Last update: 2009 Apr 30. Click History for a list of changes and updates.
__(added 2009 Apr 30) According the my notes taken at the meeting, the voting results on the proposal to increase the dues cap (annual fees) from $400 to $475 beginning in 2010 are as follows:
total votes cast: 1238__The most critical information concerning a proposed dues increase is the financial information, operating plan, and budget. The financial information provided by the board in the 2008Q4 Business Review has significant discrepancies and omission relative to the financial information in CPA's audit reports which include the financial statements. Further, the board states in the Business Review that the CPA's audit report for 2008 will not be available before the vote.
not in good standing: 33
invalid: 45
yes: 497 (43% of valid votes)
no: 663 (57% of valid votes)
__The board has not provided an operating plan, but described some broad generalities which are not quantified.
__The published budget for 2009 is balanced likely for two reasons: (1) the numbers are not realistic; and (2) not all expenditures and obligations are included in the budget.
__The continuation of this post is my 2005 Mar 25 email to MOA members with a copy to the board of directors on this subject. Financial parameters based on the CPA's methodology are developed. Alternatives for comprehensive structural reform are described. The two recommendations are to vote NO on the proposed dues increase and to write to the board requesting a comprehensive plan for a New Bargain — structural reform of MOA's model, management, and operation with the dues increase required with the New Bargain — in time for a vote to implement the reform if approved or to cut operating to live within MOA's means.
Don Nordeen
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- Key Words:_ Business Reviews; Financial Information (2008 General); Members' Rights, MOA Operations (General/Total); Preservation Fund
MOA Financial Information Re Dues Increase Vote (continued)
Memo
__ As with most of my communications to MOA members, the results presented are based on careful analysis of all information available to members. The financial information is principally based on the CPA's audit reports and financial statements. Further research has been conducted on the internet. The supporting information including the internet research is posted on the internet at my password-protected weblog, Michaywe POA at [http://swagman.typepad.com/michaywe_poa/]. See Welcome post for access. Use the text within the quotation marks with the case as shown. Once you have signed in, you should be able to access the referenced posts below without having to further use the name and password. Go back to your email software to continue reading this email.
Introduction
__At long last, a proposal from the board regarding MOA's obvious financial problems. But the proposal is too little and too late and doesn't address the needed structural reforms. The good news is that the board has ample time to bring forth a more comprehensive proposal with required structural reforms in time for implementation with calendar year 2010. This requires a "NO" vote on the board's proposal for an annual dues increase of $75 beginning in 2010. Then, please write a letter to the board asking for a comprehensive study of alternatives, and to bring forth a revised proposal with structural reform later this year.
__I agree with many members who have expressed the view that the financial situation has to bet worse before it will get better.
__The interests of the owners of property units (lots, condo units, etc.), who are mandatory members of MOA, are inescapably intertwined with one another. If MOA and the Michaywé facilities are well managed and maintained, property values should be enhanced. If not, property values will likely be adversely affected — likely worse that if MOA didn't own the recreational facilities. Consequently, all owners/members should have a strong interest in finding an organizational model that will enhance — certainly not detract from — the property values of the owners. A New Bargain among the owners/members that will have support from a majority of owners/members is needed. Unfortunately, the overall message at [http://swagmanmwpoa.blogspot.com/2009/03/comments-concerning-moas-2008q4.html#Total] in the 2008Q4 Business Review is to only consider a dues increase with all suggestions from members at [http://swagmanmwpoa.blogspot.com/2009/03/comments-concerning-moas-2008q4.html#Listen] rejected without any careful analyses.
Need New Bargain that will be supported by majority of owners/members
__While each of us may have a preference on the dues increase and the other structural reforms required, the combination that is meaningful is one that will be supported by a majority — hopefully a supermajority — of members. Gaining broad support requires fundamental fairness for the broad range of members who have different interests. Identifying common interests is the place to start. There aren't any easy answers. All proposals will likely have significant unfavorable aspects for some members. The choice will be among imperfect alternatives. Much debate is required.
2008 Financial Results
__The financial information is much grimmer than presented in the 2008Q4 Business Review. Members may be misled by incomplete financial information and information that is difficult for members to understand. The unfavorable aspects of the financial status may not be reported and may not be explained. Unfortunately, there are questions about the accounting, which would be answered if the CPA's audit report and financial statements at [http://swagmanmwpoa.blogspot.com/2009/03/comments-concerning-moas-2008q4.html#Audit] were available. My estimates for various financial parameters are based on the accounting provided by the CPAs in audit reports for 2005-2007 compared to the numbers in the 2008Q4 Business Review are shown below (Supporting analysis at 2008 MOA&PCC Financial Results at [http://swagmanmwpoa.blogspot.com/2009/03/2008-moa-financial-results.html].
