Tag: Budget

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2020 Budget Prep

Brett Funderburg

The next HOA Board Meeting is set for Monday, Sept. 16 at the Church at Canyon Creek in an upstairs room of the main church building called the “Cross Room”. At this meeting the Board will consider and adopt the operating and capital budget for 2020. Before this meeting, I wanted to give an update on where we are, where we’ve come from and where we plan to go over the next couple of years.

As many of you know, 2019 is the first year since 2004 that the Association has raised its annual regular assessment. Most of the Association’s contracted expenses (landscaping, management fees, pool service, lifeguards, custodial, pest control, etc.) increase by about 3-5% annually. Some expenses, such as insurance, increase even more than that annually. In the intervening 15 years, the Association’s direct operating costs regularly increased without a corresponding increase in assessments to keep up. I spoke at length on this subject at the 2018 annual meeting and wrote up a summary that you can read here.

The draft budget for 2020’s direct operating costs is currently $488,451. The majority of these costs are non-discretionary expenses covering the direct care and management of the property. Our discretionary operating expenses center around the budget for our annual community events such as the spring egg hunt, fall and winter festivals, back to school pool party and the recently added movie night at the pool. The proposed budget for all community events is currently just over $12,000, or a bit over $9 per household.

In cash flowing commercial real-estate, one metric for analyzing a property is the Operating Expense Ratio (OER). In simple terms, this number is just the direct operating costs divided by gross revenue. A lower number is better and you typically want to see this in the 60-80% range which means that 20-40% of a property’s income is allocable to paying investors a return and for the reserve fund. Since the Association does not have investors to whom it must pay a return, I’ve internally set our target to the high end of that range at 80%. This means that 20% of our gross assessment income is allocated for reserves and capital projects. By comparison, 2018’s budgeted OER was 85%, a little too high for comfort. (And, in fact, the actual number is almost always higher due to unforeseen repairs and expenses that weren’t originally budgeted.) To gain insight into our expected capital expenses, the Association commissions a reserve study every 3 years to identify our needs out for the next 30 years along with the recommended annual contribution to reserves and the target balance of the reserve fund along the way. The reserve study only considers the “hard” assets of the Association and doesn’t include costs for major restoration or maintenance projects for landscaping, beds, sod, tree maintenance, etc. It should therefore be viewed as the most conservative assessment of our financial needs if the Board takes on no other projects. The reserve study, along with other projects the Board prioritizes drives the total capital expense budget.

For 2020, the reserve study calls for patch, seal and striping of the CCHOA pool/courts parking lot at an estimated $9500 (in round numbers) and another $18K in repairs to the concrete pool deck. Since there are additional repairs and maintenance to the pool identified for 2021, the draft budget I’m proposing defers the $18K deck expense to 2021 so that we can address all of these elements at once in a holistic way. In addition, the Board is prioritizing $70,000 in landscape improvements along Boulder Lane to address unsightly erosion, bare dirt, beds, tree wells and other hardscape that has fallen into disrepair. We’re also allocating $25,000 to address concerns from a number of HOA members on safety and security, make some long needed electrical repairs and a small handful of other items. Looking ahead, we have a lengthy list of deferred maintenance, upkeep and appearance projects that we are playing catch up with including the aforementioned maintenance and repairs to the pool concrete deck and tile, correcting erosion and drainage problems at the tennis courts, ongoing restoration of beds, sod and landscaping along Boulder Lane, addressing erosion and muddy washouts on our sidewalks among other things. We are prioritizing these items ahead of other long awaited projects such a new landscaping installation to the south entrance medians and installation of a shade canopy for the baby pool.

