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REPORT of the 2004-5 RESERVE AND OPERATING BUDGET COMMITTEE

JUNE 15, 2004

Committee Members: Roger Axt, Glen Grossman, Jim Ray, Jack Rutherford
Chair: Rick Busman 

Findings
 

The committee was tasked with reviewing the Associationís Reserves and developing the 2004/5 Operating Budget.  Our findings and recommendations are as follows:

  1. The Glenís Reserve Account is currently funded at approximately 32%. The best practice is to have a Reserve Account funding level of at least 70%. This is also the level being considered in pending legislation which would force associations to maintain adequate reserves.
    The Committee considered various alternatives to correct this situation including special assessments, delayed spending, and phased-in dues increases. Our recommendation - increase that portion of dues which goes into the Reserve Account each year for the next 5 years.
     
  2. The Glen has run an average Operating Account deficit of close to $3,200 per year over the last 9 years. This has contributed to an ongoing cash-flow problem which has been temporarily addressed by borrowing from funds in the Reserve Account. As of April 30, 2004, the amount due from the Operating Account to the Reserve Account is reported on the financial statement as $24,887. 
    By law, such borrowing needs to be repaid within 1 year unless the Board makes a documented finding that there should be an extension. The Board may levy a special assessment to repay the Reserve Account for the borrowed funds. Such an assessment would equate to approximately $35 per unit for 12 months. 
    Since The Glen is facing an uphill battle to meet our Reserve Account cash needs (particularly for the upcoming roof replacement), this additional cash shortage must be addressed. The committee recommends instituting a repayment program immediately.
     
  3. There is relatively good news in the budget for the Operating Account. Few increases are expected for next year in services (landscaping, management, etc.) and insurance.  We project slight increases in utilities but maintenance and administrative costs should remain at levels similar to our actual 2003/4 expenses. 
    However, due to unanticipated extra expenditures for Legal, Maintenance, and Landscaping (brush clearance and increase in contractorís fee), our projected actual expenses for 2003/4 will exceed the 2003/4 budget, resulting in an additional shortfall in the Operating Account of up to $15,000 by the end of this fiscal year, 8/31/04. Therefore, the budget for the 2004-2005 fiscal year for the Operating Account will increase compared to the 2003/4 budget, but will remain flat compared with the 2003/4 actual expenses.

In summary, the committee recommends increasing the Operating Dues from $163.65 to $185 (13%) and the Reserve Dues from $81.35 to $109 (34%) for a total dues amount of $294 (20% increase).  In addition, the committee recommends implementing a Reserve Account payback assessment of $35 per month for 12 months.

How did we get into this situation?

1. Failure to raise dues: Past boards may have been too concerned about avoiding dues increases and may have chosen to minimize them. This has been compounded each year, now resulting in the need for several large increases in a row to make up for increases that should have been made in years past. The July 2001 Reserve Study by Sunstone expected the balance in our Reserve Account in 2004 to be $446,000. We are currently at $291,000. Reserve Account contributions stayed flat at $61 for 7 years (1996 Ė 2002) until it was raised to $81 in 2002/3.

2. Inconsistent estimates on prior Reserve Studies: The 1997 study estimated $275,000 for the roofs; the 2001 study estimated $390,000. $390,000 is consistent with our most current bids.

The current shortfall should not be a major surprise to anyone.  At last yearís annual meeting, Rick Busman and Jim Ray gave a presentation indicating the need for large increases in the Reserve Account contributions in the next few years. Members should keep in mind that the values of our homes have far outpaced even the proposed dues increases.

 

Attachments:

Draft Budget
Chart: Reserve Account - Cash Flow
Chart: Reserve Account - Balance
Table: Reserve Account - Items, Useful Life, & Expenditures
Graph: Reserve Income & Spending