“Don't throw the baby out

 

     with the bath water.” [1]

Or

What to do with a $500,000+ surplus?

 

An SCA View-Journal Editorial, 12 September 2005

 

            Soon our Board will be faced with a decision on what to do about an unexpected event. That event, as we have mentioned in the past, is a very substantial budget surplus, estimated at $500,000 or more. While members of the Board are seemingly unaware of the origin of this surplus, it would be incumbent on them to ascertain exactly what had changed to account for this unexpected accumulation of a surplus of this magnitude. Without a keen understanding of why this event occurred in 2005, the Board’s current thinking and planning options on what to do with the surplus may be flawed, and planning options for 2006 and beyond may be compromised. It’s important to ascertain whether this surplus is a one-time event and not to be repeated, as some believe, and if so, what that means. [2]

             If the Board were merely faced with a surplus to dispose of in some manner, that’s one thing. For example, last year eighty percent of the $700,000+ surplus went into our reserve account. While adding to our reserves again in a similar matter is one option open to the Board, that option seems unlikely since our reserve cup is being adequately handled from ongoing income. And once any money goes into that reserve account, it’s not available for just any use. It stays there, locked up, until there is a demonstrated replacement or major repair need to be met.  

So, what’s the problem or conundrum faced by the Board? The problem is the issue of our second recreation center building. For the Association, the long held assumption by Board members was that we were going to be presented with a turn-key operation. A turn-key operation is one in which from ground-breaking to ribbon-cutting, everything would be taken care of and handled completely so that all that is left to do, so to speak, is to turn the keys over to the buyer, or in our case to the Association. That did NOT happen.  

There are numerous unresolved issues where expectations were not realized, including implied warranty issues that our facilities would be able to meet our needs. The unanswered question remains at what cost and who is ultimately responsible for completing the building. While the Association believes that the Developer is responsible for incurring costs to complete the building, the Developer’s response can best be characterized as intractable in addressing our concerns. The Association is now in the process of prioritizing their facility needs to present to the Developer. Whether the Developer draws the price line at $100,000, as initially proposed, or raises that line to a more acceptable and responsible level has yet to be determined.    

            But what does our ongoing Developer negotiations have to do with the surplus? Technically, nothing, but practically, everything. The amount of the surplus, as it turns out, is roughly the same amount that some believe would make us whole on the making Independence Hall acceptable and complete, or roughly $500,000. That coincidence or fact would seem to place the Board in an uncomfortable position on just how to deal with the surplus. What are the options open to the Board?

• Should the Board allocate 80% of the surplus to the reserve account?

• Should the Board hold on to the surplus as a potential contingency against future outlays that might be needed to complete Independence Center? That, many would argue and understand, would be the prudent thing to do.

• Should the Board create some type of capital improvement fund to assist in financing amenity enhancements, whether for Bocce or Tennis, or upgrades to the Anthem Center?

• Should the Board lower our dues?

• Or, finally, should the Board make a one-time rebate of “x” amount of dollars, say $70 per household?

        While the last two have the appearance of widespread appeal, those options carry some obvious baggage. Dues once lowered are not just difficult to raise back up, but create real political problems for the Board. A one-time rebate, while easy to accomplish and having universal appeal, is akin to throwing the baby out with the bath water. In attempting to provide what some might regard as a politically appealing fix to the surplus issue with a rebate, the Association would be unnecessarily discarding an extremely valuable asset that could be used to meet our very pressing amenity needs. This would be true regardless of what the Developer decides to do.

When is a Surplus Not a Surplus?       

        Our existing $500,000+ surplus may be real and bona fide. On the other hand, it may not be! Before we go down the slippery slope of deciding what to do with out alleged surplus, the Board needs to get better informed about the nature of this so called surplus. In our drawing attention to the question, “When is a surplus not a surplus?,” it’s entirely possible that the surplus may be imaginary and not real at all. How can that be? This might occur in situations where the Developer, instead of paying, as it had in the past, the Association for “x” as “x” occurs, changed its practice and started paying for “x” in advance of “x” occurring, and at the same time paying in advance for units of “x” instead of waiting for “x” to occur. What the heck does this mean?