If we ignore for a moment the 3-5% annual increases in many of our actual direct operating costs and instead take the U.S. Department of Commerce’s average 2% annual inflation rate since 2004, then our regular assessments, simply pacing the inflation rate, should be at $549 per household; and if we consider 2.5% a conservative rate that blends all of our annual operating cost increases, then the regular assessment would be just shy of $600 each year. Taking all of the above into account, for 2020, we are targeting a 10% bump in the regular assessment, going from $440 to $484 ($3.66 per month per house). This gives us an operating expense ratio of 78% (slightly better than target) and with the capital expenses outlined above, leaves a net increase to our reserve fund of $32,443 as we exit 2020. As we address many of these deferred projects, I do expect our operating costs to increase somewhat as we pay more attention to maintaining these elements going forward. That said, managing our costs while properly running the Association and maintaining our Amenities and common areas has been and will continue to be a priority for all board members.

There will definitely be a few minor tweaks to these numbers as some final quotes come in late for our insurance renewals, and from other vendors but I am not expecting any material swings at this point. Please consider attending the meeting if you can.

View the draft budget.

View the reserve study

Page Revision History:

  • 2020-04-23 (jmw): Page moved to WordPress platform.
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Poolhouse Renovation – Response to Comments and Town Hall

Brett Funderburg

Thank you to everyone who attended the recent town hall meetings or submitted comments to the Board about the pool bathhouse renovation. We received many helpful comments and questions that we’re now considering. Unfortunately, the impression somehow got out that Members were being asked to vote for one of the four options presented. As a result, we received a number of e-mail form letters attempting to cast ballots for Option 4 which were not additive to the discussion.

From the town hall meetings and other comments received, it became obvious that Members developed multiple different interpretations of Option 4. Since the directors have been working for the last 12+ months on renovating the facility for the initially estimated price, we admit that this option currently lacks definition. There is no scope, no design plans and no cost/expense plan because until now it wasn’t the project the directors were executing.

Some Members interpreted Option 4 to mean minimal repairs at the least expense. Others took it to mean structure dry-in and all that entails plus variations on the proposed functional improvement add-ons (HOA storage area, accessibility improvements, family changing room, winter proofed exterior restrooms for court users) up to and including everything in the proposed design plan except for the enclosed meeting space.

In considering the minimal repairs approach to the bathhouse favored by some Members, the directors have again reviewed the 2016 Reserve Study in detail and are unanimous in their view that while it could be less expensive in the near-term than the other options being considered, it’s a stop-gap solution that incurs long-term expense by failing to address the water infiltration and exposure to the elements that’s led to the condition of the current structure. Moreover, it does nothing to solve the need for winter proof toilets, family friendly changing areas and other modest improvements, including accessibility that Members have requested.

Internal inspection of the masonry was beyond the scope of the 2016 Reserve Study but it states interior degradation is predicted based on efflorescence on the exterior of the stone blocks. This lends further support to the immediate need for a more comprehensive solution that addresses water infiltration and year-round outdoor exposure. As a result, with the study estimating an immediate repair need of almost $100,000 (not including the electrical work described below) and at a calculated TCO of over $13,000 annually, the directors no longer believe the minimal repairs approach to be a long-term cost-effective option for the community and are ruling out further consideration.

While the enclosure of the meeting space is not the primary cost driver of the renovation, we did find the idea of retaining the bulk of the proposed design substituting the enclosed meeting space in favor of an open, covered breezeway interesting. The primary advantage to this approach in our view is that it would remove the operational details of access control, security and cleanup for an enclosed meeting room but still offer a functional, covered space for activities at the pool complex. This option would provide a covered, outdoor clubhouse, address the functional needs requested by users of the pool and solves the water incursion and weather proofing design needs for the current structure. We intend to explore this option further with our advisors to better understand the merits and cost impact. Since this is beyond the scope of the initial project plan, it could take up to 18 months to develop a new design, schedule and contractable bids.

In considering Options 1 and 2, that would both offer the enclosed meeting space, Members questioned the upfront cost and the large divergence from the initial estimate to the lowest contractable bid for construction. The initial estimate was submitted to the Board by an experienced, qualified contractor based on four pages of schematic drawings and elevations supplied by our architecture firm Barley & Pfeiffer. Based on that estimate, the Board approved the start of detailed design work. Subsequently, engineers responsible for mechanical, electrical, and plumbing sub-systems came onsite to survey the facility in support of the detailed design development. It was during this phase that problems affecting safety and reliability of the existing electrical service to the parking lot, bathhouse and pool equipment were discovered instantly adding an estimated $50,000 to the total project. Regardless of which construction option is ultimately decided upon, the electrical issues must be resolved and the expense incurred to upgrade the service.

