Time to talk about our Capital Reserve Fund . . .

Given the size and complexity of our beloved Big Canoe and for all the capital dollars spent and long range plans envisioned, it is baffling and disturbing that our community’s restricted capital reserves have been so woefully unfunded.   Instead, leadership speaks of grandiose master plans for new and enhanced capital projects they believe necessary to establish our place in north georgia’s society as the preeminent mountain community without ever once addressing capital replacement reserves and leadership’s fiduciary responsibility, both morally and statutorily, to ensure that those reserves are planned for, budgeted and available when and if needed.  These reserves have nothing to do with leadership’s  master plan dreams and everything to do with an example of a well managed and fiscally responsible community.

The ONLY reserve fund that this $44 million plus community has available is the much ignored and arguably misunderstood restricted  Capital Reserve Fund (“Reserve Fund”).   A $2.8 million fund which has sat dormant without a single additional dollar of funding by leadership since 2016.  Therein lies our problem.

On the contrary, the Board  Designated Master Plan Fund created in 2019 via board procedure 105.2 is NOT a reserve account, and it’s purpose can be changed on a whim by the affirmative vote at any meeting of any future board.

The ongoing charade and misrepresentation of the significance of this community’s Capital Reserve Fund or lack thereof has really gone on long enough.  It is time to take off the blinders, put away the kool-aid and seriously consider the facts.

The Big Canoe Capital Reserve Fund . . .

Reserve funds could be viewed as a form of savings to provide the financial resources for the replacement of current capital components (needs/obligations) that will be required at some time in the future.  Reserve funds can also be used to provide resources for unknown events such as emergencies.  Regardless, most any well run property association will maintain some type of reserve fund account for these purposes and most associations will use a consistently updated reserve study as the tool for ensuring adequate balances are maintained in the fund.  This can be considered an industry standard.

The Big Canoe Capital Reserve Fund was approved in 2010 by the property owners for the express purpose of providing resources not only for certain emergencies, but most importantly to repair, maintain and replace current capital components (association property) as identified in a reserve study.

By statute, funding was provided to the “Reserve Fund” through year end 2016.   Had prior assessments continued to be allocated to the fund, the balance would have increased approximately $3.5 million.  Instead, those assessment dollars have been consumed by increasing operational costs throughout these last four years.

The Reserve Study . . .

In tandem with the statutorily created Capital Reserve Fund, the 2010 amendment also required an independent Reserve Study to be conducted every 3 – 5 years in order to determine appropriate funding levels.  Although utilizing various approaches to funding, reserve studies include a financial analysis or percent funded calculation.  Many industry experts conclude that a percent funded calculation of 70% or above to be ideal (although that may not be the norm for all associations).  (1)  As will be discussed below, Big Canoe was only 18.08% funded as of the last published reserve study.  Generally, a funding plan is then developed to increase the fund balances and percent funded calculation over time.

(Without going into all the specifics of various funding approaches, ample reference material is provided at the end of this article for those interested.)

Big Canoe reserve study highlights from previous years follow:

    • 2009 study prepared by Miller Dodson Associates utilized cash flow and component method funding plans.  Conducted prior to the establishment of the “Reserve Fund” in 2010, the report concluded that the POA had NO replacement reserves on deposit and no current funding of replacement reserves.  (2)
    • An updated study prepared by Miller Dodson Associates in 2012 included 580 capital components and concluded that the replacement reserves were  19.5% funded.  Funding plans utilizing the Cash Flow method plus the more conservative Component method were offered in the report. (3)
    • With an estimated $2.5 million Capital Reserve Fund balance, Facilities Advisors prepared  an updated Reserve Study in 2016 concluding that the fund was only 18.08% funded.  A funding plan utilizing the Cash Flow method only was presented and has not been followed.  (4)
    • Results of the updated Reserve Study conducted in early August 2020 are presently unknown.  Response to an Ask the POA request noted that the report would be reviewed after completion of the budget and is not presently available for publication.
The Charade . . .

This writer has had many discussions with various individuals in positions of leadership about the capital funding and status of the Capital Reserve Fund.  While some believe that the fund was never intended to receive contributions into the future to provide resources for capital replacement,  still others have characterized it as “basically useless for anything other than emergencies” while also characterizing the corresponding Reserve Study mandated every three to five years as “not really a study” or even worse questioning how any outside expert could possibly understand the capital requirements of Big Canoe better than the leadership and management of Big Canoe itself.   What an absolutely, totally naive assumption.

In fact, these arguments are baseless and efforts to redefine the significance of the Capital Reserve Fund should be disregarded as previous reserve study analysts use the “Reserve Fund” balance provided by management to compute the percent funded metric and prepare a funding plan.  Obviously, management and the analysts fully understood at that time that the “Reserve Fund” was very much more than an emergency only fund.