__________________________________________________Using CPA's_______
Parameter______________________________2008Q4 BR______Methods____Notes______
MOA&PCC Operating Profit (Loss)_______($250,000)___($300,000)______1
PCC Operating Profit (Loss)___________($244,757)___($444,757)______2
Annual Cash Flow for Generic Accounts and Items____________________3
___MOA&PCC Operating Profit (Loss)____($250,000)___($300,000)____from above
___Adjustment for Depreciation__________$252,000_____$252,000______4
___Line of Credit, Net_________________($50,000)____($50,000)______5
___Loan Payments_______________________($70,000)____($70,000)______5
___Capital Improvements________________($43,000)___($100,000)______6
___Replacement Fund____________________($48,000)___($113,000)______7
______Total variance__________________($209,000)___($429,000)____Approximately
_________________________________________________________________$220 per lot
Working Capital_____________________Not Reported___($693,917)______8
Replacement Fund Assets_________________$228,304_____$228,304______9
Replacement Fund Net Assets ________Not Reported_____$330,272_____10
Required Replacement Net Assets_____Not Reported___$1,289,350_____11
Current Cash Shortfall
___Working Capital_______________________________($1,000,000)_____12
___Replacement Fund______________________________($1,060,000)_____13
______Total Cash Shortfall_______________________($2,060,000)_____14
Long-Term and Other Debt_________________________($1,642,838)_____15
Booked and unbooked debt_________________________($3,702,838)____Approximately
_________________________________________________________________$1900 per lot
_________________________________________________________________See Note 16.
Notes
- Incorrect dues revenue by MOA. Dues Income used for the Replacement Fund cannot also be used as Dues Income for the Operating Fund. This separation in the CPA's audit financial statements. See Accounting for the Reserve [Preservation] Fund.
- PCC Expenses charged to MOA. Not all costs for operating the golf course and bar & restaurant are booked to those facilities. Rent of only $1 is charged. The CPA in 2005 estimated the total rent to cover property expenses to be $195,000. It has increased since. See Audit Considerations for 2006, third paragraph down. Unfortunately the board refused to consider full cost accounting though allocation of all costs at [http://swagmanmwpoa.blogspot.com/2009/03/comments-concerning-moas-2008q4.html#Allocation].
- The generic accounts and items are those that will appear in every cash flow statement. Other accounts may also appear in the annual statements but could be positive or negative. Consequently, the generic trend is indicated by the changes in these generic accounts and items.
- The trend for depreciation expense is decreasing indicating that more of the assets are becoming fully depreciated. Since fully depreciated is based on the useful life of the assets, it also means that some/many oof the assets are wearing out and will have to be repaire, replaced, or renovated.
- Long-Term + Miscellaneous loans, not including the Lines of Credit. Numbers from 2008Q4 Business Review.
- Ongoing improvements. Any organization must make ongoing improvements to be viable. These should be part of the operating plan and reported to members. This was the original purpose of the Debt Reduction Capital Improvement Dues, but the board in 2002, Ron Hees president, used the DR/CI Dues for operations. Members were not informed by the board.
- Required to meet 2005 reserve study which showed $161,000 required annually for capital repairs, replacements and renovations (Preservation Fund). At the 2007 Spring Town Hall Meeting, treasurer Latuszek, who is an architect, stated that the $161,000 does not include many items and the the costs in the study were too low. See Reserve for Repair, Replacement and Renovation at [http://swagman.typepad.com/michaywe_poa/2005/12/reserves-for-repair-replacement-and-renovation.html]. This post shows that the amount required in the reserve study to maintain the facilities is $385,500 for the time period 2006-2010. Since very little has been spent, the condition of the facilities and equipment is deteriorating (looking worn and tired).
- Recommended parameter by AICPA with precise accounting definition. See Audit Considerations for 2006, fourth paragraph down. It is basically current assets minus current liabilities. The numbers shown include the Lines of Credit. The 2008 end-of-year number means that current assets are less than current liabilities by $$693,917. Need about $300,000 to be viable.