As the project progressed from late 2016 to Jan. 31, 2018 when the contractable bids were due, input costs had increased across the board. Copper used in plumbing and electrical rose from $2.08/lb. to $3.08/lb. (almost 50%); lumber used in framing and roofing rose from $320/mbf to over $500/mbf (56%); steel prices have generally held steady but the impact of new tariffs are yet unknown. Austin’s building boom and the impact of hurricane Harvey on the Gulf Coast has driven up the cost and constrained availability of skilled tradesmen. In addition, we made some design decisions in support of durability and energy efficiency that increased the upfront cost in favor of lower long-term total cost of ownership. The metal roof, a key component of the overall energy efficiency strategy, has a 50 year life expectancy and carries an increased hail rating which will reduce the cost to operate and insure the building.

Despite the two lowest bids from independent contractors being within around 3% of each other, some Members asserted the bids were inflated and attempted to provide their own estimates of what a project like this “should” cost. The Board, based on its own investigations in the weeks after the bid deadline, consulting with qualified members of our community, and with arms-length third-parties determined that the low bids were fair and appropriate for the proposed design in light of prevailing market conditions. At the end of the day the opinions of uninformed laymen, including those of the directors, about how much a project “should” cost are immaterial. The only valid basis for determining how much a project will cost is what a qualified developer is willing to bid under contract in Austin, Texas today.

While the Board is disappointed at the circumstances that drove the budget beyond what was initially predicted, we still believe that in a neighborhood such as ours where many of the homes are at the $500,000 to $600,000 price point, asking for an additional $1.10 per day over the course of a single year to renovate our marquee neighborhood facility is neither extravagant nor excessive relative to Canyon Creek’s character and position in the Austin property market.

We invite additional comments and questions and expect to hold another forum once we have more clarity on the best options for moving forward. We’ll also be publishing an FAQ shortly that will answer some of the more common questions about this project in the coming days.

In the meantime, we’re submitting the current set of design blueprints to the City of Austin for review. If the city permitting department insists on expensive design modifications or other pre-requisites we’ll need to re-evaluate the feasibility of the project relative to their requirements. We’re not expecting to have any new information to share or any action to be taken on this project for 60 to 90 days while we wait for the city permitting process to play out and we investigate design and construction alternatives looking for opportunities to bring the costs back in line with the original estimates.

In the big picture, our intention with this project all along is to be a focal point for the community to come together rather than divide us. The lines of communication are always open at board@canyoncreek.net for your feedback and thank you for supporting us in our duty to make decisions in the long-term best interest of the Association as a whole.

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Treasurer’s Report for 2018

Brett Funderburg

Note: This is a cut-down version of the Treasurer’s report to the Association annual meeting on 27-March 2018.

Before getting into the details of our financials, you need to know that historically, the Association has run on the “cash” accounting method which means that expenses are allocated to the period in which they are paid rather than the period in which they are due. In order to do the kind of analysis I’m about to do though, it’s helpful to have things allocated in the period in which they are due. This gives a better view into what the true costs are for running the association by correcting for situations such as where we were late getting invoiced for landscaping services at the end of 2016. When those bills were finally received and paid in February of 2017, It suddenly looked like we had a $28,000 landscape bill. There were several instances in our historical financials going back to 2013 where that sort of thing happened or where expenses were miscategorized. I’ve spent a great deal of time going through our records and correcting these instances to come up with a set of “pro forma” financials in order to present the information below. With that out of the way, let’s get started.

