Monday, February 10, 2014

When are Community Association Reserves like Public Employee Pensions?

The following excerpts appeared in a 
February 9, 2014 newspaper editorial:

       Kudos to Gov. Jerry Brown for demanding last week that they stop kicking debt further down the road. “…they have shortfalls -- debt we are now passing on to future generations because of past failures to properly fund the system. …The longer we postpone paying it off, the greater the cost, as anyone with a credit card should understand. "No one likes to pay more …but ignoring their true costs for...years will only burden the system and cost more in the long run." That means the money…previously collected was insufficient. Fixing the actuarial assumptions creates new unfunded liabilities -- debt that must now be paid off with increased (assessments.) It also means they should be collecting larger payments in the future to cover  (future needs.) The board has tried to keep (assessments) low, leaving more funds available for other (expenses.) But at each step, the board has softened the landing by minimizing or postponing the impact of the changes. As a result, (associations) continue to under fund (reserves) and stare at more (assessment) increases -- and greater interest payments -- in years to come. As the Governor notes, it’s pay now or pay more later.

              Sound familiar? Maybe the community association reserve funding crisis is finally getting noticed by California? Not quite. These excerpts are from an article on the public employee pension crisis with a few edits. You can see the entire article at this link. But the similarity between these two funding crisis is striking. Artificially keeping owner assessments lower than necessary to adequately fund reserves is largely political and is gradually creating an enormous funding gap that will devastate future generations of homeowners. Reserve accounts that rely on static funding and incomplete investigations will encounter significant shortfalls that can only be made up by large special assessments from those owners unlucky enough to be the last ones standing when the debt comes due.


  1. The Crisis re: Reserves is more than just an underfunding issue. Actual Reserve Studies rarely are anything more than guesstimates, and overly conservative at that, of what actual costs to repair or replace will be. Further the Studies make the unreasonable assumption that all expense for, say reroofing, will be done at one time rather than over two or more years. This tends to place an unreasonable burden on the assessment process for that component. This also tends to put pressure on Boards to select cheaper repairs and actually gives HOA owners less than their best value for their money. The Reserve Study process should be dramatically analyzed by all Board members before we stick homeowners with additional assessment increases for things that actual costs and better managed repairs can avoid.

    1. Phil, thanks for you comment. You are correct--there are actually two reasons why there is a growing shortfall in reserve accounts: (1) assessments are not high enough to adequately fund the true cost of the repairs that have been forecast, but also (2) the typical reserve study in California, at least, follows the provisions of the Civil Code which requires only an inspection of the "visible and accessible" areas of the building. We know from years of representing older associations, that for an aging building "visible and accessible" just doesn't cut it when it comes to understanding which building components will require rehabilitation and should be included in the reserve forecasts.

  2. I never had any issues after buying a unit at d'leedon condo. Public retirement systems are hiding the "true" cost of public pensions from taxpayers. That's all I know!

  3. This is interesting, I owns a condo in fort global and I don't any problems or issues with the developer and unit.