- MOA's reporting is incomplete. The $228,304 is the amount shown as Cash Restricted Accounts in the 2008Q4 BR. MOA does not provide line items Replacement Fund Assets and Replacement Net Assets which the CPA audit reports do. Not does MOA provide a statement of revenues and expenses for the Replacement Fund, which is provided in the CPA's audit reports. This error/omission would be prevented if MOA would follow the statements in the CPA's audit reports.
- The amount $330,272 is based on the 2007 CPA's audit report plus the $48,000 allocated in 2008. Shortfall: $228,304 - $330,272 = ($101,968).
- The amount $1,289,350 is based on the 2005 CPA's audit report which stated a shortfall of $600,000 plus accumulated shortfalls of annual allocations and unexpected expenses since 2005. Shortfall: $228,304 - $1,289,350 = (1,061,046).
- This is the amount required to bring the amount to a viable $300,000.
- See Required (Replacement Fund) Net Assets above. The amount is shown in Note 9.
- Not shown in 2008Q4 BR.
- This is the amount from MOA's statement of financial position (balance sheet) in the 2008Q4 BR, which is about $850 per lot.
- The amount per lot excluding the long-term debt is about $1050.
Possible Structural Reforms
- Organizations in financial distress must consider all types of structural reforms including: change in the scope of operations; consolidation of operations with similar organizations to obtain economies of scale; methods for increasing revenue which include greatly expanding the customer base; reduced costs through more efficient operations; consolidation of job functions with elimination of jobs; comprehensive analysis of revenues and expenses including identification of perquisites; sale or lease of assets.
- Sale, lease or elimination of money-losing operations.
- Ensure that competitive prices are charged for all goods and services. No giveaways or perquisites.
- Many opportunities have been identified by MOA members. A partial list is provided in the post, Index, Posts on MOA's Challenges at [http://swagman.typepad.com/michaywe_poa/2009/12/index-posts-on-moas-challenges.html]. The opportunities given in MOA's Challenges are not repeated here.
- Full and accurate accounting in compliance with GAAP and presented to members in a way that members can easily understand the financial status and challenges.
- Realistic and achievable budgets founded on sound operating plans. An obvious way to instill the discipline for realistic operating plans and budgets is to require members' approval annually of the operating plan and budget. To ensure the discipline, an amendment to the bylaws is necessary. See Recommended Bylaws Provision re Operating Plan and Budget at [http://swagman.typepad.com/michaywe_poa/2007/04/recommended_byl.html#PrpsdAmndmnt].
- The above two bullets are essential to preventing the financial status from getting out of hand as it has during the past 8 years.
- Full and accurate information to members with no omission of information that makes the communication incomplete and/or misleading. Much more openness by the board in board meetings, use of closed meetings only when MOA would suffer material harm if discussed on the open meeting, closed sessions only with a 2/3 vote of the board with clearly stated reasons and documentation that open meeting would result in material harm to MOA, easier and full access by members to all records limited only if MOA would suffer material harm if disclosed. That includes all instructions to MOA's attorney and CPA and replies. Attorney opinion shall meet the standard of what a court of appeals would likely rule if pros and cons are fully considered.
- Independent audit and legislative (governance documents) committees of the membership as part of the good governance of checks and balances and separation of powers.
__Without a New Bargain that makes the operation viable, their enjoyment related to the recreational facilities is in jeopardy. Again, it is not what this group may want, but rather it should be a proposal that is in their interest and would likely have the support of enough others to gain majority approval. It is also clear from many discussions that most members believe that the members who use and enjoy the recreational facilities should pay a greater fraction of the total costs. This is most obvious in the various proposals for home owners to pay higher dues than lot owners.
Conclusion
__Experience has shown that the boards over the past 8 years have not taken the actions concerning structural reform described above. The information in the 2008Q4 Business Review basically rejects any structural reform. If the $75 increase is approved, it seems unlikely that the board will consider any of the above. The members have leverage only by voting AGAINST the proposed dues increase, and then writing to the board requesting a comprehensive analysis of alternatives and a new proposal including structural reform year this year.
__The board can then get on with an effort to define needed structural reform in combination with a possible dues increase to create a New Bargain that will have the support of a majority or supermajority of owners/members.
- History:_
- 2009 Apr 30 — Results of the vote added.
- 2009 Mar 25 — Initial Post
- Links:_ MOA Financial Information Re Dues Increase Vote at [http://swagmanmwpoa.blogspot.com/2009/03/moa-financial-information-re-dues.html]
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