last longer than expected while others do not last as long as expected. With respect to the Reserve Study process, Gary Porter has stated that he follows the International Capital Budgeting Institute Professional Reserve Study Standards. Section 3-5.1 of those Standards state “The cash flow method shall be used for all budgetary reserve study calculations where more than one component exists. The cash flow method calculates funding based on the aggregation of all components projected future expenditures. The cash flow method does not contemplate any specific funding goal.” Section 3-5.2 goes on to state “The component method should never be used for calculating reserve study funding for budgetary purposes, as it requires assumptions that can be used to manipulate the funding plan, whether purposely or inadvertently.” These standards were last updated in July 2020. I do not know what the prior versions of the standards provided but based on the previous Reserve Study Reports prepared by Criterium Engineers, it appears they followed the same standard. With respect to the “proper” funding level for our Main Reserves, I looked at the Reserve Study Reports on the SCA website going back to 2014. None of those reports reflected or recommended a 90% funding level. I also note that Jim Mayfield’s comment regarding the method used by Gary Porter is not accurate. According to the Community Associations Institute Reserve Study Standards, the Baseline Funding method is not a recommended method. We use Threshold Funding, not Baseline Funding and his suggestion that we be at “the 90% standard that was customary” supports the use of Threshold Funding. Ronnie Young stated that you cannot measure the unexpected. While he is correct, our funding plan includes funding for “unscheduled work” in every year. For 2024, the amount is $96,000 which is adjusted for inflation in each of the subsequent years. There is no way to know if this is sufficient, but I am hard pressed to imagine we would spend the entire $14 million dollars of our Main Reserves on unexpected events, net of our insurance coverage.
Michael Thanks for the information and your perspective. Thanks for info on taxes. Makes sense. Consider in the larger context that if Reserves were higher during these times they’d be earning good interest and the net returns( after taxes) would be reducing potential future obligations while compounding. I haven’t found one Reserve specialist who disagrees that 100% Funding offers the best protection for homeowners. That’s my objective. The villas are a real life example in our community of the unexpected happening. When we are younger we recover from whatever happens. And many of us are fortunate and never have to worry. But there are some amongst us that are more fragile. During the villa debacle I had calls from two widows crying that they had to sell because they couldn’t afford the $10,000 hit. They sold. We do live in a world where it is every girl for herself but if their Reserves were funded at 100% they wouldn’t have had to sell. I think the 2014 Reserves were at 88% and have been depleted ever since.
Before the Assessment Enhancement Fund was created and funded new Capital Expenditures were budgeted and part of the Budget Ratification process. Now they are not so the transparency during the normal budget cycle is gone. Looks like the board waits until December to disclose. And that’s just the way it is.
But as it relates to 2024 Main Reserve expenditures please correct me if I am wrong. The Reserve Specialist Gary Porter was on site maybe one day and his task is to bless the remaining useful life estimates that management presents. Is that right? And if so how is it possible that the 2024 expenditure list prepared by management and blessed by Gary Porter is dismissed by the Board as not going to happen when just a number of weeks before they approved it?
Again thanks for input and hopefully this exchange will help readers. Robert
Robert, having a higher percent funded in the Reserves for the villas probably makes more sense than for the Main Association, but I do not know the history of why their Reserves are at the current levels.
My concern for the Main Association is the dollar amount needed to get there and knowing that we could be overfunded if expenditures are less than projected in a given year. I do not know if we have to issue refunds or credits if Reserves are overfunded, but I can only imagine the heat the Board would take if we have more money in Reserves than the Study states the fully funded balance is. Being cautious is fine, but if the Reserve specialist’s opinion is that our balance is reasonable for our situation, I would tend to go with that.
I do not know how many days Gary Porter and his team were on site. I know they conducted visual inspections and had meetings with SCA personnel and I believe Facilities and Landscape members were involved as well. Porter would have had access to prior Reserve Study Reports and SCA provided an updated list of components to him. I do not know who made the determination of the remaining estimated useful lives for the various items, but I believe it was a combined effort of Porter’s team and SCA personnel.
Regarding the 2024 Reserve expenditures question, are you referring to the difference between that and the 5-year Capital Projects Plan? If so, I cannot comment on that as I have no specific knowledge other than what I heard at Board meetings on the topic.
Thanks Michael
1. Solving an overfunded problem is much easier than solving an underfunded problem as the purpose of funding is to prevent the need for any special assessment. there is no requirement to refund overfunding but it should be avoided and is easily corrected in the next fiscal year with no harm to homeowners.
2. I went back to read Mr. Porter’s report and suggest you do as well where he states ” The Governing Body of Sun City Anthem Community Association is responsible for the preparation and fair presentation of the reserve study report.”
3. Mr. Porter and 2 associates were on site one day April 26, 2023 and Mr. Porter states, ” A reserve management plan engagement involves the reserve professional providing assistance to management of SCACAI.” So it is SCA personnel that gathered and evaluated the data not Mr. Porter. It was SCA personnel that determined the estimated useful life of components.
4. So basically it was SCA’s judgment that there was $4.95 million of components needing replacement in 2024 because their estimated useful life expired in 2024. And it was the board that voted to accept that and then ignored the results of their own work by Steve Anderson and Greg Swenson declaring that “NO WAY” just weeks later would they spend that kind of money in 2024. Isn’t that a bit crazy making if they believed in THEIR staff’s work? But at the same time they argue the work was blessed by Mr. Porter. Well read his disclaimers. He didn’t make any determinations without disclaimers that lay 100% of this on SCACAI. He doesn’t state anywhere that the balance is reasonable as that is not his mission. So the board has some heavy duty explaining as one would expect that the very first year of a study would mirror what you intended to do for that Budget year( 2024). And if not what the hell were you doing in preparing the report and approving it?
5. The 5 Year Capital Project is different. I am told it is a combination of spending from reserves to replace ,refurbish or repair existing components and new capital projects that will if purchased then require more reserves. Because SCA is using AEF monies to purchase capital assets outside of the Budget process homeowners do not have ratification rights. Not that it matters. And to me that doesn’t matter because of the 90% rule. What matters is having board members that are financially responsible in ALL spending.
I believe that the financial administration of SCA is in poor hands and that personnel changes in staff and board members are necessary.
Again Michael thanks for the exchange. Robert
Robert, thanks for the details. I will certainly read the report. The language sounds similar to the type of disclaimer Accounting firms use on financial statements they don’t audit, so maybe that is the standard cya reserve specialists use for reports like ours. I do not have any past experience with Reserve studies of our size. The other HOA I lived in was very small by comparison. The Criterium reports on our website do not have language or disclosures like this so I am not sure what level of service they were hired for. I may request a full copy of their last study report so I can compare the two.