1	Paying for Today, Preparing for Tomorrow (Taking the Mystery Out of Reserves)
2	Ralph A. Troiano Ralph Troiano is President of C.I.A. Services, Inc., a professional management company for community associations throughout Harris, Fort Bend, Montgomery, Brazoria and Galveston counties. With 23 years of experience in the trenches, Mr. Troiano has presented numerous seminars on a variety of topics such as "Coping with Disaster", "Finance and Operations", “Strategic Planning", "Practical Deed Restriction Enforcement", "Super Budgeting“, “Risk Management” and "Myths in Management". Prior to establishing C.I.A. Services in 1984, Mr. Troiano worked as an engineer and systems analyst for two major petrochemical companies. He has both bachelors and masters degrees in chemical engineering from MIT and has earned the PCAM designation from Community Associations Institute. His interest in community association management began by serving on the Board of Directors and being an active volunteer in each neighborhood he has lived. He currently also serves as the investment officer for a Fort Bend County Levee Improvement District. C.I.A. Services, Inc. 9800 Centre Parkway, Suite 625 5616 FM 1960 East, Suite 190 Houston, Texas 77036 Humble, Texas 77346 Phone: 713-981-9000 Phone: 281-852-1700 Fax: 713-981-9090 Fax: 281-852-4861 www.ciaservices.com
3	Agenda The Questions About the Word “Reserves” The Concept of Funds Fund Calculations Financing Options for Projects Fund Trends Cash in Bank versus Fund Balances The Answers
4	The Questions Every Board member should be able to easily answer two simple questions from homeowners: How much money should we have in the bank? What is the right assessment for our community? When we are done today, you will be able to accurately and confidently answer those questions. You’ll also know how to project those answers five or ten years into the future.
5	About the Word “Reserves” “Reserves” is one of the most misused and confused words in budgeting and financial management It is a proper generic term signifying funds set aside, or reserved, for a particular future purpose The problem is that people have different things in mind when they hear and use the word: Is it everything we have in the bank? Is it the money we have in case the clubhouse burns down? Is it the amount we have accumulated for the new playground? Is it what we’ve put aside for a rainy day? Always use an adjective in front of the word (“Capital Reserves”) or avoid using the word altogether (“Capital Fund”)
6	The Concept of Funds A “fund” is an accounting category for moneys on hand for a designated purpose Fund accounting facilitates planning for both short-term and long-term expenditures Fund accounting allows the Board to be confident they have set the proper assessment for the community We will review the four types of funds used in community associations: Operating Fund Replacement Fund Capital Fund Special Purpose Funds
7	Operating Fund The purpose of this fund is to protect against fluctuations in budgeted revenues or expenses In the 1980’s there were major reductions in Association revenues streams as the economy faltered and some owners lost their homes and others could not pay their assessments At the same time, expenses rose greatly as inflation reached double-digits Normal assessment increases, capped at 3%, 5% or 10%, were not able to keep up We recommend 25% to 75% of the annual operating expenses as the ideal operating fund level depending on the type and size of community
8	Operating Fund Most DRs limit assessment increases so they limit ability to increase revenues Interest on investments have plummeted since 2000 Hearthstone & Kirkmont section II – cable franchise fees will disappear when current agreement term expires Electricity costs rose over 20% in 2001, stabilized and dropped slightly in 2002/2003 and jumped again by 2004 – all within a flat economy Quail Bridge & Pine Forest Village – board addressed security needs by adding security patrols Treehouse Condominiums – rash of internal leaks from aging piping resulting in excessive plumbing and sheetrock repairs
9	Replacement Fund The purpose of this fund is to pay for the predictable costs of maintaining and replacing major assets of the community If we plan to repaint our common area fences every five years at a cost of $20,000 then we need to put $4,000 into the fund every year We do not typically put funds aside for low dollar items with unpredictable lives (e.g. pool pumps) We do not typically put funds aside for items with very short lives (e.g. power-washing clubhouse) or very long lives (e.g. brick columns) The ideal replacement fund balance is calculated through a “reserve analysis”
10	Replacement Fund Sugarwood – replastered swimming pool and replaced chain link fence with ornamental iron Bridlewood Estates – cleaned, repaired and repainted perimeter ranch style fences Colony Grant – replaced original 25 year old lake fountain with a new floating model Hearthstone Meadows – replaced malfunctioning gate operating system including underground loops and phone lines Townewest – added crushed granite to jogging trail University Place Townhomes – reroofed every building over a three year period
11	Capital Fund The purpose of this fund is to pay for new community assets If we want to build a new $40,000 playground in 4 years then we need to put aside $10,000 each year to meet our goal Getting a loan for a capital project is just a variation – instead of accumulating the funds in advance and then doing the project, we do the project and then pay back the loan plus interest The ideal capital fund balance is based on the capital project plan – how many years do we have to accumulate how many dollars
12	Capital Fund The Highlands – replaced common area fences around community entries with brick walls – added columns to fences Vicksburg – assumed responsibility for the fences along the boulevards and replaced all of them Quail Run – built a clubhouse and recreation center for the community Colony Grant – added shade covers, fans and lights around the perimeter of the lap pool deck West Airport – constructed monuments on South Gessner to delineate boundaries of the community and beautify area Settlers Park – covered pool deck concrete with a durable, textured concrete surface
13	Special Purpose Funds Special purpose funds are any that are accumulated over time and are somehow restricted in how they can be used The ideal special fund balance is determined by their purpose and expenditure plan
14	Special Purpose Funds Valley Lodge – levied a special assessment for road repairs in 2002 and had a small amount left over after work was done – the extra is set aside and is being held for future road repairs Treehouse Condominiums – many years ago a cash settlement was provided by the developer over construction defects – the initial problems were repaired but the majority of funds were set aside to make repairs as problems arise Crestwater – a group of homeowners donated funds to the association for planting trees – the funds were set aside and combined with association funds to do the project Southglen Village – donations and fund raisers were used to build a new playground sooner than planned – the association set the funds aside until the playground was built
15	Where Does the Money Come From
16	Operating Fund Ideal Balance The ideal Operating Fund balance is a percentage of the normal operating expenses.
17	Reserve Analysis
18	Asset Schedule
19	Capital Project Plan
20	Capital Budget
21	Alternative Financing There are alternatives for financing operations, replacement projects or capital projects: Special assessment “Borrow” between funds or within funds Bank loan Ultimately, all financing will eventually come from the property owners (to make the special assessment, to repay the loan or to replenish the internal funds) Alternative financing simply changes the timing of cash flows and makes a small difference in the cost It could be argued that replacement expenditures should come from accumulated funds and capital projects from loans (why?)
22	Alternative Financing - Example Scenario: a $100,000 playground – build it now with a bank loan or build it in 5 years after we’ve accumulated the funds The table below shows the project comparison Bank Loan Capital Fund
23	Fund Trends
24	Cash in Bank versus Fund Balance
25	Funds on the Balance Sheet
26	Cash on the Balance Sheet
27	The Answers How much money should we have in the bank? We need to have $30,640 in our Replacement Fund according to our reserve analysis. We need to have $42,567 in our Capital Fund so we can do our four entry and park projects on schedule. And we want to have $54,000 in our Operating Fund which, by Board policy, is set at 4 months operating expenses. Therefore, we should ideally have $127,207 in our Fund Balance. We currently have $105,000 or 83% of our ideal balance. What is the right assessment for our community? Our assessment has been set at $340 to meet all of our operating, replacement and capital goals and to get us to our ideal funding levels within two years.
28	Questions & Answers