        In other words, the so called surplus may be nothing more than our receipt in advance of what we would have received over a 9-12 month period. For example, if instead of the Developer paying us for each lot sold as they are sold, what if the Developer paid the Association for a large block of unsold lots in advance of their sale.  Such a change in practice, if true, would create the false impression of an existing surplus when no real surplus exists. 

So, before we make any assumptions about how to handle the surplus, let’s make sure what the current surplus represents. If we find that our current surplus represents nothing more than an advance payment on anticipated future income, then there is no so called surplus to dispose of. The "surplus" may merely represent what would have been future income but received in advanced in 2005.  

Whatever the answer to this question, the Board needs better information on which to rely in making any decision on what to do with the surplus.

Ron Johnson

12 September 2005     

        Upon reading Dave Weil’s rather comprehensive report on the status of pending and resolved issues surrounding Independence Center, one could not help being impressed with the report’s scope and detail. And no one needed to spend any time looking for the report on the internet since it was prominently announced as you entered the community’s website. 

Board President Dave Weil reports on the Status of Independence Center as of 8/16/2005.

As informative and reassuring as the report was, there were some troubling admissions and disappointments, such as our billion dollar Developer 1) abdicating any responsibility for securing code compliance and warranty work; 2) setting an arbitrary dollar amount for “completion” work without regard to the amount that is actually needed; and 3) not assuming financial responsibility outside of their $100,000 contribution for major re-construction efforts needed to make the building safe. On the positive side, we understand that discussions between the Board and the Developer may be continuing on the scope of the community's needs. At least we hope that is the case.   

The Decision Not to Link

All one needed to read the report was the slightest hint of the report’s existence, as we had done in providing a Link to the Association’s website on our Home Page. What better way to draw people to Sun City’s website than to give our members a reason to log on. But instead of providing that informational Link on the AC’s newsletter to bring those readers forward to the Association’s website, presto, Dave Weil’s report, suddenly made its appearance in the AC, and for world wide distribution on the web at that.  

For the Association to be working so hard to attract readers to their site, and having within reach the one issue that was guaranteed to bring new readers to their website, one has to wonder the rationale for going outside of the system when all that was needed was an information Link in the AC announcing the availability of Dave Weil’s report at the Sun City website.

Insatiable Appetite

It seems that having available the Spirit magazine (where the report will appear), Channel 99 (where Mr. Weil makes an oral report), and your own website (the report is online) is barely sufficient to meet the community’s appetite to communicate. It was strange, and admittedly disappointing, to know that SCACAI felt the need to reach beyond its own communication resources to the AC to reach the community.

On the Proposed Clarion Newspaper

And speaking of that appetite, a revamped Clarion newspaper business plan is in the works. If you did not get the Association’s messages on TV, through the internet, or in the Sprit, don’t feel left out as you will not be able to miss their newspaper delivered to you. While it may be heresy to some to suggest that the need for a newspaper has yet to be established, let me venture in that direction with these thoughts.  

·         It’s unclear whether there is sufficient newsworthy content to justify the addition of a fourth communications vehicle;

·         We already have two relatively new communications vehicles that are in need of substantial improvements to make them more relevant to the community;

·         While newspapers generally are in decline, TV and the internet have essentially replace the newspaper as a source of information and content;

·         It belies common sense to start a fourth communications vehicle when that vehicle offers little new or additional content beyond the vehicles already available to the community;

·         The community would be better served by working to improve TV production, content and quality, and internet accessibility and content;

·         While the Communications Committee may be disposed to recommending a newspaper to the Board, community support seeking a newspaper and the rationale for doing so seems lacking; without such support and given the nature of the vehicle being proposed, there seems little need to go forward at this time;

·         Let’s give our Channel 99 and our new internet service an opportunity to fill the substantial void perceived by those proposing a newspaper before we embark on starting up a newspaper; and

·         Those interested in the newspaper project might look to what can be accomplished by totaling revamping the Spirit following DW’s departure that would better meet the community’s print needs.

