14 December 2012
OUR 2012 BUDGET
(The good, bad and ugly)
We have come a long way in 2011 in reducing our outlays and identifying areas in which we can reduce our costs. These savings are reflected in our 2012 budget. This effort has been spearheaded by a few homeowners that have actively participated in assisting the board in identifying areas in which we have saved significant money.
Our 2012 budget is $19,000 less than our 2011 budget and is $8000 less than our projected actuals for 2011. Much of the credit for this reduction goes to John St. Rock and the members of the Financial Committee and also to Kara Gifford who was able to reduce our insurance costs. We should all take the time to thank these homeowners for their outstanding efforts in supporting our HOA.
An economic factor that seems to get lost in the discussion of budget reductions is inflation. We all know, and have come to accept, that things will cost more in the future than they have in the past. Just as most of our daily living costs, such as food, gas, clothing etc. have gone up over what they were years ago, so then have our HOA costs. It would be unreasonable to think that goods and services that the HOA buys is going to cost less in the future rather than more. Yet, there are homeowners that seem to believe that our HOA costs should show a downward trend over the years rather than an increase. This is just an unreasonable expectation. If we can keep even with inflation, our board will be doing a good
job.
Homeowners should remember that the primary job of a board is to protect and increase the value of our home investment. It is not to spend the least amount of money.
The chart below compares our 2012 budget with what we have spent each year since 2008. It also tracks the national inflation rate (CPI) starting with 2008.
Assuming the inflation rate in 2012 remains the same as it has been between 2008 and 2011, it can be seen that our 2012 budget is under the expected inflation rate by approximately $13,000. This is significant. We would expect that the same goods and services that the HOA paid $261,000 for in 2008 would cost $279,000 in 2012, yet we are planning to expend only $266,000, all things being equal.
So overall, looking at HOA’s big financial picture, we are doing very well. Our costs are below the expected inflationary rate. Two specific areas where we have had significant cost reductions are:
Budget Item 2011 Budget 2012 Budget Reduction
Fire and liability insurance- $29,500 $19,000 $11,000
Plumbing $26,000 $18,000 $8,000
Looking again at the above chart, you will notice a huge increase in total expenditures in 2010. The building experienced three separate water damage incidents involving six units in 2010.
The source of these leaks was a section of our roof, a deck and subcontractor negligence. The HOA’s portion of the cost to repair the damage was almost $26,000 that year, with more to come.
In a stacked (multiple floor) multifamily older building such as ours, water damage is the number one problem. Roof leaks, leaks in individual units and common area plumbing problems cause serious and expensive damage, usually to multiple units. When we have water damage we also must conduct mold and asbestos remediation. This can easily double or triple the repair costs. Our best defense against water damage is routine plumbing and roof maintenance.
The chart below breaks down the HOA expenditures into five main areas over the years from 2008 to the 2012 budget. You can see that the only spike in costs in 2010 was the Maintenance category due to the water leaks. Since 2009 our Insurance costs have been dropping. There is a slight increase in Utility costs from 2009 as one would expect as the costs of gas, electricity, and water have increased. Our major
Contract costs (custodian, elevator, and landscaping) have slightly decreased since 2009 and our Administrative costs are expected to be less than 2010.
That takes care of the good (our expenditures are dropping) and the bad (expensive water leaks). The ugly is special assessments.
At the Annual Homeowners Meeting on 14 November 2011, the Board voted (based on homeowner input) to have another Special Assessment in 2012 to make up for what is now become an annual budget shortfall of between $14,000 and $20,000. Having a special assessment to cover these costs is just wrong and will wind up having more of a negative effect on our property values than if we raised our monthly dues.
Special assessments are not intended to make up shortfalls in the operations budget. They are for unanticipated and unplanned emergencies, such as the collapsed sewer pipe we had several years ago. By taking the head-in-the-sand approach and not facing up to the fact that we must increase our monthly revenue to cover our monthly bills, we run the very real risk of having multiple special assessments every year when real financial emergencies occur. This will do more damage to our property
values in the long run than raising our monthly dues.
Nothing raises more red flags to potential buyers than multiple special assessments in succeeding years. This is an indicator of incompetent management and no one wants to buy into a HOA with this history and the uncertainty of what their financial commitment would be. If we were to have the most expensive monthly dues on the Esplanade, so be it. This, however, would not be the case. We can raise our dues to cover the short fall and still be well under the top HOA Esplanade rate. It’s time to get off this lame ostrich approach, we are only hurting ourselves.