Financial Review - November 27, 2017

 

In 2017 the Stone Brooke Board of Directors initiated a review of the financial systems for the Stone Brooke Homeowners Association. The review was undertaken in responce to several residents having expressed a desire for an independent look at the association finances. This was not a formal audit in the strict accounting sense, but does provide an independent evaluation of whether the receipts and disbursements of the Association are being handled in accordance with our Covenants. 

 

Two Stone Brooke residents, Jim Patton and Bill Good were requested to undertake the analysis. Between the two of them they represent many years of professional experience, Jim as a bank president and Bill as a practicing lawyer. They spent many hours conducting the review and the the Board of Directors greatly appreciate their volunteer efforts. 

 

The Financial Review Report was presented to, and accepted by the Board of Directors at its regular meeting held on November 27, 2017.  The report is shown below. 

 

Review of the report by Stone Brooke residents is encouraged. Please direct comments or questions to any member of the Board of Directors.

 

Stone Brooke Homeowners Association Board of Directors:

Larry Koehrsen, President 

Beth Coon 

Dave Schrader 

Howard Levine 

Lee Griffin 

Bob Blattert 

Eileen Tramp 

Lara Hallgrimsdottir 

Dean Axland

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To:  The Board of Directors (Board) of the Stone Brooke Homeowners’ Association, Inc. (Association)

 

From:  Jim Patton, Bill Good

 

Re:  Financial Study

 

Date:  November 16, 2017

 

Background

 

We were asked by the Board to review the Restated Declaration of Covenants, Conditions and Restrictions (Covenants) of the Association and such other documents as we deemed appropriate in order to provide an opinion as to whether the receipts and disbursements of the Association are being handled in accordance with the Covenants. 

 

To that end we have reviewed:

 

  • The Covenants dated 5-24-2011 as they pertain to collections and use of assessments (Articles V and VI),
  • The Association’s Bylaws dated 5-24-2011,
  • The Association’s Restated Articles of Incorporation dated 4-25-11,
  •  The December 31 Financial Statements for the years 2013 – 2016 (Prior Years Financials) compiled by the accounting firm LWBJ, LLP,
  • The May 31, 2017 Financial Statement compiled by LWBJ (2017 Financial),
  • A Reserve Study Executive Summary dated 4-13-12, and
  • An email dated 7-24-17 from Attorney Brian D. Torresi to Bob Blattert regarding the Covenants.

 

In addition, we have had meetings with accountants from LWBJ and the Board President and Treasurer to gain an understanding of current practices. 

 

We are not Certified Public Accountants; therefore, we are not competent to perform, nor have we attempted to perform, a review or an audit or an analysis of internal controls in the sense that CPAs do.  If the Board believes that such services are warranted or desirable, we suggest that the Board discuss the costs and benefits of those services with an accounting firm. 

 

Based on our review, we submit the following:

 

Observations

 

The Supplemental Information to the Prior Years Financials (specifically, the Statement of Revenue and Expenses by Class) tracks the assessments and expenses for five categories:  Administrative, Common Area, Roofs, Siding and Painting, and Townhomes.  This information shows how well the receipts and disbursements for each category matched for the year in question.  The net result is then transferred over to the Members’ equity (deficit) section of the Statement of Assets, Liabilities, and Members’ Equity (the Balance Sheet) so that one can see the cumulative surplus or deficit for each category over the years. 

 

The first two categories – Administrative and Common Area – are what the Covenants refer to as the ARTICLE VI Expenses (and referred to in this memo as the Common Expenses).  These expenses are to be shared by all members of the Association (192 units), i.e. both Class A Members (townhome owners – 167 units) and Class B Members (single family residence owners -- 25 units). 

 

The last three categories – Roofs, Siding and Painting, and Townhomes – are what the Covenants refer to as the ARTICLE V Expenses (and referred to in this memo as the Townhome Expenses).  These expenses are to be shared by only the Class A Members (167 units).  (The Covenants actually refer to these categories as Roof Replacement, Other Maintenance, and Lawn and Snow; we presume the labels used on the Prior Years Financials were modified for brevity purposes.) 

 

Issues

 

1.  Separation Between Assessments And Expenses For The Common Expenses And The Townhome Expenses. 

 

The Covenants are clear that this separation is important.  In stressing the importance of this separation, the Covenants state that assessments for the two categories “shall be separated into two accounts …” See ARTICLE V, Section 2. (d).   While two separate bank accounts could be used for this purpose, we believe this is unnecessary and that the spirit of the requirement can be satisfied by the use of one bank account with separation being made by appropriate bookkeeping entries (as is done now). 

 

Attorney Torresi’s interpretation of the Covenants is consistent with our interpretation.