There are 1293 homes in Canyon Creek, each paying an annual Regular Assessment of $400. This gives a top line, fixed income of $517,200 to work with. In 2017, on a pro-forma basis our direct operating expenses (i.e. excluding all non-recurring items) broke down as follows (the unlabeled wedges are things like legal, accounting, postage, copies, etc.):

At the end of 2016, we re-bid and consolidated landscaping and irrigation services which reduced the base contract costs by around $15,000. We also had the irrigation staff aggressively manage our irrigation controllers which resulted in a water expense savings of around $20,000 compared to historical trends. We’re not necessarily expecting that level of savings going forward because of seasonal weather effects and the upward trend in water rates, neither of which we have any control over. The chart below shows our cumulative water expense by year. 2016 was clearly an outlier year we attribute to AT&T’s fiber tunneling that resulted in damage and leaks in our irrigation system. 


We also looked at insurance last year and found that we were underinsured. This led to the Association raising its coverage limits with commensurate increase in premiums as you’d expect. The premium increase is not reflected on this chart but will hit in 2018 bringing the total just under $20,000 annually.
Management fees were looked at last year starting in October and are pretty much inline with everyone else in this business for a community our size. The change in management company is not resulting in any material impact on the budget but we are expecting better service, support, attention to detail and follow through going forward.
Pool operations is the last of the big ticket items that we have not re-bid at as of yet. At this point, we’re working on modifications to our phone and internet service supporting the pool area security cameras and emergency phones that will allow us to consolidate lines and reduce costs. We’ve also made some investments in LED lighting at the pool parking lot that will reduce our electric bills. This investment has a break-even ROI of about 24 months.

For three of the previous five years, the Association has run operating deficits totaling over $208,000. The most recent two years have resulted in small surpluses totaling just over $56,000, largely because we funded only the most necessary maintenance needs and few aesthetic improvement to the community while simultaneously working to reduce operating costs. (And remember, $20,000 of the 2017 surplus was due to unexpectedly large reductions in water usage.)

To get a sense of the true operating costs for the Association, I developed the chart above which reflects the following changes: 1) fixes the mis-classification from prior years of various expenses to the wrong categories; 2) reduces the outlier water expense in 2016 to a more appropriate number based on historical average; 3) it excludes all “discretionary” non-recurring expenses including those related to the bathhouse renovation project such as architect fees and surveys. For 2015 the total includes repairs and maintenance to the pool, fence and irrigation system. It excludes various landscape improvements, tree plantings, and upgrades to the pool park security system that benefitted the property but, strictly speaking, weren’t required. For 2016 the total includes fence maintenance, repairs to the pool and courts, electrical repairs to lighting and some landscape work. For 2017 this includes fence maintenance, tree trimming and repairs to the pool awnings. Not included is the stone and mulch work along Boulder Lane that year. Again, that work benefitted the property but strictly speaking wasn’t required. What you’re left with reflects the cost to run the Association if you fixed things as they break but made no other improvements to the property.

Aside from the non-recurring maintenance and upkeep needs that are budgeted annually, the sole discretionary spending item in the budget is for community events; usually around $6,000 each year. This includes the pool party, the holiday fest, Easter egg hunt and the garage sales. All other items in the budget are non-discretionary and directly apply to the operations of the Association and its duty to maintain the common areas and amenities whose ongoing maintenance and repair needs are being underfunded.

The chart above is presented in order to illustrate the upward trend in operating and administrative costs to the Association even with $35,000 less in water and mowing expenses realized in 2017. Were it not for the intense focus on operating costs and the deferral of necessary maintenance and upkeep expenses, the HOA would be running more deficits.

After more than doubling from 1993 to 2003, the regular annual assessment amount has held steady at $400 for the last 15 years. Were this amount to simply have kept pace with inflation over this period, assessments today would equal $538. A fiscally sound policy for setting the regular annual assessment would be to have the budgeted direct operating and administrative expenses covered by no more than 80% of the regular assessment amount with the reminder allocated to the Association’s capital accounts for major capital improvements and unplanned repairs. If we use round numbers of $500,000 for the expense budget; that implies an assessment amount of $625,000 for a per household assessment in the neighborhood of $483. The governing documents of the Association limit the regular assessment increase to no more than 10% annually. For 2019, that would be capped at $440 or stated another way, an increase in current rates of 11 cents a day.