The metamorphosis of our capital funding . . .

Last month’s board meeting was certainly full of surprises. Not only did we learn of the bleak 2020 financial projections, but we were also presented with a completely new approach and purpose for what has now become known as the Board Designated Cash – Capital Fund (Board Fund).

What was originally proposed as an account funded by the additional $25 monthly assessment to be used “exclusively” for master plan expenditures (1) has now evolved into a fund comprised of every available POA dollar of cash for purposes that seem to change on at least a monthly basis and with absolutely no controls or apparent oversight whatsoever.

In addition to the monthly assessment and $1.250 million in excess cash transferred to the account, it is learned that based on a recommendation outlined by the finance committee chair, an amount equal to depreciation will be transferred to the Board Fund each month beginning July. (2) Likewise, it was also noted that this change in practice would necessitate a change in existing Board policy no. 105.2. (3)

In actuality, the “Board Designated Cash – Capital Fund” is nothing more than a slush fund . . .

It is a concern that the Board Fund does not carry any of the restrictions and controls found in the governing documents that pertain to the Capital Reserve Fund (Capital Reserve Fund). Instead it contains no minimum balance requirements and would capture all cash ordinarily used for road paving and replacement and renovation of existing capital components as well as any funding of master plan projects without any required segregation of those balances. In other words, all funds for all purposes would be commingled. Further, according to a previous discussion at the March 2020 board meeting, funds from this account could also be utilized, if necessary, for funding operating expense shortfalls. (4) And as has already been shown, next month or next year, the utilization of the Board Fund might be something yet again entirely different as it’s existence is outside the realm of our governing documents.

It would also be important to emphasize that the non-restricted nature of this account and ad hoc accumulations of cash do not qualify as a substitution for the restricted  Capital Reserve Fund required by our governing documents.

Having the proper reserves is a sign of a healthy community” . . . (5)

Meanwhile, the actual Capital Reserve Fund established in 2010 and mandated by the bylaws (6) and Article VI, Section 13 (7) of the covenants, has not received any funding other than interest income since 2016 and is now mistakenly referred to by some in leadership as merely the “emergency fund”. Yes, while the restricted Capital Reserve Fund may be used for emergency purposes, the language found in the amended covenant specifies the Capital Reserve Fund would also be used “to pay for the purchase, repair, maintenance, and replacement of Association property identified in a Capital Reserve Study performed by a Reserve Specialist”. The covenant further specifies that “when reserves are used for capital or emergency purposes, the POA shall in subsequent years build reserves back up to Reserve Study recommended levels.”

Yet, for whatever reason, recent previous boards appear to have disregarded their fiduciary responsibility by failing to maintain the Capital Reserve Fund at adequate and appropriate levels.  Note: To read the contents of this very important amended covenant that was voted on and approved by 70% of all property owners that voted in 2010, click here.Capital Reserve Fund Amendment

Breaking it down and keeping it simple . . .

• • Big Canoe POA bylaws (6) and Article VI, Section 13 of the covenants (7) require a reserve fund.                                                       The Capital Reserve Fund was established in 2010.                               The Board Fund is NOT a reserve fund.

• • BCPOA covenants require an updated reserve study prepared by a reserve specialist  every 3-5 years.                                                             The last reserve study was prepared in 2016 and a new study has been planned for later this summer.

• • BCPOA covenants require that the results of the reserve study be used to establish the funding levels in the reserve account.              According to the last study, the Capital Reserve Fund should have had a balance of $3.9 million at year end 2019. The present balance is only $2.8 million resulting in an underfunded reserve.

• • BCPOA covenants require property owner approval when funds from the Capital Reserve Fund are used for a capital project exceeding $1 million, cpi adjusted.                                                                The Board Fund contains no such restrictions.

Establish funding priorities . . .

Any available cash absolutely should always be allocated to the Capital Reserve Fund first. After reconciling the balance to the level required in the updated reserve study at each year end, any additional surplus cash could then be applied to master plan projects or other new capital components.

Remember, these are our obligations. New master plan ideas are our dreams. (8)

Imagine, with a fully funded Capital Reserve Fund, replacement and renovation of capital components might not be so eagerly deferred as those dollars could never be used for any other purpose than that originally specified in Article VI, Section 13 of the covenants.

Let’s pause for now and dial it back a bit . . .

Before we continue to transfer inordinate amounts of money to an unrestricted Board Fund and have existing board policies and procedures rewritten, it really might make more sense to pause and await the updated reserve study that is scheduled next month. At that time, more current data would be available to determine a path forward and ascertain the appropriate funding level of the required Capital Reserve Fund.  Anything less, could be construed as negligent. Once that is done, the amount of residual funds available for Master Plan projects would become clearly apparent.

As it is, with significant cash distributed throughout various unrestricted accounts on the balance sheet and constant redefining of various funds and commingling of purposes, it’s like an exercise in musical chairs or playing a shell game called “where’s the money?”

Require three readings . . .

Further, any revisions to board policies and procedures should always be subjected to three readings similar to revisions of rules and regulations. This basic practice allows discussion and additional opportunity to forego unforeseen consequences or errors in the revision.

Good intentions . . .

And although the requirements of Article VI, Section 13 appear obvious to this writer, there are differences of opinion regarding it’s application. It will also be assumed that actions taken by our board are done with the best of intentions. But regardless, it must be noted that any well run association/community will and should have a reserve fund that is maintained at an adequate level and in recent years, that has not been the case at Big Canoe.

By design or otherwise . . .

In essence, what has taken place is that any available excess cash as well as amounts equal to depreciation expense have been moved out of reach of the restricted Capital Reserve Fund and the operating departments to be exclusively controlled without any restriction whatsoever by the Board of Directors. And that is indeed, a most untenable situation.

. . . . .

Should you like to see additional articles posted in the future, please subscribe for an email notification.  Likewise, please feel free to share your comments on this site regarding these suggestions or contact me at thepcrosses@gmail.com for questions or further discussion.  Meanwhile . . . take care and stay safe.

Patricia Cross (10438 Big Canoe)

References:

1 2019 Facilities and Master Plan, November 2, 2019, at 1:01:00 (POAwebsite>POA>Meetings>Videos>2019FacilitiesAndAmenitiesMasterPlan)

2 Meeting of the Board of Directors Video, June 18^th, 2020, at 49:00 (POAwebsite>login>POA>Meetings>SubscribeToOurYouTube . . . >)

3 Board Policies and Procedures No. 105.2 (POAwebsite>login>POA>GoverningDocuments>BoardDocuments>BoardPoliciesAndProcedures)

4 Meeting of the Board of Directors Video, March 19, 2020, at

(POAwebsite>login>POA>Meetings>Video>2020MarchBoardMeeting)

5 https://smokesignalsnews.com/archive/poa-board-proposes-vote-on-two-new-reserve-funds/article_e250377d-4ff3-5852-90b2-3dd7c94896e7.html

6 2004 Second Amended and Restated Bylaws (a) XII; (b) X

(POAwebsite>login>POA>documentarchive>BoardofDirectors>10-

2004BCPOABylaws)

7 Second Amendment to the Covenants, dated August 21, 2010 –

(POAWebsite>login>POA>Governing Documents>Covenants>Capital Reserve2010)

8 “About that $5,000 Fee”, dated November 18^th; 2019, bcmatters.org