Unfortunately, leadership’s failure to acknowledge, much less address, the lack of funding of the “Reserve Fund” is negligent at best.   Instead, leadership has found it necessary to repeatedly offer additional revenue sources to fund new and enhanced capital projects (wants/dreams) only to perpetuate the problem by failing to commit those resources to the restricted Capital Reserve Fund (needs/obligations).

Other  Communities – a comparison . . .

Management’s  comparison of Big Canoe to other communities with regards to the existence of a transfer fee has provided an interesting opportunity to also compare other features such as reserve fund methodologies, debt and annual assessments, etc.  While it has been noted previously that Connestee Falls makes yearly contributions to both capital and infrastructure funds as part of their budget process, (5) other communities include:

Hilton Head Plantation:

 Current Annual Assessments: $1,276 

 2019 Year End: (6)

 Net Contribution to Reserves: $ 674,634 

 Reserve Balances: $4,385,115 

 Total Assets: $16,510,06 

 Debt: $0
The Landings at Skidaway Island:

Current Annual Assessments:   $1,850

2019 Year End: (7)

 Net Contribution to Reserves: $570,957

 Reserve Balance: $3,183,230

 Total Assets: $20,091,327

 Debt: $0 
Big Canoe:

Current Annual Assessments: $3,672

2019 Year End:

 Net Contribution to Reserves: $ Interest Only

 Reserve Balance: $2,777,263

 Total Assets: $44,130,238

 Debt: $6,955,958

 Leases: $482,925

Palmetto Dunes:   Although not included in management’s comparisons, this community has an excellent discussion on reserves and reserve studies.  (8)  With current assessments at $1,800 annually; reserve balances at $7,257,714; and total assets at $29,773,998 at year end 2018, they, like the other two communities, are also debt free.

Governing documents . . .

In addition to any requirements found in the 2010 amendment to the covenants, specific reference is made in Section 5.2 of the 2006 Big Canoe bylaws stating “The Annual Financial Plan shall make provision for maintaining a Reserve Fund.”   As the management company for numerous other communities in addition to Big Canoe, surely Bobby Jones Links is familiar with the importance and necessity of adequate reserve funding and should be advising our Board of such yet – no provisions for maintaining this fund were mentioned in the 2021 budget presentation.   (9)

What more can be said? . . .

Appropriately funding the reserve for replacement of current components (needs/obligations) by developing target funding goals and sticking to the funding plans found in consistently updated reserve studies should absolutely be the number one priority before even discussing new and enhanced capital projects (wants/dreams).

In conclusion,  please click here and scroll down to read an outstanding article titled “Why do them?  Reserve Studies and Why we do them” by Peter B. Miller of Miller Dodson Associates.

With his firm employed to perform at least three previous reserve studies for Big Canoe, his credibility should be unquestioned.

What more could possibly be said?

. . . . .

If you would like to see additional articles posted in the future, please check back frequently or subscribe for an email notification.  Likewise, please feel free to contact me at thepcrosses@gmail.com for questions or further discussion.  Meanwhile . . . take care and stay safe.

Patricia Cross (10438 Big Canoe)

(It must be emphasized that the Capital Reserve Fund and it’s appropriate funding is a separate and distinct discussion from “transfer fees” and master plan projects, and this article is not intended to represent a for or against position in those discussions. )

References:

1 https://www.rdanorthwest.com/mt-content/uploads/2019/06/2019-reserve-study-guidebook-for-board-members-property-managers_5d17971f8b558.pdf (at page 24)

2 2009 Miller Dodson Replacement Reserve Analysis

(POAWebsite>login>POA>Reports and Studies>Reserve Study 2009)

3 2012 Miller Dodson Replacement Reserve Analysis

(POAWebsite>login>POA>Reports and Studies>Reserve Study Big Canoe POA 2012)

4 Big Canoe POA – Reserve Management Plan, August 7, 2016 –

(POAWebsite>login>POA>Reports and Studies>Reserve Study 2016)

5 “Where does our Money Go?”, November 8th, 2020, bcmatters.org

6 http://www.hiltonheadplantation.com/PDF/Audit_Report_2019_FINAL_web.pdf

7 https://www.landings.org/sites/default/files/resources/Annual%20Reports/2019%20Annual%20Report.pdf

8 https://pdpoa.org/controllers-report-july-2019/

9 Notes from Board working session on November 9th, 2020

(POAwebsite>login>POA>meetings>BoardDocuments>WorkSessionNotesNovember 9th)

10 “Why do Them? . . . Reserve Studies and Why We Do Them” by Peter Miller, Arch., R.S. https://millerdodson.com/reserve-studies/reserve-studies-for-homeowners-associations/

Other Reference Material:

https://www.reserveadvisors.com/reserve-studies/definitions.aspx

https://www.caionline.org/LearningCenter/Education-for-Managers/PMDP%20Readings%20and%20Samples/M-206%20Course%20Reading%20Materials.pdf

https://www.caionline.org/LearningCenter/credentials/Documents/NRSSClarificationArticles.pdf