On Channel 99   

There seems to be growing if not intense pressure to bring our Channel 99 volunteer enthusiasts out of the middle ages of TV production and into the modern era. Assuming we already have all the technical staff needed to support such efforts, we are told there are two additional needs: reporter/writers and equipment. And without the influx of willing reporter/writers to volunteer their services, Channel 99 will be hard pressed to do more than they are currently doing or to become the broad based communications vehicle they envisage. With a dearth of reporter/writers to sustain ongoing TV productions, purchasing sophisticated TV equipment may be putting the cart before the horse, or a little premature. 

Channel 99 has all the appearances of doing an excellent job in covering a variety of newsworthy and interesting events and activities, along with community updates from DW Management and Dave Weil, while making different presentations on the hour and at the half hour at certain times during the day. Kudos to the Channel 99 team for their programming and quality efforts, sometimes under difficult conditions.

Appearances of being in reasonably good shape are apparently deceiving since we have learned that our Channel 99 team is in need of a little financial assistance, about $100,000. Given the variety and magnitude of their equipment needs, and assuming they have exhausted potential donations from our nearby TV stations, our Ch. 99 team will be looking to extract those funds from our current budget. Poof! The money is gone. Not to worry about the benefits of Committee oversight, though, since the Board will be acting in our best interests without any input from our standing Committees charged with giving advice and providing watchful care that our funds are spent judiciously and wisely.

Assuming there is a need to fund OTHER various activities associated with the new center, and absent additional funding from Pulte, Channel 99’s funding needs might need some further scrutiny or paring down:  

• It's unclear whether the Association is looking at the purchase of brand new equipment, or good used equipment that should be available on the market.
• While Channel 99 clearly would like to have their needs met now (assuming no gratis offering from Pulte), is it necessary to meet their needs all at once rather than over an extended, say, two or three-year period?
• When authorizing expenditures of that potential magnitude for a single activity, can Channel 99’s most immediate needs be met with fewer pieces of equipment now, deferring a decision on other purchases until a later date?
• Clearly, if given a budget of spending $40,000 now, or some other amount, instead of the sought after amount of $100,000, priorities would be set and some needs might have to be postponed.  
• What percent of Channel 99's needs can be met with, say, $40,000 or $25,000 in the purchase of used TV equipment? While my 10 year old camcorder works fine, that may be as true in the case of well maintained used video cameras and equipment.
• Don't overlook potential donations of equipment from TV studios.

What's the “Wish List”

          We have been frequently reminded about some kind of “Wish List”—those missing items that would make the Independence Center complete and fully functional. While the Developer has offered us $100,000 to complete the building, that entire amount, unfortunately, will not be available to cover the cost of those “Wish List” items as presently envisaged by the Developer. A substantial portion of that amount may have to fund other needed construction efforts, such as the Freedom Hall stage floor, etc., leaving only a fraction of that amount left for those “Wish List” items. We understand that the disposition of funding such efforts, as well as the “Wish List” items, is still under review by the Board and the Developer.

As a hypothetical and for illustration purposes only, let’s assume that roughly $50,000 will be available for those “Wish List” items after other construction efforts like the stage floor and other similar projects have been funded. So, just how far will this hypothetical $50,000 amount go towards meeting those “Wish List” needs? Not as far as one might think!

$500,000 and Counting

At this month's Finance Committee meeting, Wendy Linow, our Community Manager, mentioned that the estimated cost of procuring those "Wish List" items is currently around $500,000 to complete the building in a manner acceptable to the Association.

As a result, we have a long way to go to make the community whole on completing our new recreation center. For us, that $500,000 amount represents an unacceptable, if not impossible obstacle to overcome, while to our Developer, that same amount represents only a 5% cost overrun on this one project. Considering that the level of the Developer's overall commitment to the Association in buildings and recreational amenities at build out will be far in excess of 50 million dollars, there seems little reason for the Developer to deny the community the opportunity to make full and effective use of our second recreation center and community service annex building.

Ron Johnson

August 18, 2005