 

2.  Separation Between Assessments And Expenses For The Various Townhome Expenses.

 

The Covenants provide that assessments for Roof Replacements are to be made by one formula, assessments for Other Maintenance (mainly siding and painting) are to be made by another formula, and assessments for Lawn and Snow are to be made equally.  While the Covenants do not emphasize separation among these three Townhome categories as strongly as it does the separation between Common Expenses and Townhome Expenses, the implication is that assessments collected for a particular purpose are to be used for just that purpose.  If that were not the case, why would the Covenants provide a different method of assessing dues for the different expense categories? 

 

3.  What If A Category Has A Surplus Or Deficit For A Particular Year?

 

Tracking expenses for each category would not mean that necessary work could not be done if the category in question was running a current or long-term deficit.  We see no prohibition in the Covenants that would prevent “borrowing” by one category from another. 

 

As a practical matter, it is unlikely that any category would ever break even in any given year.  So one can assume that all categories will always have a surplus or a shortfall for any given year.  But so long as the cumulative effect is tracked, and efforts are made as appropriate to bring them back into balance, over time expenses for any particular category should closely match the assessments made for that category.

 

The result of this tracking means that if a particular category continually runs a deficit, then the assessments for that category should be raised by a rate more than just the general rate of inflation.  Similarly, for categories that continually run a surplus, the dues for that category may need to be reduced.

 

With respect to adjustment in dues, we are not opposed to annual increases in dues to cover general inflation.  Gradual increases would no doubt be more palatable to the members than larger, periodic catch-up increases.  But we do not believe that dues need to be adjusted each year to take into account the surplus or deficit that each category will inevitably have each year.  We believe that approach would be impractical and would be disturbing to the Association’s members.  We believe the better approach would be to make dues adjustments as necessary to keep the various categories in balance over time. 

 

4.  The Establishment Of Reserves

 

The Covenants clearly provide that the Board can establish reserves for future maintenance.  Because unexpected expenses should really not be unexpected, prudence would demand that there should always be some overall reserve.  (We did not address what that level should be.)

 

5. Does A Class A Member Have A “Vested” Interest In The Dues Paid With Respect To That Member’s Unit?

 

No.   Dues are paid for the benefit of all of the Class A Members, not for a particular member’s unit.  When a member buys a unit, the member does not acquire a fractional interest in the Association’s assets that the member can get “refunded” when the member sells his or her unit.  Attorney Torresi’s opinion is in accord with our opinion. 

 

6.  In Conclusion

 

We believe that the receipts and disbursements of the Association are being handled in accordance with the Covenants so long as

 

  • The receipts and disbursements are tracked on an annual and cumulative basis for each of the five categories set forth in the Covenants.
  • The receipts and disbursements for each category balance out over reasonable periods of time (not each year).  
  • Reserves are maintained in one or more of the categories in amounts deemed prudent by the Board to in order to have cash available to cover current deficits in any category and to help fund large future expenses that are reasonably anticipated.  

 

Miscellaneous

 

During the course of our study, various extraneous issues occurred to us that we believe merit brief mention.  In no particular order, they are as follows:

 

1. Reserves for Pool/Clubhouse.  This may very well have been on the radar of this board and many past boards, but we believe the board should always be mindful of large, future expenses and try to anticipate accordingly.  While hopefully the existing pool and clubhouse, with regular maintenance, will be serviceable for many years, each would be a large expense if a major repair or replacement became necessary.  While starting to do so now may be premature, at some point, building up a reasonable reserve for these items would be prudent.

 

2.  Review Procedure for Billing and Collection of Trash.  Now that the Association has been billing and collecting for trash for some time now (as opposed to each member arranging individually for his or her own trash collection), it may be appropriate to review how all of this is going.  In particular, LWBJ indicated that when members stop trash pickup while gone for extended periods, the Association’s billing to the members doesn’t always match up with Chitty’s billings to the Association.  This makes reconciling all of this somewhat difficult and labor intensive.  We’ve not studied the matter enough to have a recommendation, but if anything can be done to simplify the process, this should reduce time for the accountants and presumably expense for the Association.

 

3.  Accounts Receivable Collection Procedure.  It does not appear that accounts receivable are a problem, but it may be prudent to have a procedure in place for dealing with slow receivables before a problem arises.

 

4.  Purchase Orders.   We understand the use of purchase orders is a new procedure, and it appears that the procedure is working as intended.

 

5.  Budget Report in Financial Statements.  Perhaps this is personal preference, but the Budget Report in the financial statements has more columns than we think necessary or helpful … almost too much information.

 

6.  Financial Statement Terminology.   This may also reflect personal preference, but we believe the use of the terms “Profit or Loss”, or even “Income and Expenses” seems a bit incongruent in the context of a non-profit entity, and may even provide the wrong impression for readers who are not well versed with financial statement terminology.   We tend to think that the terms “Receipts and Disbursements” are a better description. 

 

7.  Invite Accountants to Annual Meeting.   If questions tend to arise at the annual meeting about what services the Association’s accountants are providing, why audits aren’t being done, etc., perhaps the most effective way to answer those is to have one of the accountants attend the meeting.   That way, questions like these can be answered directly by the professionals. 

 

 

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